Insolvency and Bankruptcy Code 2016

India’s bankruptcy legislation, the Insolvency and Bankruptcy Code, 2016 (IBC), intends to consolidate the current framework by adopting a unified insolvency and bankruptcy legislation. The Code was introduced in the parliament in 2015. While, on May 28, 2016, the President of India gave his assent to the Code. From the 5th to the 19th of August 2016, certain parts of the Act came into effect.

The Code provided a one-stop solution for complicated and fragmented insolvency and bankruptcy process. That is varying between the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Companies Act, 1956, the Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI Act), 1993, the Sick Industrial Companies (Special Provisions) Act, 1985, etc. 

The IBC 2016 provided a unified framework for bankruptcy resolution in the nation, providing a careful balance for all stakeholders to keep the firm running and economic value intact promptly.

In circumstances of CIRP initiation, Section 14 of the IBC, 2016 addresses the idea of a Moratorium. This is a significant policy that tries to safeguard ailing enterprises to aid their resurrection and re-establish themselves in the competitive market.

Moratorium tries to safeguard a Corporate Debtor under Section 14 in Part II of the IBC and the individuals/partnership firms under Section 101 in Part III of the IBC against the Financial Creditors, Operational Creditors, and Corporate Applicants under Section 7, 9, and 10 respectively of the Code.  

Section 14(1) holds the prime key to this postulate while Section 14 (2) and (3) of the Act forms an exception to the former. It states that the Adjudicating Authority shall by order declare a moratorium for prohibiting institution or continuation of suits; transaction of Corporate Debtor’s asset or legal right or any beneficial interest. As mentioned under the SARFAESI Act, 2002; recovery of any property by an owner or lessor currently held in possession of Corporate Debtor.

Canara Bank vs. Deccan Chronicle Holdings Limited

[LSI-1886-NCLAT-2017-(NDEL)], The power of the Hon’ble Apex Court under Articles 32 and 136 of the Indian Constitution, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Indian Constitution, shall be untouched by the moratorium, it was noted.

In Shah Brothers Ispat (P) Ltd. vs. P Mohanraj [2018 SCC Online NCLAT 415], it was established that criminal proceedings being grave shall not be exempted from being affected by the moratorium under Section 14 of the Code. 

In Power Grid Corporation of India vs. Jyoti Structures Ltd. – [LSI-85-HC-2017(DEL)],

The Hon’ble High Court of Delhi observed that the term “proceedings” as used in Section 14(1)(a) did not include “all” proceedings, and thus Section 14 of the IBC,2016 would not apply to proceedings in favor of the Corporate Debtor, as the Code’s goal is to strengthen and flourish the enterprise’s financial position.

The IBC forbids “recovery of any property by an owner or lessor of such property is occupied by or in the possession of the corporate debtor,” according to Section 14(1)(d). From the start of the CIRP to the end, the provision tries to prohibit owners and lessors from recovering “any property” from the Corporate Debtor.

Immovable and moveable property, such as land and buildings, as well as goods and equipment, are all included. It’s best to read “lessor” and “in possession of” together. This means that the corporate debtor has legal possession, which includes both real and constructive possession.

In the case of Rajendra K Bhutta vs. Maharashtra Housing and Area Development Authority and Anr [Civil Appeal No 12248 of 2018], it was observed that the dissolution of agreement in the moratorium to provide a property to the Corporate Debtor for the developmental activity shall be in violation concerning Section 14(1)(d) of the Code.

In the case of Bank of India AND ORS vs. Mr. Bhuban Madan And Ors. [No. 590 of 2020 & I.A. No. 156 of 2020], it was held that merely because the Corporate Debtor had enough liquidity to run the Company as a going concern, the act of the Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

Following a thorough examination of the situation, it may be concluded that the IBC’s moratorium provisions are crucial in protecting corporate debtors and guaranteeing a successful resolution. While this can present significant impediments for third parties, Section 14 has a broad reach, covering a wide range of decisions. Being a newly adopted Code, it is in its evolving stage. Further, re-evaluation of these is demanded from time to time.

