Resolution Strategies – CS Professional Insolvency Law and Practice Study Material

Chapter 5 Resolution Strategies – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Resolution Strategies – CS Professional Insolvency Law and Practice Study Material

Question 1.
(a) ‘Corporate Restructuring is an inorganic business strategy where one or more aspects of a business are redesigned to improve commercial efficiency, manage competition effectively, drive faster pace of growth, ensure effective utilization of resources, and fulfilment of stakeholders’ expectations. It serves different purposes for different companies at different points of time and may take up various forms.’ – Brief on External and Internal Restructuring through Resolution Plans. (Aug 2021, 6 marks)
(b) Whether the promoters can claim that ‘they should have been given an opportunity to settle the dues, if Committee of Creditors did not find any resolution plan as viable and feasible.’ Citing relevant decision whether the claim of the promoters is tenable and within the objects of the IBC, 2016. (Aug 2021, 6 marks)
Answer:
(a) External Restructuring :
It consists of merger, and amalgamation of one company with another or demerger of one or more undertakings of a company into another company, acquisition of controlling stake in acompany through purchase of majority stake in it, conversion of debt into equity, etc. The same are briefly explained hereunder.
1. Restructuring through mergers, amalgamation and demerger:
A company merged, amalgamated or demerged to achieve improvement in efficiency in operational and financial performance of the company. In the insolvency proceedings of a corporate debtor, the resolution plan may provide for merger, forward or reverse of the corporate debtor with the resolution applicant (company) or any of its group companies to maximize the utilization of the assets of the corporate debtor. Similarly, the resolution applicant may provide to demerge one or more units of the corporate debtor to gain operational and financial efficiency.

2. Restructuring through acquisition of controlling stake/purchase of Shares: The resolution applicant may, through a resolution plan, acquire the controlling stake in the corporate debtor by either reducing or cancelling existing paid-up shares capital and recapitalizing it by infusing further equity capital. Alternatively, the resolution applicant may acquire the existing equity share capital of the company party or fully by making payment of some nominal consideration to the shareholders of the Corporate Debtor and for meeting the requirement of funds of the Corporate Debtor, the Resolution Applicant may infuse the funds partlty in equity of partly in the form of debt or fully in the form of debt only. The management of the Corporate Debtor including its Board is also changed by the Resolution Applicant by appointing his nominee directors on the Board and by appointing other key managerial personnel.

3. Restructuring through conversion of debt for issuance of securities: It can be understood that the insolvency of a Corporate Debtor is mainly due to default in its debt, whether financial debt or operational debt. Where it could not fulfil its repayment obligation. The Resolution Applicant on the basis of the assessment of the Corporate Debtor, may purpose the conversion of debt of the Corporate Debtor into securities of the Corporate Debtor issued in favour of the creditors, thereby, changing the nature and terms of the debt. The said securities may be in the form of equity share, preference share or debentures/ bonds. As a result of the said restructuring, the existing debt of the Corporate Debtor is reduced to a sustainable level by conversion of the same into equity and by waiving substantial part of the unsustainable debt.

Resolution Strategies - CS Professional Study Material

Internal Restructuring:
The internal restructuring includes operational and financial restructing.
These are discussed in detail as follows:
1. Operational Restructuring:
Operational Restructuring involves improving the operational efficiency of the corporate debtor so as to increase its business receipts and profitability. It may consists of creation of new departments to serve growing markets or downsizing of eliminating departments to serve growing markets or downsizing or eliminating departments to conserve overheads. A company may undertake restructuring to focus on a particular market segment leveraging its core competencies or may undertake restructuring to make the organization lean and efficient. This type of restructuring affects employees and involves layoffs or collaboration with third parties to upgrade skills and technical knowhow.

2. Financial Restructuring:
Financial restructuring is the process of reorganizing the financial structure, which primarily comprises of equity capital and debt capital. There may be several reasons (financial and non-financial) that trigger the need for financial restructuring. Financial restructuring is undertaken either because of compulsion (to recove from financial distress) or as, part of comapany’s financial strategy to achieve better financial performance. Financial restructuring is done for various business reasons such as to overcome poor financial performance, to gain market share, or to seize emerging market opportunties.

