Jun 04
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legal due diligence

Things to Keep in Mind Before Devising Legal Due Diligence

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Legal Due Diligence – Things to Keep in Mind Before Devising

Legal due diligence is the process of studying a company’s documentation and interviewing its workers in order to do research and analysis on it. Its goal is to gather information about the company in order to guarantee that the investment or purchase is worthwhile by disclosing key facts and potential liabilities. This might aid the business in making a better-educated selection.

Due diligence is typically undertaken while preparing for a merger, acquisition, public offering, joint venture, or other transaction, and it focuses on intellectual property, technical features, financial statements, and other areas of the firm.

Thorough due diligence research necessitates precise information about a company’s legal and financial responsibilities, management and employment concerns, tangible and intangible assets, contracts, existing litigation, and business strategy, among other things. Further, it requires the preparation of comprehensive and customized checklists detailing specific questions that can elucidate information needed for a better understanding of the business.

The checklist must include:

  • Corporate Documents of the Business and its Subsidiaries
  • Undertaking and declaration to be obtained
  • Contracts and Agreements
  • Legal Obligations
  • Debt Obligations
  • Trade union and Labour relations
  • Financial Information
  • Title to Property and Real Estate
  • Insurance
  • Undisclosed Liabilities
  • Taxation
  • Governmental Regulations
  • Employees and Related Parties
  • Exchange control
  • Statutory Documents
  • Products and Equipment
  • Environmental Matters
  • Intellectual Property
  • Others

Legal due diligence not only aids in making educated business decisions, but also assists the firm in better understanding its business and worth in terms of assets, agreements, and any dangers that may stymie the transaction. Further, the information gathered during the due diligence process can lend support to the drafting and negotiations process and give an unbiased legal expert’s opinion to the buyer and the seller company.

The disadvantage of Due Diligence investigations is that they are sometimes met with opposition from companies that are guilty of engaging in questionable business practices, and the outcome of the process may be skewed by those who stand to profit personally or professionally from the proposed activity.

As a result, businesses must be wary of such careless or faulty attitudes, because an ineffective Due Diligence process can cost organizations severe harm with far-reaching implications for the firm’s reputation.

 

Tags: legal diligence, due diligence law, diligence lawyers, legal due diligence, diligence in law, legal due diligence process, potential liabilities, due diligence law firm

Jun 03
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k sera sera ltd

SEBI Fines Rs 1 Cr Fine On K Sera Sera’s Director for GDR Fraud

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K Sera Sera Ltd – SEBI Fines Rs 1 Cr Fine On GDR Fraud

(SEBI) India’s capital market regulator Securities and Exchange Board of India has penalized the major media and entertainment, business group. Such as K Sera Sera Ltd, also known as KSS Ltd for having defrauded Indian investors under Section 12A(a), (b), (c) of SEBI Act read with Regulations 3(b), (c), (d), and Regulations 4(2)(c), (f), (k) and (r) of PFUTP Regulations over the issuance of Global Depository Receipts in the year 2007 and 2009. 

It has made the company liable for Rs. 12.1 crore while Hussain  Sattaf, the director, and managing director Rajesh Pavithran, the managing director have been asked to pay Rs. 1 crore each.

Following a thorough examination by the authorities, it was discovered that KSS had issued GDR issues on March 30, 2007, and May 15, 2009, respectively, with Pan Asia Advisors Ltd serving as the book-running lead manager for each of these companies. Further, Arun Panchariya was the company’s founder, director, and only shareholder of Pan Asia. 

According to the order copy, the investigation report (IR) alleges that Mr. Panchariya designed and arranged the whole process of KSS GDR issuances to the detriment of Indian investors, whereby loans were secured for the subscription of KSS GDRs on both occasions.

Mr. Panchariya was also reported to be the Managing Director, a 100% shareholder, and an authorized signatory of Vintage, the company with whom KSS had a loan and pledging agreement for both of its GDR issuance. He used certain domestic businesses connected to him to convert the GDRs into underlying shares, which he then sold on the Indian securities market with the aid of some Foreign Institutional Investors (FIIs).

KSS is also accused of violating Sections 11C(3) and 11C(6) of the SEBI Act by neglecting to submit some information required by SEBI and supplying false information.