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DUE DILIGENCE

Due diligence is a procedure that entails:

• Estimating an entity’s commercial potential by analyzing various aspects.
• A comprehensive assessment of the financial viability of an entity based on its assets and liabilities.
• Reviewing the operations and verifying the material facts of the entity concerning relation to a proposed transaction.

The term ‘due diligence’ refers to the process of verifying and taking steps to detect and avoid anticipated dangers. It is the process of thoroughly assessing a problem from a range of angles before deciding on a business.

The Indian legal, economic, and regulatory environment is complex. Therefore, a company’s ability to navigate the Indian business landscape is critical to its success. Thus, a company’s success is directly related to the risk management and mitigation strategies it employs.

Types

1.   Operation Due Diligence: Assesses the Target company’s operational efficiency. Examine non-financial components of a Target company, such as system and process evaluations, management team evaluations, personnel levels, and other HR operations, or insurance arrangements.

     2. Technical Due Diligence: Examines and performs due diligence on intangible assets such as Patents, Copyrights, Designs, Trademarks, and Brands. Furthermore, it includes assessing the Target Company’s performance on the current level of technology and determining future scope for improvement.

Focus areas of Due diligence

1. Mergers and Acquisitions: Both the buyer and the seller perform due diligence. The seller is more concerned with the buyer’s background, financial capabilities, and capacity to follow obligations than the buyer, who is concerned with financials, lawsuits, patents, and a wide variety of other pertinent facts.

2. Financing Agreements: Examine copies of all agreements evidencing borrowings by the Target company, whether secured or unsecured, documented or undocumented, such as loan and credit agreements, mortgages, deeds of trust, letters of credit, indentures, promissory notes, and other shreds of evidence of indebtedness, as well as any amendments, renewals, notices, or waivers, as well as any amendments, renewals, notices, or waivers…[1]

1.     Partnership: All strategic alliances, strategic partnerships, business coalitions, and other partnerships are subject to due diligence.
2.     Joint Enterprise and Collaboration: When companies join forces, the reliability of the combined company is a subject of concern. Accordingly, the other company’s position would include the adequacy of supplies at their end.
3. Intellectual Property: Patents, trademarks, copyrights, and trade secrets are all forms of intellectual property. A thorough examination of all contracts, licenses, and litigations involving a target company’s intellectual property is conducted as part of legal due diligence.
4.     To check Regulatory Compliance: A compliance with regulations, policies, and standards refers to an organization’s adherence to the laws, regulations, and policies within which it operates. To ensure regulatory compliance, the acquirer must ensure that the target company is on the right side of the law. In this regard, legal due diligence is an essential component of the due diligence process, where the acquirer can view how the target company follows regulatory guidelines and complies with regulations.

Advantages

•   Opportunity to understand the target company: An acquirer can run due diligence on a target company before closing a deal, identifying and assessing risks, liabilities, and business problems ahead of time, helping to prevent losses and poor press later on.
•       To identify the future of business: To make informed decisions, the information gathered during this process should be reported. By reviewing the Due Diligence report, one can determine how the company plans to earn additional income (both monetary and non-monetary). As a result, it serves as a handy reference for understanding the state of affairs at the time of purchase/sale, etc. Ultimately, the goal is to get an accurate understanding of how the business will perform.

To identify future Legal risks: There may be risks entrenched inside the target firm that might become troublesome after the merger, in addition to the risks connected with finalizing the acquisition. Furthermore, these risks may include outstanding litigation, permission on pending intellectual property such as patents, trademarks, and other forms of intellectual property, tax and other government responsibilities, and so on.

Limitations

Due diligence provides a superficial understanding of the target company to the acquiring company. Thus, businesses may not succeed at all times as a result.

1.  Commercial or financial risks: An examination of asset elements including operating and maintenance costs, current and future profitability, the cost of environmental mitigation measures (such as pollution), and the impact of potential delays or problems.
2. To the acquiring company, the workforce, the competencies, and the work culture remain a mystery, all of which are crucial to its smooth operation.
3.  There is a risk involved with due diligence because it is judgment-driven.
4.  There is one major obstacle that often causes the process to be shaky, and that is the lack of available information.