(b) In the matter of Y. Shivram Prasad & Ors. vs. S. Dhanapal & Ors, the NCLAT passed the impugned order of liquidation as Committee of Creditors did not find any resolution plan viable and feasible. The promoters submitted that they should have been given an opportunity to settle the dues.
While rejecting the said submission, the NCLAT clarified that settlement can be made only at three stages, i.e., before admission, before constitution CoC and in terms of Section 12A of the insolvency and Bankruptcy Code (IBC) and such stages were over in this instant matter.
It, however, observed that during the liquidation process, it is necessary to take steps for revival and continuance of the Corporate Debtor by protecting it from its management and from a death by liquidation.
Wherein this Appellate Tribunal having noticed the decision of the Hon’ble Supreme Court in “Swiss Ribbon Pvt. Ltd. & Anr. vs. Union of India & Ors where Hon’ble Supreme Court observed that “What is Interesting to note is that the Preamble does, not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up the mark. Even in liquidation, the liquidator can sell the business plans submitted are not up the mark. Even in liquidation, the liquidator can sell the business of the Corporate debtor as a going concern” and NCLAT in its matter further held that “In view of the provision of Section 230 and the decision of the Hon’ble Supreme Court in ‘Swiss Ribbons Pvt. Ltd’, We direct the Liquidator to proceed in accordance with law.”

He will verify claims of all the creditors; into custody and control of all the assets property, effect and actionable claims of the ₹ corporate debtor’, carry on the business of the t corporate debtor’ for its beneficial liquidation, etc. as prescribed under Section 35 of the Code.
If the members or the ₹ Corporate Debtor’ or the ₹ creditors’ of a class of creditors like ₹ Financial Creditor’ or ₹ Operational Creditor’ approach the company through the liquidator for compromise or arrangement by making proposal of payment to all the creditors(s), the Liquidator on behalf of the company will move an application under Section 230 of the Companies Act, 2013 before the Adjudicating Authority i.e. National Company Law Tribunal, in terms of the observation as made in above. On failure, as observed above, steps should be taken for outright sale of the ‘Corporate Debtor’ so as to enable the employees to continue.”

Question 2.
Financial Creditors initiated Corporate Insolvency Resolution Process (CIRP) against a corporate debtor and invited the expression of interest (EOI) of Resolution Plan from the eligible persons. One company, showed interest and submitted the EOI, which was agreed upon by the Committee of Creditors (CoC) and proposal was submitted by the CoC with the Adjudicating Authority (AA). As per the Resolution Plan, the Resolution Applicant agreed to pay in cash to acquire the controlling stake in the Corporate Debtor to tune of 75% and the Operational Creditors will be paid in instalments in settlement of their claims stretchable upto the next 12 months.
The AA accepted the Resolution Plan. However, the promoters of the Corporate Debtors and other Operational Creditors objected and appealed before the NCLAT raising the following points :
(i) The promoters of Corporate Debtor contended that the Resolution Applicant is not eligible to submit the Resolution Plan, since its subsidiary company in the UK was fined by the English court under the provisions of UK Act, which provides for imprisonment for a term not exceeding 12 months or a fine or both. Hence in terms of Section 29A(d) of the Insolvency and Bankruptcy Code, 2016 (IBC) the Resolution Applicant is ineligible to submit the Resolution Plan.
(ii) The Operational Creditors also objected taking the plea that there was unfair distribution of settlement amount in instalments for their claims under the provisions of the IBC.
Explain with relevant case law, whetherthe Resolution Applicant was eligible to submit the Resolution Plan? (Dec 2021, 6 marks)
Answer:
Yes, the Resolution Applicant will be succeeded in the NCLAT. The facts of the case are similar to that of the case of acquisition of Bhushan Steel Ltd by Bamnipal Steel Ltd (BNL), a subsidiary of Tata Steel Ltd, which is as under:
The acquisition of Bhushan Steel Ltd (BSL) for ₹ 35,200 crore by Bamnipal Steel Ltd (BNL), a subsidiary of Tata Steel Ltd. in May 2018, has been the first major case of acquisition of a major stressed asset under the Insolvency and Bankruptcy Code. BNL completed the acquisition of controlling stake of 72.65 per cent in BSL in accordance with the approved resolution plan under the Corporate Insolvency Resolution Process (CIRP) of the IBC. Tata Steel has paid ₹ 35,200 crore in cash to acquire Bhushan Steel. It would pay another ₹ 1,200 crore over next 12 months to operational creditors.

