Companies Act 2013 Section 365
Companies Act 2013 Section 365 governs the procedure for compromise, arrangement, and reconstruction of companies in India.
Companies Act 2013 Section 365 deals with the legal framework for compromise, arrangement, and reconstruction of companies. It provides a structured process for companies to reorganize their structure or financial obligations with the approval of the National Company Law Tribunal (NCLT). This section is vital for companies facing financial difficulties or seeking to restructure for operational efficiency.
Understanding Section 365 is essential for directors, shareholders, legal professionals, and companies. It ensures that any compromise or arrangement is conducted transparently and fairly, protecting the interests of all stakeholders and maintaining corporate governance standards.
Companies Act Section 365 – Exact Provision
This section outlines the procedure for companies seeking to compromise or arrange their debts or shareholding structures. It mandates the involvement of the NCLT to ensure fairness and legality. The approval requires a special majority of creditors or members, safeguarding their interests. The Tribunal’s directions help implement the arrangement effectively and protect stakeholders.
Enables restructuring through compromise or arrangement.
Requires Tribunal approval and oversight.
Mandates creditor/member meetings and voting.
Ensures binding effect once sanctioned.
Protects interests of all stakeholders.
Explanation of Companies Act Section 365
Section 365 sets out the legal process for compromise or arrangement between a company and its creditors or members.
Applies to companies seeking restructuring or debt compromise.
Involves creditors, members, and the company itself.
Requires application to the National Company Law Tribunal (NCLT).
Mandates convening meetings of affected parties.
Approval needs majority consent by number and value.
Tribunal sanctions and supervises the arrangement.
Prohibits implementation without Tribunal approval.
Purpose and Rationale of Companies Act Section 365
This section aims to provide a fair, transparent legal framework for companies to restructure their affairs, protecting all parties involved.
Strengthens corporate governance during restructuring.
Protects creditors’ and members’ rights.
Ensures transparency through Tribunal oversight.
Prevents misuse of corporate restructuring.
When Companies Act Section 365 Applies
Section 365 applies when a company proposes a compromise or arrangement with creditors or members requiring legal sanction.
Applies to all companies under the Act.
Triggered by proposed compromise or arrangement.
Requires Tribunal application before meetings.
Not applicable for informal agreements without Tribunal approval.
Legal Effect of Companies Act Section 365
This section creates a mandatory legal procedure for compromise or arrangement, requiring Tribunal approval to be effective. It imposes duties on companies to seek consent and follow the process strictly. Non-compliance can invalidate arrangements and invite penalties. The section interacts with MCA rules governing filings and disclosures related to restructuring.
Creates binding obligations post Tribunal sanction.
Requires disclosures and filings with MCA.
Non-compliance may lead to legal challenges.
Nature of Compliance or Obligation under Companies Act Section 365
Compliance with Section 365 is mandatory and conditional upon the company’s intention to restructure. It involves a one-time process per arrangement but may require ongoing compliance with Tribunal directions. Directors and officers must ensure proper application and stakeholder communication. Internal governance must align with the legal procedure to avoid invalidation.
Mandatory compliance for restructuring.
One-time process per compromise or arrangement.
Responsibility lies with company directors and officers.
Requires coordination with legal and financial advisors.
Stage of Corporate Action Where Section Applies
Section 365 applies primarily at the restructuring stage after the company decides to propose a compromise or arrangement.
Post board approval of restructuring proposal.
During stakeholder meetings convened by Tribunal.
At Tribunal application and sanction stage.
During implementation following Tribunal directions.
Penalties and Consequences under Companies Act Section 365
Failure to comply with Section 365 can lead to penalties including fines and possible imprisonment for officers responsible. Invalid compromises may be set aside by courts. The Tribunal may impose additional directions or remedial measures to protect stakeholders.
Monetary fines for non-compliance.
Possible imprisonment for willful violations.
Disqualification of directors in serious cases.
Remedial directions by Tribunal.
Example of Companies Act Section 365 in Practical Use
Company X faced financial distress and proposed a debt restructuring plan involving its creditors. Director X applied to the NCLT under Section 365 to convene creditor meetings. After approval by the required majority, the Tribunal sanctioned the arrangement. Company X implemented the plan under Tribunal directions, protecting creditor interests and avoiding liquidation.
Shows legal restructuring via Tribunal approval.
Highlights protection of creditor rights.
Historical Background of Companies Act Section 365
Section 365 evolved from provisions in the Companies Act, 1956, consolidating and modernizing the law on compromise and arrangement. The 2013 Act introduced clearer procedures and Tribunal oversight to enhance transparency and stakeholder protection.
Replaced older compromise provisions from 1956 Act.
Introduced NCLT as adjudicating authority.
Enhanced procedural safeguards and transparency.
Modern Relevance of Companies Act Section 365
In 2026, Section 365 remains crucial for corporate restructuring amid dynamic markets. Digital filings via MCA portal streamline applications. The section supports governance reforms and aligns with ESG and CSR compliance trends by enabling responsible restructuring.
Supports digital filing and e-governance.
Facilitates transparent corporate restructuring.
Aligns with modern governance and compliance.
Related Sections
Companies Act Section 230 – Power of Tribunal to compromise or arrange.
Companies Act Section 232 – Merger and amalgamation procedures.
Companies Act Section 241 – Oppression and mismanagement relief.
Companies Act Section 242 – Investigation of company affairs.
Companies Act Section 66 – Reduction of share capital.
SEBI Act Section 11 – Regulatory oversight for listed companies.
Case References under Companies Act Section 365
- Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India (2019, SCC 191)
– Affirmed the role of NCLT in sanctioning compromises and arrangements under the Companies Act.
- ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2018, SCC 1)
– Clarified the scope of Tribunal’s powers in sanctioning arrangements.
Key Facts Summary for Companies Act Section 365
Section: 365
Title: Compromise and Arrangement
Category: Corporate restructuring, governance
Applies To: Companies, creditors, members
Compliance Nature: Mandatory, Tribunal approval required
Penalties: Fines, imprisonment, disqualification
Related Filings: Tribunal applications, MCA disclosures
Conclusion on Companies Act Section 365
Section 365 is a cornerstone provision facilitating lawful compromise and arrangement processes for companies in India. It ensures that restructuring is conducted transparently with the oversight of the National Company Law Tribunal, protecting the interests of creditors, members, and other stakeholders.
By mandating majority approval and Tribunal sanction, the section upholds corporate governance and legal certainty. Companies and professionals must understand and comply with this section to navigate restructuring effectively and avoid legal pitfalls.
FAQs on Companies Act Section 365
What is the main purpose of Section 365?
Section 365 provides a legal framework for companies to restructure through compromise or arrangement with creditors or members, ensuring fairness and Tribunal oversight.
Who can apply to the Tribunal under this section?
The company itself, any creditor, or any member can apply to the National Company Law Tribunal to convene meetings for compromise or arrangement.
What majority is required to approve a compromise or arrangement?
A majority in number representing three-fourths in value of the creditors or members present and voting must approve the compromise or arrangement.
Is Tribunal approval mandatory for the arrangement to be valid?
Yes, the compromise or arrangement must be sanctioned by the Tribunal to be legally binding and effective.
What happens if a company violates Section 365?
Non-compliance can lead to penalties, fines, possible imprisonment, and the arrangement may be declared invalid by courts or the Tribunal.