The “Order” can be read hereunder –

https://www.sebi.gov.in/enforcement/orders/jan-2021/adjudication-order-in-the-matter-of-gdr-issue-of-k-sera-sera-limited-now-known-as-kss-limited_48875.html

 

Tags: global depository receipts, global depositary notes, k sera sera limited share price, gdr global depositary receipt, k sera sera ltd, global depositary shares, international depository receipt

Jun 03
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single securities code

Single Securities Code: Combination of Financial Laws

By Corporate Law, Banking, Media Coverage No Comments

Understanding The Single Securities Code: Combination of Financial Laws

Multiple pieces of law governing the banking industry have created more uncertainty than legislators could have imagined. The Minister Of finance created a Single Securities Code to address this issue. SEBI Act 1992, Depositories Act 1996, Securities Contracts (Regulation) Act 1956, and Government Securities Act 2006 were presented as a complete framework for the four most essential legislation relating to the financial industry.

Whereas SEBI, as the market regulator, is responsible for enforcing these laws, courts have been forced to interpret the impact of these laws on one another in the past, making things more confusing. Also, the implementation of several legislations for each facet of the capital market often leads to duplication and conflict as was also visible in dematerialized shares; wherein experts had to refer to various acts to ensure regulatory compliance.

Indeed, a common code would enhance the operational efficiencies in terms of bringing down the turnaround time in matters of regulatory approvals. It may even offer the investor community at large and market intermediaries improved clarity in terms of the legalities of certain matters as, firstly, it will avoid a conflicting scenario.

Moreover, it will improve administrative efficiency, making it easier to regulate trading and reducing the need for SEBI to stretch its claws across securities and commodities markets.

Additionally, over time, it is past time for harsh laws to be repealed and replaced with a contemporary framework that results in a slim code. That is quite similar to the present environment.

Thereby, the unification of four laws into one would not only make the laws more cohesive but also suitable for the present times as some were introduced as early as 1956. This would also allow the policymakers to address all the current ambiguities within the regulatory framework and introduce provisions that may be presently missing. 

A single rule would also provide tremendous operational efficiency to the regulator, who is currently overburdened with the responsibility of regulating many types of assets, including equity, commodities, currency, interest rates, and stock exchanges.

That gives a mercantilism platform for government and private sector bonds as well. Moreover, unification of the securities market code would mean that Government Securities augment the credibility of the government’s borrowings and the foreign capital flow in the country.

Therefore, a comprehensive code if enforced will make compliances transparent, and efficient, and enforcement of regulations simpler, thereby, reducing litigation. It would also enable the revamping of the Securities Contract Regulation Act streamlining multiple laws, guidelines, ordinances, and regulations.

Nevertheless, SEBI acts as a watchdog to observe key aspects of the capital market transactions along with an enormous variety of investment vehicles like foreign investors and mutual funds. There is the likelihood that the consolidation of the legislation into a renewed Code, could elevate the position of SEBI from a watchdog to that of a Super Regulator. 

This is significant considering that the Supreme Court in the matter of SEBI vs IRDAI battle over unit-linked insurance plans, issued a clarion decision back in 2010 towards a revamp of financial laws. Probably hinting at the formation of a super-regulator by the Central Government. More recently, regulatory overlaps appear to have arisen between SEBI and NFRA in penalizing quality lapses by auditors and audit corporations. 

The management and regulation of government securities presently lie with the Reserve Bank of India whereas trading of Government Securities along with other financial instruments on the stock exchanges is regulated by SEBI.

Thereby, including the Government Securities Act under the same umbrella as the SEBI Act and Securities Contracts (Regulation) Act, 1956. Which is the regulative foothold of SEBI, and poses a potential overlap of powers between RBI and SEBI once again. However, while drafting a unified Code the clarification of regulatory jurisdiction of these agencies could be addressed and conquered.

 As a result, there are several overlapping laws and interpretations of many acts that require tweaking and modifications, which could be readily accomplished by enacting a Consolidated Code. That could also assist in the creation of contemporary financial legislation. In addition, it would provide ease of operations for businesses and enhance the confidence of investors leading to an overall flourishment of the securities market as well.