The promoters of BSL approached the National Company Law Appellate Tribunal (NCLAT) over issue of ineligibility of Tata Steel to acquire BSL. L&T, an operational creditor also approached the Hon’ble NCLAT over issue of unfair distribution of settlement amount for its claim under the provisions of IBC, 2016.
NCLAT upheld the acquisition of Bhushan Steel, rejecting allegations of its ineligibility by the promoters of the company. The NCLAT also rejected the claims of L&T, an operational creditor of Bhushan Steel Ltd, opposing Tata Steel’s resolution plan seeking a higher priority in debt settlement.
The NCLAT said that Tata Steel UK, a foreign subsidiary of Tata Steel, which was fined by an English Court in February 2018 under UK Act, had a provision of ‘imprisonment for a term not exceeding twelve months, or a fine, or both’. While, the provision in section 29A(d) of the Code, which deals with eligibility, stipulates “has been convicted for any offence punishable with imprisonment for two years or more”, cannot be equated with Section 33(1)(a) of the U.K Act, said NCLAT. Section 29A of the IBC mandates that a person convicted for any offences punishable with imprisonment for two years or more is ineligible for submitting a resolution plan.
Over the claims of L&T, which had supplied goods and machineries over ₹ 900 crore, NCLAT said that Tata Steel’s resolution plan was fair towards operational creditors of Bhushan Steel which has a total demand of 11,422 crore. The NCLAT observed that the company has allotted ₹ 1,200 crore for them and L&T plea for a higher priority could not be accepted.
Moreover, it also declined the plea of the promoters family, contending Tata Steel’s Resolution Plan’ was illegal as it purports to transfer shares’ of the ‘preference shareholders’ of Bhushan Steel without their consent for a fixed consideration of ₹ 100 as against ₹ 2,269 crore.

Resolution Strategies - CS Professional Study Material

Question 3.
M/s ABC through Ankit, the proprietor, approached you as professional, to seek direction about its business. He says, that the business is in distress and there are heavy debts, thus unable to run the business. He wants to find solution to the debts, so that he can run the business smoothly. He shares following details about his business :
(i) Gross annual turnover ₹ 50,000
(ii) Aggregate Value of Assets ₹ 20,000
(iii) Value of Debts incurred in last two months ₹ 32,000
(iv) There is no dwelling unit owned by him
(v) There is no insolvency resolution process, bankruptcy process or fresh start process subsisting against him.
Based on above details, advise him to get rid of his debts and to re-start his business smoothly. (June 2022, 6 marks)

Question 4.
What is an Insolvency Resolution Plan?
Answer:

  • Insolvency Resolution Plan is a unique combination of financial, legal, management and technical features which would provide a reasonable assurance of sustainable viability over the period of recovery from internal or external stresses.
  • A plan could involve the purchase of the equity or assets of the corporate debtor, the infusion of additional debt, the de-merger of debtor’s businesses, financial “haircuts” taken by creditors, or the extinguishment of some liabilities.
  • It is a procedure for restructuring encompasses, schemes of reconstruction, takeovers, mergers, transfer of undertakings and restructuring of debts.

Question 5.
Explain the legislative framework for insolvency and bankruptcy proceedings in India.
Answer:

  • It provides for a wide range of resolution strategies, viz. re-organisation through a scheme for compromise, arrangements and reconstruction or financial, capital and business restructuring.
  • The procedure for restructuring encompasses, schemes of reconstruction, takeovers, mergers, demergers, transfer of undertakings and restructuring of debts as provided in Sections 230-240 of the Companies Act, 2013 by way of which the liabilities of the distressed companies can be restructured.
  • Further, in the event of initiation of a Corporate Insolvency Resolution Process against the Corporate Debtor under IBC 2016, the Resolution Professional shall invite resolution plans from the prospective Resolution Applicants, subject to the compliance of the conditions as laid down under Section 30(2) of the IBC, 2016.
  • Debt-for-equity swaps can be used as a tool for restructuring as duly recognised/provided for in restructurings undertaken under sections 230-231 of the Companies Act, 2013 as well as the resolution plans that may be submitted by the Resolution Applicants to the Resolution professional for onward consent of the Committee of Creditors and thereafter the approval of the Adjudicating Authority.
  • The same is done to bring the debt to a sustainable level either by waiver of excess debt or conversion into equity, or a combination of both. Apart from the above, the Asset Reconstruction Companies (ARCs) set-up under the provisions of SARFAESI Act, 2002 may also acquire the debts of the Corporate Debtor from the lending Banks/ Financial Institutions (FIs) and subsequently restructure the same in post discussions and arrangement with the debtor.
  • The provisions of SARFAESI Act, 2002 also empower the lenders/ARCs to effect a change in management as a restructuring mechanism.

