Concept and modes of demerger

Concept and modes of demerger

 

“Demerger” can be defined as split or division of a company into more number of companies. The new companies, the transferees, need not be the subsidiaries of the parent companies undergone such split or division. The New Oxford Dictionary defines the term “demerger” as “the separation of a larger company into two or more smaller organizations.”

Modes of Demerger

Demerger May Be Partial Or Complete: Partial demerger results when a part/department/division of company is separated and transferred to one or more new company/companies formed with the same shareholders allotted shares in new company in same proportion as held by them in the demerged company. Complete demerger results when the whole of the business/undertaking of the existing company is transferred to one or more new company/companies formed for the purpose and the demerged company is dissolved by passing special resolution by its shareholders. Such company is wound up voluntarily and disappears. The shareholders of the dissolved company are issued and allotted shares in the new company/Companies as per the share exchange ratio sanctioned under the demerged scheme.

Demerger By Agreement: English Law is quite exhaustive on the issue of ‘demerger’. While ‘demerger’ is affected by agreement and original company is wound up after division, it was held in Cardiff Preserved Coal and Coke Co v. Norton that the liquidator cannot dispute the validity of the transaction and therefore cannot require its shareholders to transfer to him the shares which have been allotted in the new company or companies so that he may sell them and use the proceeds to pay the original company’s debt.

Demerger Under Scheme Of Arrangement: On the basis of the powers a company has in its Memorandum, it can carry out division or split of its entity in the same manner as it could accomplish amalgamation through a scheme of arrangement under the provisions of the Companies Act, 1956. The procedure laid down in Chapter-V under the Companies Act, 1956 regarding Arbitration, Compromises, Arrangements and Reconstruction would be followed in the case of division of the company.

Demerger Under Voluntary Winding Up: The original company which has split into several companies after division could be wound up voluntarily pursuant to the provisions of Sections 484 to 498 of the Companies Act, 1956.

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