 

Tags: single securities code, depositories act 1996, securities contracts regulation act 1956, securities code, combination of financial laws, financial laws

Jun 02
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united co operative bank ltd

Impact Of Cancelling United Co-Operative Bank’s License

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United Co Operative Bank Ltd – Impact of Cancelling License

The license of United Co-operative Bank Ltd., Bagnan, West Bengal, has been revoked by the Central Bank of India, according to an order dated May 10, 2021. As a result, on May 13, 2021, at the end of the business, the bank will cease to undertake banking activities.

With immediate effect, United Co-operative Bank Ltd., Bagnan, West Bengal, is forbidden from doing the business of “banking,” which includes accepting and repaying deposits, as defined in Section 5 (b) read with Section 56 of the Banking Regulation Act, 1949.

The West Bengal Registrar of Cooperative Societies has also been asked to issue an order for the bank’s winding up and the appointment of a liquidator.

As listed in the order here are the following reasons why the bank’s license was revoked by the Reserve Bank:

  •  The bank lacked sufficient capital and earnings potential. As a result, it violated section 11(1) and section 22 (3) (d) of the Banking Regulation Act, 1949, as well as section 56 of the Act.
  •   The bank has failed to comply with the provisions of sections 22 (3) (a), 22 (3) (b), 22 (3) (c), 22 (3) (d), and 22 (3) (e) of the Banking Regulation Act, 1949, as well as section 56.
  • The bank’s continued existence was seen to be detrimental to its depositors’ interests.
  •  With its current financial situation, it was concluded that the bank would be unable to pay all of its current depositors in full; and
  •  If the bank had been permitted to continue operating as a bank, it would have harmed the public interest.

With the cancellation of the license and the initiation of liquidation processes, the process of repaying the depositors of United Co-operative Bank Ltd., Bagnan, West Bengal, as per the DICGC Act, 1961, would begin. According to the bank’s information, all depositors will get the whole amount of their deposits from the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Subject to the terms of the DICGC Act, 1961, every depositor would be entitled to receive deposit insurance claim amounts in respect of his or her deposits up to a monetary ceiling of Rs. 5,00,000/- (Rupees Five lakh only) from the DICGC upon liquidation.

The Banking Regulation (Amendment) Bill 2020, which was passed by the Lok Sabha, brought cooperative banks under RBI supervision in order to solve the following issues that the cooperative banking industry in India was facing.

1)  The capital base is limited

Cooperative banks have a small capital base, which can start as low as Rs. 25 lakhs, making it difficult to account for a portion of that capital as working capital, which has been a major difficulty for practically all cooperative banks.

2)  Interference by politicians

Politicians use them to increase their vote bank, and they usually elect their representatives to the board of directors in order to get illegitimate benefits such as loan approvals that are later revoked.

3)  Supervision by the RBI

Cooperative banks are subject to less stringent RBI oversight than commercial banks. The RBI only inspects the records of some banks once a year.

4)  Dual-control system

Cooperative banks are managed by a dual system, with the RBI and state governments overseeing them, providing coordination and management difficulty.

5)  Management expertise and technical advancement

Cooperative banks are usually resistant to new technology, such as computerized data management. Due to a lack of funds and human training, professional management at banks is usually insufficient.

6)  Financial reliance

Cooperative banks rely heavily on the RBI, NABARD, and the government for refinancing. It relies on the government for funding rather than its members.

As a result, cooperative banks are now controlled by the RBI, which has the jurisdiction to give or revoke a bank’s license. The amendment’s goal is to safeguard depositors’ interests and enhance cooperative banks by improving governance and supervision, as well as extend the RBI’s authority over other banks to cooperative banks.

However, existing powers of the State Registrars of Co-operative Societies under state co-operative legislation are unaffected by the modifications. This measure will increase cooperative banks’ access to capital, which has been limited previously.

It strikes the right note by establishing a process for these institutions to be reformed, as well as significantly enhancing their regulatory oversight by the RBI, a competent and efficient regulator. This move should increase public confidence in cooperative banks while also protecting the interests of all stakeholders in the long run.

To deal with bank failures, central banks have been established all over the world. Even after regulating and adopting extensive oversight of banks, the RBI has been unable to prevent many of them from collapsing, as indicated by the recent history of banks put under moratorium in the public interest due to mismanagement and progressively going out of business.