Question 6.
What is Corporate Restructuring?
Answer:

  • It is an inorganic business strategy where one or more aspects of a business are redesigned to improve commercial efficiency, manage competition effectively, drive faster pace of growth, ensure effective utilization of resources, and fulfilment of stakeholders’ expectations.
  • It serves different purposes for different companies at different points of time and may take up various forms.
  • Restructuring typically occurs to address challenges or it can be driven by the necessity to make financial adjustments to its assets and liabilities.
  • Mergers, amalgamations, acquisitions, compromises, arrangement or reconstruction are various forms of corporate restructuring exercises.
  • The purpose of each of these restructuring exercises may be different but each of these exercises attempts to bring in more efficiency in the system.
  • Corporate Restructuring process in India is governed by the Companies Act, 2013, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and various other regulatory laws such as the Income Tax Act, 1961, the Competition Act, 2002, the Foreign Exchange Management Act, 1999, the Indian and State Stamp Acts and Insolvency and Bankruptcy Code, 2016. Chapter XV of the Companies Act, 2013 (comprising sections 230 to 240) regulates compromises, arrangement and amalgamations.

Resolution Strategies - CS Professional Study Material

Question 7.
Explain the types of Corporate restructuring.
Answer:
Corporate restructuring may be broadly categorised as:
1. Organisational Restructuring
2. Financial Restructuring

1. Organisational Restructuring

  • It may involve creation of new departments to serve growing markets or downsizing or eliminating departments to conserve overheads. ‘
  • A company may undertake restructuring to focus on a particular market segment leveraging its core competencies or may undertake restructuring to make the organisation lean and efficient.
  • This type of restructuring affects employees and involves layoffs or collaboration with third parties to upgrade skills and technical know-how.

2. Financial restructuring

  • It is the process of reorganizing the financial structure, which primarily comprises of equity capital and debt capital.
  • There may be several reasons (financial and non-financial) that trigger the need for financial restructuring. Financial restructuring is undertaken either because of compulsion (to recover from financial distress) or as part of company’s financial strategy.
  • Financial restructuring is done for various business reasons such as to overcome poor financial performance, to gain market share, or to seize emerging market opportunities.
  • Financial restructuring undertaken to recover from financial distress involves negotiations with various stakeholders such as banks, financial institutions, creditors in order to reduce liabilities.

Question 8.
When can Corporate financial restructuring be adopted by any business?
Answer:
It involves a considerable change in the company’s financial structure and is undertaken for various business reasons such as:

  • To overcome poor financial performance
  • To address external competition
  • To regain market share
  • To seize emerging market opportunities
  • Risk reduction
  • Development of core competencies.

Question 9.
Explain the components of financial restructuring.
Answer:

  • Debt Restructuring (restructuring of the secured long-term borrowing, long-term unsecured borrowings, short term borrowing)
  • Equity Restructuring (alteration or reduction of capital, buy backs).

Question 10.
Explain Debt restructuring.
Answer:

  • Debt restructuring is the process of reorganizing the whole debt capital of the company in negotiation with bankers, creditors, vendors.
  • Debt capital of the company includes secured long-term borrowing, unsecured long-term borrowing, and short-term borrowings.
  • Debt restructuring involves a reduction of debt and an extension of payment terms or change in terms and conditions.
  • Debt restructuring is more commonly used as a financial tool than compared to equity restructuring.
  • Restructuring includes alteration of repayment period, repayable amount, the amount of instalments, rate of interest, roll over of credit facilities, sanction of additional credit facility, enhancement of existing credit limits, compromise settlements.
  • Debt restructuring involves:
    • Restructuring of secured long-term borrowings – It is undertaken for reducing the cost of capital, improving liquidity and increasing the cash flow.
    • Restructuring of unsecured long-term borrowing – It depends on the type of borrowing which can be in form of public deposits, private loans (unsecured), unsecured bonds or debentures.
    • Restructuring of short-term borrowings – These borrowings are generally not restructured and but can be renegotiated with new terms.