According to independent surveys, countries with higher levels of development have less corruption and greater openness, making it simpler to verify facts. A company conducting due diligence may quickly obtain information from a number of government offices that also serve as public record offices.

A factor that is intricately related to the accessibility of information is the efficiency of such offices in keeping information records. The answer depends on the archiving and filing processes these offices follow, as well as the level of information of records they have.

Conclusion

Obtaining accurate and timely feedback on financial facts is the foundation of a strong decision-making process. Due diligence should be considered an essential component of every financial transaction or activity.

Due diligence must be organized and coordinated so that the buyer may make an educated choice about whether or not to proceed with the purchase or operation based on the information gathered.

Tags: regulatory environment, risk management and mitigation strategies, operation due diligence, due diligence, technical due diligence, financing agreements, financial due diligence, types of due diligence

Disinvestment Plan

While the pandemic is still ongoing, the government has made significant attempts to counteract not just the loss of life, but also the loss of companies, activities, and the economy. The economy has experienced a severe setback as a result of the second wave, which has hit India harder in every aspect, generating financial problems for many MSMEs and indigenous enterprises. To revive the economy disinvestment of more sectors is considered by the government.

To comprehend the disinvestment strategy, we must first comprehend the major elements associated with it. The complexities of disinvestment include anticipating better possibilities.

It also contains other data such as the process’s sector and the required percentage. These factors are the tip of the iceberg when it comes to comprehending disinvestment. To understand the current scenario we have to analyze defenses, comprehend the present, and calculate the prospects.

Disinvestment is being undertaken by the government in order to lessen the budgetary load on the exchequer. It raises funds for specific purposes, such as covering losses from underperforming industries. And may occur in a variety of situations to privatize. Even though privatizing some assets raise the total proportion of earnings.

However, not all disinvestments result in privatization. It has to be comprehended because of the false context that arises. Disinvestment plans have various types within themselves that formulate overall schematics. Minority disinvestment, majority disinvestment, and complete disinvestment to name a few.

To comprehend the necessity of disinvestment, we have to demarcate the basic yet main goals of the plan. These goals/objectives mainly involve reducing certain debt and increasing the proficiency of a particular underperforming sector. It may also include:-

• Diminishing the financial loss on the exchequer.
• Incentivizing sectors and Improving finances
• Encouraging ownership by private entities.
• Increasing competition and maintaining quality assessment of commodities.

As per the government, disinvestment measures are appropriate in the current situation. Before establishing the policy that ushered in a new chapter in our country’s economy, the Indian economy was impacted by bankruptcy. With the introduction of the policy of LPG in 1991, the main aim of the preceding governments has also been to reduce the financial burden accumulated due to poor policy implementation, and improper and unarticulated procedures. 

All disinvestment-related activity for the public authority is handled by a separate entity within the Ministry of Finance. Since the latter half of the 1990s, progressive administrations have made disinvestment an almost automatic element of their budgetary strategies. That set an objective every year to raise assets from stake deals in public sector endeavors.

 Due to the second wave of COVID-19 hitting every corner of the country and wreaking physical, and mental, the financial health of families’ drastic measures had to be undertaken. The public authority to decrease the damage may move dependence on cash-rich and monetarily independent central public area ventures (CPSEs). 

To protect the disinvestment and its key programs with a view that the monetary deficiency because of the Covid-19 pandemic will hose revenue of private area homegrown and overseas financial investors. The COVID-19 pandemic affected the public authority’s CPSE stake deal program, and the objective has been brought down to Rs 32,000 Cr. in the Revised Estimates.

Despite the fact that disinvestment has certain advantages, it is far from being the final solution/answer to the current situation. Fear of foreign control, a lack of interest from the investment sector, and the possibility of the establishment of a single monopoly all impede the economy’s general growth. The unprecedented times have called for a beneficial and insured method of involvement of foreign finance to provide aid. 