Due to increased control and regulation, cooperative banks play a significant role in the achievement of development goals and are crucial to the smooth running of India’s banking industry. Following a series of high-profile scams, India is categorized as an underbanked country, and actions must be done to narrow the gap and restore public trust in the banking system.

 

Tags: the banking regulation act 1949, united co operative bank ltd, banking act 1949, section 56 of banking regulation act, br act 1949, banking regulation act 1949

Jun 01
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cybersecurity norms

Decoding The Cybersecurity Norms for Payment Service Providers

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Cybersecurity Norms – Decoding for Payment Service Providers

Cybersecurity is a major concern in an increasingly digitalized society. Because of the rapid rise of online transactions, payment service provider systems have become vulnerable to cyber-attacks. As a result of the increasing number of breaches by third-party payment service providers, the RBI has tightened the criteria for the operation and regulation of such payment service providers.

Following a string of data breaches, the RBI introduced perspective guidance with regard to digital payment protection whereby it stated security protocols to be used in mobile apps, internet banking of scheduled commercial banks, small finance banks, payment banks, and card issuing non-bank lenders.

These rules would unquestionably strengthen digital payment security requirements by increasing security, control, and enforcement for banks and other regulated companies. Furthermore, it mandates multi-factor authentication for payments and fund transfers made by electronic means, achieving a dual goal of promoting customer convenience while also tightening the loose ends of digital payment security.

Strong governance, enforcement, and scrutiny at the ground level on fundamental security measures for networks such as internet and mobile banking, card payments, and so on are critical to the achievement of these principles.

Moreover, as digitization and human lives become increasingly intertwined, security checks at all levels will be essential to cope with any cybersecurity concerns. It’s also worth noting that the rule fails to recognize the potential harm that monopoly poses in this industry.

Notwithstanding the government’s numerous restrictions, individual users must stay cautious at all times, since this is the only way to ensure that hazards associated with digital transactions are not abused. As a result, the challenge to be met is to implement fintech without jeopardizing the financial sector’s safety and security.

 

Tags: cybersecurity norm, internet banking, online banking, cybersecurity norms

May 29
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due diligence report

Due Diligence Report : The Ball of The Game

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Due Diligence Report

The Business Standards, on its 27th of May 2021 issue, reads a headline about how million-dollar M & A deals are being sealed in the pandemic situation where countries over the world are facing the wrath of lockdowns.

What is M&A?

M&A, the abbreviated term for Mergers and Acquisitions, is a generalized term describing the coming together of companies or the assets through transactions like mergers, acquisitions, purchase of assets, tender offers, partnerships, and consolidations. The term Merger and Acquisition is often understood as synonymous, whereas they are not.

A merger is the bringing together of two or more separate businesses to form a single new firm. An acquisition is the takeover of a submissive firm by a dominant one, with the dominant firm becoming the owner of the submissive firm.

I concluded that before a merger or acquisition, a corporation must study and examine important benefits and drawbacks in order to transform the financial transaction into a lucrative one. And this research must be done meticulously. Here comes the role of ‘Due Diligent Report’.

What is the Due Diligent Report?

The importance of mergers and acquisitions in the development of firms may be demonstrated by using Yahoo as an example. Once a pioneer in the world of the Internet, this company has squandered its value whereas its competitor, Google, has made it to the apex, which is all due to the calculated steps taken during Mergers & Acquisitions.

Prior to paying a large sum of money in a commercial deal, investors conduct extensive research, which is referred to as Due Diligence. It is clear from the term that the act of research is being carried out with the utmost care. This conscious analysis, when presented as summarized in a report, it is known as a ‘Due Diligence Report’.

A due diligence report includes a statement describing the research, the documents based on which the research is performed, information on assets and liabilities, debts, market analysis, and SWOT Analysis. SWOT stands for Strength, Weakness, Opportunities, and Threats, linked with the company being acquired. 

What are the types of Due Diligent Reports?

The due diligence report forecasting the estimates of commercial potentialities are primarily of 3 (three) types. They are:-

  1. Financial Due Diligence
  2. Business Due Diligence
  3. Legal Due Diligence

The accounting practices, audits, tax-related compliances, and other financial and commercial prospects of the acquired business are highlighted in the financial due diligence report. The business due diligence report demonstrates the parties engaged in the transaction’s business viability. Legal due diligence, also known as Documents Only due diligence, is the estimation of the legal risks that are evaluated before a merger or acquisition.