Resolution Strategies - CS Professional Study Material

Question 11.
Explain the provisions regarding the formal restructuring and insolvency proceedings.
Answer:

  • The legislative framework in India now provides only for formal restructuring and insolvency proceedings. Part II of the Insolvency and Bankruptcy Code, 2016 deals with the insolvency resolution and liquidation for corporate persons.
  • Section 4 of the Insolvency and Bankruptcy Code, 2016 provides that Part II of the Code shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees.
  • The proviso to section 4 empowers the Central Government to specify, by notification, the minimum amount of default of higher value but it shall not be more than one crore rupees.
  • Part II of the Insolvency and Bankruptcy Code, 2016 lays down the following two independent stages:
    (i) Corporate Insolvency Resolution Process [Sections 4 and 6 to 32] and
    (ii) Liquidation [Sections 33 to 54 and Section 59] Chapter II of Part
    II deals with corporate insolvency resolution process while Chapter
    III together with Chapter V of Part II govern the liquidation process for corporate persons.
  • Under the Insolvency and Bankruptcy Code, 2016, the resolution professional, during the corporate insolvency resolution process, invites resolution plans from prospective Resolution Applicants.
  • Such plans may be based on one or more mechanisms outlined in Chapter XV of the Companies Act, 2013 as well as in accordance with various mechanisms laid under Regulation 37 of the IBBI (Insolvency Resolution Process for Corporate Persons), Regulations, 2016 subject to the compliance of conditions as laid down under Section 30(2) of the IBC, 2016.

Regulation 37 provides that a resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following:
(a) transfer of all or part of the assets of the corporate debtor to one or more persons;
(b) sale of all or part of the assets whether subject to any security interest or not;
(c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons;
(ca) cancellation or delisting of any shares of the corporate debtor, if applicable;
(d) satisfaction or modification of any security interest;
(e) curing or waiving of any breach of the terms of any debt due from the corporate debtor;
(f) reduction in the amount payable to the creditors;
(g) extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor;
(h) amendment of the constitutional documents of the corporate debtor;
(i) issuance of securities of the corporate debtor, for cash, property, securities, or in exchange for claims or interests, or other appropriate purpose;
(j) change in portfolio of goods or services produced or rendered by the corporate debtor;
(k) change in technology used by the corporate debtor; and
(l) obtaining necessary approvals from the Central and State Governments and other authorities.
One of the best methods for corporate debt restructuring is debt-equity swap where specified shareholders have right to exchange stock for a predetermined amount of debt (ie, bonds) in the same company.

Question 12.
What is Equity Restructuring?
Answer:

  • It involves reorganization of equity capital. The following comes under
    equity restructuring:
  • Alteration of share capital
  • Reduction of share capital
  • Buy-back of shares.

Resolution Strategies - CS Professional Study Material

Question 13.
Explain the provisions related to compromise or arrangement between the creditors /members and a company.
Answer:
The Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

Upon hearing the application under sub-section (1) of section 230 of the Act, the Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect of the following matters:
(a) determining the class or classes of creditor or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement; or dispensing with the meeting or meeting for any class or classes or creditors in terms of sub-section (9) of section 230;
(b) fixing the time and place of the meeting or meetings;
(c) appointing a Chairperson and scrutinizerfor the meeting or meetings to be held, as the case may be and fixing the terms of his appointment including remuneration;
(d) fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy or by postal ballot or by voting through electronics means;
(e) determining the values of the creditors or the members, or the creditors or member of any class, as the case may be, whose meetings have to be held;
(f) notice to be given of the meeting or meetings and the advertisement of such notice;
(g) notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;
(h) the time within which the chairperson of the meeting of the meeting is required to report the result of the meeting to the tribunal; and
(i) such other matters as the Tribunal may deem necessary.

Question 14.
What disclosures have to be made to the Tribunal by the company or any other applicant?
Answer:
The applicant shall disclose to the Tribunal by affidavit the following:
(a) all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company;
(b) reduction of share capital of the company, if any, included in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per cent, of the secured creditors in value, including:
(i) a creditor’s responsibility statement in the prescribed form;
(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) report by the auditorthat the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
(vi) a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer. [Section 230(2)]

Question 15.
What are the provisions regarding the documents to be submitted and the advertisement of the notice of the meeting?
Answer:

  • Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or class of members and the debenture-holders of the company, individually at the address registered with the company.
  • It shall be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed.
  • Provided that such notice and other documents shall also be placed on the website of the company, if any, and in case of a listed company, these documents shall be sent to the Securities and Exchange Board and stock exchange where the securities of the companies are listed, for placing on their website and shall also be published in newspapers in such manner as may be prescribed.
  • Provided further that where the notice for the meeting is also issued by way of an advertisement, it shall indicate the time within which copies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company. [Section 230(3)]
  • Provided that an advertisement of the notice of the meeting (Rule 7) shall be given in Form No. CAA.2 in at least one English newspaper and in at least one vernacular newspaper having wide circulation in the state in which the registered office of the company is situated, or such newspaper as may be directed by the Tribunal and shall also be placed, not less than thirty days before the date fixed for the meeting, on the website of the company of the SEBI and the recognized stock exchange where the securities of the company are listed.
  • Provided that where separate meetings of classes of creditors or members are to be held, a joint advertisement for such meetings may be given.