The combination of disinvestment and privatization may help to revive the economy, which is otherwise thriving. It might be claimed that commercialization is the way to go in today’s world, but mixed nature should also be considered. To ensure that the government and GDP do not suffer as severely as they would in a communist economy. 

Some PSUs (railways, defense) may have shut down, been corrupted, or extorted as a result of private sector engagement, but are still afloat thanks to government assistance. Post disinvestment, the economic growth of Central Public Sector Enterprises (CPSEs)/ financial institutions will be through the infusion of private capital, technology, and best management practices. Will contribute to economic growth and new jobs,” the Budget said.

Therefore, we can understand why disinvestment may be looked upon while reviving the economy in these times. With the loss of lives, and livelihood, the government must adopt measures modified and efficient to decrease fiscal losses.

The pandemic sure has left an unprecedented dent in the economy, even at the smallest level. Strategic privatization coupled with disinvesting those sectors where the government still has a majority may be the key role to eradicate the deficit in a faster and an efficient manner.

Tags: indigenous enterprises, disinvestment strategy, disinvestment plan, center disinvestment plan, central public sector enterprises

Due Diligence and The Key Areas

Due diligence is a study and analytical procedure that is carried out before a merger and acquisition, an investment, a business partnership, or a bank loan to establish the worth of the topic of the due diligence, if there are any serious difficulties, and to ensure that the transaction is legal. There are majorly 3 types of due diligence, namely, business due diligence, legal due diligence, and financial due diligence.

Brief History of Due Diligence

Due diligence is a term that refers to the process of completing a transaction. It became popular after the passage of the United States Securities Act of 1933, specifically Section 11b3, which states that sellers of securities must provide sufficient information to allow investors to make an informed decision before purchasing.

The phrase signified “necessary carefulness” or “due care” in this context. Since then only the expression has become common in other areas and has found its most common use in mergers and acquisitions.

Need for Due Diligence

A Company needs to initiate the process of due diligence because it performs various functions that benefit both buyers and sellers in a merger or acquisition. These benefits include the following:

•  To confirm and verify the information that was brought up in a particular deal or investment
•  To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction
•  To obtain information that would be useful in the valuation of the concerning deal
•  To ensure that deal or investment opportunity complies with the investment or deal criteria

Challenges to Due Diligence                                              

Some of the challenges in undertaking the due diligence in distress M&A are given below:

• Lack of information: Due diligence on a corporate debtor is limited by a lack of shared information, since the reliance on information at several levels, beginning with the IRP, COC, and existing management for supplying important information, frequently leads to discrepancies that can lead to conflicts.
• Access to the information: Since the management of the affairs of the corporate debtor vest in the IRP; having access to the information itself is a challenge. This has to do with the IRP, who, in most cases does not possess knowledge of the industry and simply relies on the promoters and other officers of the corporate debtor for such information. The promoters, being already removed, are typically not very cooperative and leave a huge piece of anonymous information with the IRPs. Though, the IBC directs the promoter or the other person to co-operate with the IRP and provides IRP a right to approach NCLT with an application for necessary directions just in case of default.
• Time Factor:  In a normal M&A situation, the stakeholders have time to negotiate with third parties to obtain consent or negotiate changes to allow the sale to proceed, but in an unsettled sale, there could be situations of interaction with third parties who have interests in the sale of assets and over whom the seller has no control. This can create significant delays in the wind-up of a transaction.

Due Diligence in Indian Law

In India, there are no particular regulations governing due diligence, but the Securities and Exchange Board of India (SEBI) and various clauses in the Companies Act, 2013 put a requirement on directors to act in the best interests of the firm. While doing so, he is required to exhibit proper caution and expertise.

In Nirma Industries and Anr v. Securities Exchange Board of India, the Supreme Court held that under Regulation 27 (d) of the SEBI, 1997, an investor Company needs to ensure that appropriate due diligence is carried out with respect to the target company before investing.

Tags: due diligence process, financial due diligence, due diligence, commercial due diligence, due diligence real estate, types of due diligence, investment due diligence, legal due diligence, operational due diligence