Importance of Due Diligent Report

The main objective of the Due Diligent Report is to give the company acquiring a complete overview of the possible risks in the future. These risks, when recognized, can be negotiated likewise for the smooth running of the business.

Sections of the Due Diligence Report

The sections of a due diligence report are as follows:-

  1. Corporate Records like the certificate of incorporations, certificates of shares, articles of
  2. Association, memorandums, and the existence of any warrants.
  3. Financial information for the past five years. The statements of audits, taxes filed, the tax returns, internally generated financial models, etc.
  4. The records of indebtedness of the company to be acquired like the loan agreements, mortgages, etc.
  5. The list of employers and the code and policies related to employment. Documents if there is any pending litigation related to labor law.
  6. Documents relating to the real property of the company.
  7. All the agreements the target company has entered into.
  8. Copies of legal proceedings, environmental policy compliances, and licenses obtained.

 Conclusion

As a result, a Due Diligent Report is an essential component of any financial transaction involving two or more organizations. The importance of the report emphasizes how meticulously it should be created, as the prospects of both the firm acquiring and the firm acquired are dependent on it, despite the fact that such studies have some limitations.

The competency of the workforce remains behind the curtain. The report entirely relies on the information available and this may pose a hurdle for a reliable due diligence report. 

 

Tags: due diligence, due diligence report, m & a deals, purchase of assets, financial due diligence, commercial due diligence, tender offers, legal due diligence

May 29
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tax on reit

The Imposition of Tax on REIT / INVIT Under The Finance Act 2020: A Critical Evaluation

By Corporate Law, Banking, Media Coverage One Comment

The Imposition of Tax on REIT/INVIT Under Finance Act 2020

Real Estate Investment Trusts and Infrastructure Investment Trusts are rapidly growing investment vehicles that allow developers to monetize revenue-generating real estate and infrastructure assets while also allowing unitholders to participate without owning the assets.

The Indian real estate sector has long campaigned for the creation of “Real Estate Investment Trusts (hereinafter REITs)” and “Infrastructure Investment Trusts (IITs)” (hence InvITs). Although these industry launches were originally permitted a few years ago, their popularity has waned because of the ambiguity surrounding the tax legality of all pass-through transfers. REIT may be defined as a sort of mutual fund that enables investors to invest in real estate.

A real estate investment trust (REIT) is a firm that receives money from interested investors and invests it in real estate projects. InvITs, on the other hand, vary from REITs in that the majority of willing investors often participate in capital investments with a long gestation period.

They are collectively known as “Business Trusts,” and they have enormous potential to aid the government in accomplishing one of the country’s large infrastructure expansion goals while also encouraging the country’s commercial real estate market to improve.

Dividends (received by unitholders of REITs and InvITs) were not subject to tax prior to the approval of the Finance Bill tabled in Lok Sabha. The Finance Minister, Ms. Nirmala Sitharaman, released the Union Budget for the years 2020-2021 and requested several changes. For the fiscal year 2021, the Bill tabled in the Lok Sabha comprised many budgetary and taxation-related suggestions to change the Income-tax Act, 1961 (“Income-tax Act”).

Following the passage of the bill, the government decided to tax profits received by unitholders in REITs and InvITs, jeopardizing the developers’ and road-to-port the builders’ intentions to collect all money from such instruments. It may as well had been a tax policy enforced, but the dividend distribution tax was eliminated in Budget 2020-21, putting the burden of proof on the holders.

Although tax-free SPVs and trusts will remain, unitholders of InvITs and REITs will no longer be exempt. They will also be subjected to be taxed at the applicable income tax rate for the dividend income under the finance act 2020.

Upon the bill’s ratification, there was some unanimity on the fairness of the taxation policy imposed on dividend unitholders, and some remained unaffected by the adjustment in the taxation policy since it was not a major problem and was not unreasonable given that the government had already decreased the corporate tax rate. The aim behind such imposition seems to be convincing as it was to apply one advantage – either exempt the dividends or offer a lower corporate tax rate to the SPVs.

The imposition of tax responsibility on REITs and InvITs, like two sides of a coin, has its own set of benefits and downsides. The idea in the Union Budget to tax the profits obtained in the hands of unitholders/investors was developed after studying the chances of imposing the tax and taking into account the views addressed by real estate industry authorities.