Resolution Strategies - CS Professional Study Material

Question 16.
Who is allowed to take part in voting in the meeting and what is the procedure of voting through proxy or through postal ballot?
Answer:

  • The person who receives the notice as a shareholder or creditor may within one month from date of receipt of the notice, vote in the meeting either in person of through electronics means to the adoption of the scheme of compromise and arrangement.
  • A notice under sub-section (3) shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice.
  • Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent of the shareholding or having outstanding debt amounting to not less than five per cent of the total outstanding debt as per the latest audited financial statement. [Section 230(4)]

Question 17.
What matters have to be covered under the Order of the tribunal?
Answer:
An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters, namely:
(a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable;
(b) the protection of any class of creditors;
(c) if the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given effect to under the provisions of
section 48;
(d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending before the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;
(e) such other matters including exit offerto dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement.
Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133. [Section 230(7)]

Question 18.
Explain the provisions related to merger and amalgamation of companies.
Answer:
Section 232 corresponds to section 394 of the Companies Act, 1956. It provides that –
Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal –
(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and
(b) that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies, the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct and the provisions of sub-sections (5) to (6) of section 230 shall apply mutatis mutandis. [Section 232(1)]
Where an order has been made by the Tribunal under sub-section (1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely:
(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;
(b) confirmation that a copy of the draft scheme has been filed with the Registrar;
(c) a report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promotors and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
(d) the report of the expert with regard to valuation, if any;
(e) a supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned forthe purposes of approving the scheme. [Section 232(2)]

Resolution Strategies - CS Professional Study Material

Question 19.
How merger and amalgamation takes place in the case of certain companies as per Section 233?
Answer:
Notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:
(a) a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
(b) the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety per cent, of the total number of shares;
(c) each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
(d) the scheme is approved by majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

  • The transferee company shall file a copy of the scheme so approved in the manner as may be prescribed, with the Central Government, Registrar and the Official Liquidator where the registered office of the company is situated.
  • On the receipt of the scheme, if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies.
  • If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of thirty days: Provided that if no such communication is made, it shall be presumed that he has no objection to the scheme.
  • If the Central Government after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme under section 232.
  • On receipt of an application from the Central Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit.
    Provided that if the Central Government does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme.
  • A copy of the order under sub-section (6) confirming the scheme shall be communicated to the Registrar having jurisdiction over the transferee company and the persons concerned and the Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where transferor company or companies were situated.
  • The registration of the scheme under sub-section (3) or sub-section (7) shall be deemed to have the effect of dissolution of the transferor company without process of winding-up.

The registration of the scheme shall have the following effects, namely:-
(a) transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company;
(b) the charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company;
(c) legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company; and
(d) where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company.

  • A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.
  • The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorised capital and pay the prescribed fees due on revised capital.
    Provided that the fee, if any, paid by the transferor company on its authorised capital priorto its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorised capital enhanced by the merger or amalgamation.
  • The provisions of this section shall mutatis mutandis apply to a company or companies specified in subsection (1) in respect of a scheme of compromise or arrangement referred to in section 230 or division or transfer of a company referred to clause (b) of sub-section (1) of section 232.
  • The Central Government may provide for the merger or amalgamation of companies in such manner as may be prescribed.
  • A company covered under this section may use the provisions of section 232 for the approval of any scheme for merger or amalgamation.

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Question 20.
Describe the process of merger or amalgamation of company with foreign company.
Answer:

  • The provisions of section 234 (1) unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under Section 123 of this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.
  • Provided that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.
  • Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

Question 21.
Are there any separate provisions for acquiring shares of dissenting
shareholders from scheme or contract approved by majority?
Answer:

  • Yes, there are any separate provisions for acquiring shares from dissenting shareholders under Section 235.
  • Where a scheme or contract involving the transfer of shares or any class of shares in a company (the transferor company) to another company (the transferee company) has, within four months after making of an offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies, the transferee company may, at anytime within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.
  • Where a notice under sub-section (1) is given, the transferee company shall, unless on an application made by the dissenting shareholder to the Tribunal, within one month from the date on which the notice was given and the Tribunal thinks fit to order otherwise, be entitled to and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company.
  • Where a notice has been given by the transferee company under sub-section (1) and the Tribunal has not, on an application made by the dissenting shareholder, made an order to the contrary, the transferee company shall, on the expiry of one month from the date on which the notice has been given, or, if an application to the Tribunal by the dissenting shareholder is then pending, after that application has been
    disposed of, send a copy of the notice to the transferor company together with an instrument of transfer, to be executed on behalf of the shareholder by any person appointed by the transferor company and on its own behalf by the transferee company, and pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which, by virtue of this section, that company is entitled to acquire, and the transferor company shall-
    (a) thereupon register the transferee company as the holder of those shares; and
    (b) within one month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company.
  • Any sum received by the transferor company under this section shall be paid into a separate bank account, and any such sum and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which the said sum or other consideration were respectively received and shall be disbursed to the entitled shareholders within sixty days.

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Question 22.
How the shares will be treated in the absence of a physical delivery of shares by the shareholders within the time specified by the company?
Answer:

  • In such a case, the share certificates shall be deemed to be cancelled, and the transferor company shall be authorised to issue shares in lieu of the cancelled shares and complete the transfer in accordance with law and make payment of the price out of deposit made under sub-section (4) by the majority in advance to the minority by despatch of such payment.
  • In the event of a majority shareholder or shareholders requiring a full purchase and making payment of price by deposit with the company for any shareholder or shareholders who have died or ceased to exist, or whose heirs, successors, administrators or assignees have not been brought on record by transmission, the right of such shareholders to make an offer for sale of minority equity shareholding shall continue and be available for a period of three years from the date of majority acquisition or majority shareholding.
  • Where the shares of minority shareholders have been acquired in pursuance of this section and as on or prior to the date of transfer following such acquisition, the shareholders holding seventy-five per cent or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro rata basis.

Question 23.
Describe the power of Central Government to provide for amalgamation of companies in public interest.
Answer:
Section 237 corresponds to section 396 of the Companies Act, 1956.

  1. In case the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order.
  2. The order under sub-section (1) may also provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.
  3. Every member or creditor, including a debenture holder, of each of the transferor companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the transferee company as he had in the company of which he was originally a member or creditor, and in case the interest or rights of such member or creditor in or against the transferee company are less than his interest in or rights against the original company, he shall be entitled to compensation to that extent, which shall be assessed by such authority as may be prescribed and every such assessment shall be published in the Official Gazette, and the compensation so assessed shall be paid to the member or creditor concerned by the transferee company.
  4. Any person aggrieved by any assessment of compensation made by the prescribed authority under subsection (3) may, within a period of thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal.
  5. No order shall be made under this section unless
    (a) a copy of the proposed order has been sent in draft to each of the companies concerned;
    (b) the time for preferring an appeal under sub-section (4) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; and
    (c) the Central Government has considered, and made such modifications, if any, in the draft order as it may deem fit in the light of suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or from any creditors or any class of creditors thereof.
  6. The copies of every order made under this section shall, as soon as may be after it has been made, be laid before each House of Parliament.

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Question 24.
State the provisions regarding the registration of offer of schemes involving transfer of shares.
Answer:
Section 238 corresponds to Section 395(4A) of the Companies Act, 1956. It lays down that –
In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235,
(a) every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information and in such manner as may be prescribed;
(b) every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; and
(c) every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered: Provided that the Registrar may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the information required to be given under clause (a) or which sets out such information in a manner likely to give a false impression, and communicate such refusal to the parties within thirty days of the application.

  • An appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular under-sub-section (1).
  • The director who issues a circular which has not been presented for registration and registered under clause (c) of sub-section (1), shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

Question 25.
What is Asset memorandum?
Answer:
On forming the liquidation estate under section 36, the liquidator shall prepare an asset memorandum in accordance with this Regulation within seventy-five days from the liquidation commencement date.
The asset memorandum shall provide the following details in respect of the assets which are intended to be realized by way of sale –
(a) value of the asset, valued in accordance with Regulation 35;
(b) value of the assets or business(s) under clauses (b) to (f) of regulation 32, valued in accordance with regulation 35, if intended to be sold under those clauses;
(c) intended manner of sale in accordance with Regulation 32, and reasons for the same;
(d) the intended mode of sale and reasons for the same in accordance with Regulation 33;
(e) expected amount of realization from sale; and
(f) any other information that may be relevant for the sale of the asset.

The asset memorandum shall provide the following details in respect of each of the assets other than those referred to in sub-regulation (2)
(a) value of the asset;
(b) intended manner and mode of realization, and reasons for the same;
(c) expected amount of realization; and
(d) any other information that may be relevant for the realization of the asset.