 It would have a detrimental effect on the potential of InvITs and REITs, as a budget choice would go against the government’s immediate efforts. This was done to entice InvITs and REITs to give some tax certainty to long-term infrastructure developers. The introduction of the tax, on the other hand, contributes to the uncertainty among international/foreign investors who are skeptical of India’s tax regime’s stability and will be irreversibly hurt by the tax regime’s unpredictability.

The government’s proposed/passed reforms, as well as the application of a tax on dividends earned by REIT and InvIT unitholders, seem to have a significant influence on the business trust’s future potential in one way or another. Nevertheless, the appeal of these structures remains unresolved following a comparative review of the revisions.

 

Tags: finance bill 2020, reit taxation, the finance act 2020, tax on reit, 2020 finance act, reit tax benefits, finance act 2020, reit dividend tax, finance act 2020 summary

May 27
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intellectual property rights

Intellectual Property Rights VS Open Access Initiatives

By Corporate Law, Media Coverage No Comments

Intellectual Property Rights and Open Access Initiatives

In the wake of the global epidemic, the conflict between open access and traditional IP rights is becoming a significant problem. The essence of IPR and open access is that they are opposed to one another, to the point that approving one is destructive to the other. Let’s break down and find a balance between them.

IPR registration primarily consists of safeguarding one’s intellectual work for innovations and creative works, indicating its origin, and providing the owner unlimited control over that particular product for a certain length of time.

Whereas the fundamental goal of most open-access efforts is to help people and organizations overcome barriers. And to aid individuals and organizations in overcoming legal barriers, sharing and developing knowledge, and addressing global concerns.

 The effort encourages open access sharing and gives information on how to distribute information while avoiding prejudice against any individual or group of individuals. It would also stimulate fresher ideas and solutions to society’s broader issues, as well as provide a fair playing field for all entrepreneurs and people to compete on an equal footing with giant corporations with more resources.

As a result, these ideas are intended to both promote and enable access to individuals who may not otherwise be able to afford it.

The basics of open access, as can be shown, contravene one of the most fundamental concepts of intellectual property rights, which is to safeguard intellectual property. The rationale for the parties wanting legal protection for their IP is mostly commercial profit. The patent helps provide a framework to share protected work without letting go of any commercial benefits like product sales and licensing royalties. For instance, a person can patent his scientific tool and then sell the same to a huge corporation.

As an outcome, the firm may create it in big quantities at a lesser cost, lowering the cost to the customer. For all parties concerned, this is a triple-win situation. The patent owner makes money from the invention, the business sells the item to the consumer, and the customer gets a cheaper product. Copyrights are also for anyone who wants to safeguard their work, such as literary works or movies, while simultaneously benefiting from IP protection.

A large portion of this labor is shown in front of the public to get advantages. Without copyright protection, the author’s work might be duplicated or exploited without the originator receiving any recompense.

Furthermore, a trademark serves as a means of distinguishing one company’s goods or services from those of another. It also allows an owner to restrict other parties from using his or her trademark. A trademark’s main purpose is to provide information about a product’s origin and excellence to help consumers make better purchasing decisions.

It also gives a single owner monopolistic power because a large number of registered marks means fewer marks are accessible for others to use in the public domain.

As a result, in addition to symbolism, a trademark may be extremely valuable to a firm, causing some to incorporate it into their value. Trademarks are perpetually protected as long as they are in use and the owner can defend them. It protects companies from impersonators who want to profit by creating uncertainty in the marketplace by attempting to imitate an already recognized brand.

Striking a balance between traditional intellectual property rights and open access projects may be difficult, because artists may contemplate the consequences of doing something for the greater good, but they are also likely to consider how profitable their invention may be. However, recently this convergence has been seen in the Open COVID Pledge where the world is coming together to fight the pandemic. 

The goal of the committee is to urge organizations all around the globe to share their intellectual property so that we can all combat COVID together. This vow will eventually assist in the defeat of COVID-19 and will benefit humanity as a whole. Participating in this promise may also benefit businesses by generating goodwill and resulting in future commercial benefits.

 

Tags: open access initiatives, intellectual rights, ipr law, intellectual property rights law, ip rights, intellectual property rights, intellectual property protection, ipr act

May 26
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personal guarantor insolvency

The New Legislation of Personal Guarantor’s Insolvency Under IBC

By Corporate Law, Banking, Media Coverage No Comments

Personal Guarantor Insolvency

IBC 2016 was created to replace the old framework for insolvency and bankruptcy with single legislation. With the adoption of the IBC, the winding-up procedure was brought under the supervision of the National Company Law Tribunal, guaranteeing prompt and speedy action during the early phases of a firm’s financial default. The IBC’s primary goal is to help distressed corporate debtors.

History of Personal Guarantor Insolvency

As defined by Section 5(22) of the Code, a personal guarantor is an individual who is the surety under a contract of guarantee to the corporate debtor. While the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were implemented by the Central Government in 2016, the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were not.

The provisions pertaining to Personal Guarantors to Corporate Debtors’ bankruptcy resolution procedure were not. Prior to the Code’s creation, the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 covered insolvency and bankruptcy for all persons, including personal guarantors.

NEW LAW

The IBC shall apply to the personal guarantor of the corporate debtor as of 1.12.2019, according to a notice dated 15.11.2019. Section III of the IBC will only apply to personal guarantors, according to this notice.

The Supreme Court in landmark judgment held that lenders can now initiate insolvency proceedings against promoters, managing directors, and chairpersons who issued personal guarantees on corporate loans if the borrower defaults.

Prior to the Notification concerning Section 60 of the Code, the Debt Recovery Tribunal had jurisdiction over insolvency and bankruptcy procedures against personal guarantors, whereas procedures against corporate debtors for the same default were either underway or became pending before an NCLT. 

This had the opposite effect, delaying the legal procedure and producing inaccuracies in estimating the amount to be recovered from the guarantors. To resolve this issue, Sections 60(2) and 60(3) of the Code were inserted, mandating that bankruptcy procedures against personal guarantors and corporate debtors be conducted by the same court, namely the NCLT.

ADVANTAGES AND DISADVANTAGES OF THE NEW LAW

  1. Consolidation of proceedings safeguards the debtors’ and guarantors’ interests by ensuring that the claim amounts issued to creditors do not overlap.
  2. For creditors, it allows for simultaneous actions before the same court, removing the burden of having to go to two separate forums to recover the same amount.
  3. The new legislation is likely to significantly reduce delays in the collection of creditors’ dues, as the Code mandates a time-bound approach.
  4. In addition to the SARFAESI Act, debt recovery suits, and other civil remedies, creditors now have another option for recovering their loans, resulting in a concentration of power in their hands.
  5. There appears to be no clear provision in Part III of the IBC, 2016 that allows an aggrieved personal guarantor to challenge the adjudicating authority’s decision.
  6. A pro-creditor insolvency framework presently applies to personal guarantors. Liabilities do not exclude guarantors. As a result, organizations must exercise prudence and prudence before issuing assurances in order to protect themselves from unanticipated events.

IMPACT ON THE INDUSTRY

In Lalit Kumar Jain vs. Union of India, the Hon’ble Supreme Court confirmed the legality of the 2019 notice expanding the IBC rules to personal guarantors. The Court also concluded that approving a Corporate Debtor’s resolution plan did not free a Personal Guarantor of their responsibility to repay the Corporate Debtor’s debt owed to an independent contractor.

A distinctive aspect of loans supplied to MSMEs is that it is frequently backed by personal guarantees supplied by promoters (which account for around 29 percent of GDP). Promoters will be encouraged to employ the pre-packaged insolvency resolution procedure for MSMEs to get creditor-friendly outcomes and strengthen credit discipline across the loan market as a result of the decision.

CONCLUSION

Despite being a good legislative attempt at efficiency, asset valuation maximization, and resolution process optimization, the new legislation fails to address the realities of the bankruptcy process.

For instance, an ordinance dated 05.06.2020 halted the implementation of Sections 7, 9, and 10 of the IBC, 2016, which were intended to safeguard corporations against new insolvency actions, citing the COVID-19 epidemic as the rationale. 

However, relevant provisions of Part III of the IBC, 2016 dealing with individual/personal insolvency, including personal guarantors to corporate debtors, are not suspended in the same way, even though it is reasonable to assume that the economic slowdown caused by COVID-19 will affect both corporates and individual guarantors equally.