  • The liquidator shall file the asset memorandum along with the preliminary report to the Adjudicating Authority.
  • The asset memorandum shall not be accessible to any person during the course of liquidation, unless permitted by the Adjudicating Authority.

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Question 26.
How valuation is done of the assets intended to be sold?
Answer:

  • Where the valuation has been conducted under regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 or regulation 34 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017, as the case may be, the liquidator shall consider the average of the estimates of the values arrived under those provisions for the purposes of valuations under these regulations.
  • In cases not covered under sub-regulation (1), the liquidator shall within seven days of the liquidation commencement date, appoint two registered valuers to determine the realisable value of the assets or businesses under clauses (a) to (f) of regulation 32 of the corporate debtor.
    Provided that the following persons shall not be appointed as registered valuers, namely:
    (a) a relative of the liquidator;
    (b) a related party of the corporate debtor;
    (c) an auditor of the corporate debtor at any time during the five years preceding the insolvency commencement date; or
    (d) a partner or director of the insolvency professional entity of which the liquidator is a partner or director.
  • The Registered Valuers appointed under sub-regulation (2) shall independently submit to the liquidator the estimates of realisable value of the assets or businesses, as the case may be, computed in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017, after physical verification of the assets of the corporate debtor.
  • The average of two estimates received under sub-regulation (3) shall be taken as the value of the assets or businesses.

Question 27.
How the valuation takes place under the Insolvency and Bankruptcy Code?
Answer:

  • Valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill etc. under the provisions of the Companies Act, 2013.
  • Similarly, valuation is also required under the Insolvency and Bankruptcy Code, 2016. According to regulation 2(h) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, “registered valuer” means a person registered as such in accordance with the Companies Act, 2013 and rules made thereunder.
  • Thus, a valuer registered under the Companies Act, 2013 can also undertake valuation underthe Insolvency and Bankruptcy Code, 2016.

Question 28.
State the contents of Asset sale report?
Answer:
On sale of an asset, the liquidator shall prepare an asset sale report in respect of said asset, to be enclosed with the Progress Reports, containing
(a) the realized value;
(b) cost of realization, if any;
(c) the manner and mode of sale;
(d) if the value realized is less than the value in the asset memorandum, the reasons for the same;
(e) the person to whom the sale is made; and
(f) any other details of the sale.

Question 29.
Describe the procedure of realization of security interest by secured creditor.
Answer:

  • • A secured creditor who seeks to realize its security interest under section 52 shall intimate the liquidator of the price at which he proposes to realize its secured asset.
  • The liquidator shall inform the secured creditor within twenty one days of receipt of the intimation under sub-regulation (1) if a person is willing to buy the secured asset before the expiry of thirty days from the date of intimation under sub-regulation (1), at a price higher than the price intimated under sub-regulation (1).
  • Where the liquidator informs the secured creditor of a person willing to buy the secured asset under sub-regulation (2), the secured creditor shall sell the asset to such person.
  • If the liquidator does not inform the secured creditor in accordance with sub-regulation (2), or the person does not buy the secured asset in accordance with sub-regulation (2), the secured creditor may realize the secured asset in the manner it deems fit, but at least at the price intimated under sub-regulation (1).
  • Where the secured asset is realized under sub-regulation (3), the secured creditor shall bear the cost of identification of the buyer under sub-regulation (2).
  • Where the secured asset is realized under sub-regulation (4), the liquidator shall bear the cost of incurred to identify the buyer under sub-regulation (2).
  • The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993.

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Question 30.
How the distribution is done of the unsold assets?
Answer:
The liquidator may, with the permission of the Adjudicating Authority, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances.
The application seeking permission of the Adjudicating Authority under sub-regulation (1) shall
(a) identify the asset;
(b) provide a value of the asset;
(c) detail the efforts made to sell the asset, if any; and
(d) provide reasons for such distribution.

Question 31.
Explain the process of realizing the uncalled capital or unpaid capital contribution by the liquidator.
Answer:

  • The liquidator shall realize any amount due from any contributory to the corporate debtor.
  • Notwithstanding any charge or encumbrance on the uncalled capital of the corporate debtor, the liquidator shall be entitled to call and realize the uncalled capital of the corporate debtor and to collect the arrears, if any, due on calls made prior to the liquidation, by providing a notice to the contributory to make the payments within fifteen days from the receipt of the notice, but shall hold all moneys so realized subject to the rights, if any, of the holder of any such charge or encumbrance.
  • No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporate debtor.

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