This has led to the creditors having the option, even during a COVID-19 pandemic, to take action against personal guarantors but not against corporate debtors.

 

Tags: individual insolvency under ibc, personal guarantor ibc, personal guarantee ibc, voluntary liquidation under ibc, personal guarantor under ibc, personal guarantor insolvency, ibc personal guarantor, personal insolvency under ibc, personal guarantor insolvency under ibc, insolvency proceedings against personal guarantor

May 25
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limited due diligence

Limited VS. Exhaustive Due Diligence

By Others No Comments

Exhaustive Due Diligence

The term “due diligence” is not defined in Indian law, but it suggests that a buyer should exercise caution. It is an inquiry or verification of the affairs of a business organization conducted by any individual or other business entity interested in taking over, combining, or investing in that former entity.

This is done to prevent foreseeable risks. Every business must conduct legal due diligence and be ready for unwelcome surprises before doing any deal the mergers & acquisitions. There are many processes involved in due diligence including business due diligence, special due diligence, accounting due diligence, and legal due diligence.  Due diligence looks at the past and current performances of the businesses.

LIMITED VS. EXHAUSTIVE DUE DILIGENCE   

As we talk about limited due diligence, we imply it’s confined to a certain level and focused on certain legal concerns, whereas exhaustive due diligence takes into account, encompasses, and evaluates everything about a corporate organization. While considering a merger or an acquisition transaction, the buyer, acquirer, or investor, as the case may be, will have limited knowledge pertaining to the target company other than what is available in the public domain.

 Due to this, the buyer will appoint legal and financial experts preferably lawyers, chartered accountants, or merchant bankers to conduct an exhaustive due diligence process on its behalf. In an exhaustive due diligence process, a vast amount of information is to be reviewed.

The legal due diligence team typically analyses the charter documents, material contracts, employment agreements, and real estate documents. Including corporate compliances, tax compliances, financial documents, insurance contracts, labor law compliances, intellectual property rights, and any litigation proceedings by & against the target company. 

Prospective buyers should gather documentation that reveals the company’s organization the parties need to refrain from the structure. They must also gather information on taxes, strategic fit, intellectual property, material assets, contracts, members, and lawsuits. 

PROS AND CONS

PROS 

  • It aids in the identification and mitigation of the target entity’s risks and responsibilities.
  • It evaluates the value of the target entity.
  • The information acquired following due diligence aids in deciding whether or not the agreement with the target firm is worthwhile.
  • Exhaustive due diligence helps in getting complete or overall information about the target entity.

CONS 

  •  Limited information or inquiry is the main reason for mergers & acquisitions failure.
  • Exhaustive due diligence is a very time-consuming process.
  • Any mistake, omission, or oversight committed at the time of the due diligence process can have adverse effects.

IMPACTS ON INDUSTRY

  • When a business entity confirms deals without doing due diligence or deals with insufficient due diligence, the damages can be dangerous. 
  •  After a merger or acquisition, all financial risks of the target company are transferred to the acquirer company.
  • Once governmental authorities or third parties take action against a targeted firm following a merger or purchase, the acquirer will face substantial legal fights and proceedings even if the acquirer had no involvement in the targeted firm’s non-compliance, fraud, or irregularity. Therefore, strict due diligence and deep investigation into the background of the cases of the targeted company are of paramount importance.

CONCLUSION

A well-executed due diligence process with proper effort is an essential part of a successful M&A deal. Negligence or other improper conduct in this regard will have harmful effects on the deal M&A. A failed M&A deal will create serious financial and legal difficulties and damage the reputation of the parties to the deal.

In order to remove any inadequacies in a due diligence process, it is essential that the process is done by people with the necessary skills and competencies. A well-qualified team with a systematic approach will make sure that the risks associated with the deal are identified and are not transmitted to the consumer.

 Therefore, it is essential for the parties to refrain from being overly enthusiastic or emotionally vested in a transaction that can cause the parties to ignore any negative information and cloud their judgment. The next time you engage in an M&A transaction, you’ll know what to do and how to go with your legal due diligence process, which will provide you with a clear picture of your future with the subject firm.

 

Tags: commercial due diligence, due diligence, due diligence real estate, legal due diligence, limited due diligence, financial due diligence