CHANAKYA NATIONAL LAW

UNIVERSITY

DISTRESSED COMPANIES: LAST HOPE

CORPORATE LAW II
FACULTY- MRS. NANDITA S. JHA

ANUBHUTI VARMA
ROLL-721
8TH SEMESTER
1

ACKNOWLEDGMENT
Im thankful to MRS. NANDITA S. JHA for her able guidance throughout the making of this
project. Special thanks to my friends for their assistance and much needed help. Thank you one
and all.

RESEARCH METHODOLOGY
SUBJECT: Corporate Law II
TOPIC: Distressed Companies: Last Hope
OBJECTIVES: To ascertain the revival and rehabilitation mechanism for sick companies by way of
takeover.
RESEARCH METHODOLOGY: Doctrinal research methodology has been used. Keeping the
objectives in mind, material was collected with the help of different books and then it was compiled to
make the theoretical part of the project. Secondary sources were also utilized in order to complete the
objective.
RESEARCH TOOLS: The research of this project was carried with the help of the Internet and Library
of Chanakya National Law University.
FOOTNOTING STYLE: In whole of my project uniform footnoting style has been adopted.

CONTENTS
INTRODUCTION........................................................................................................... 5
TAKEOVERS UNDER THE SCHEME OF REVIVAL AND REHABILITATION.........................7
(i) Emergence of the concept of takeover...............................................................7
(ii) Objects of takeover............................................................................................ 8
(iii) Kinds of takeovers............................................................................................. 9
(iv) Legal aspects of takeovers.............................................................................. 11
TAKEOVER AND ACQUISITION OF MINORITY INTEREST.............................................12
(a)Takeover of Unlisted and Closely Held Companies............................................12
(b) Takeover Bids................................................................................................... 14
(c)Fairness of takeover bids...................................................................................14
(d)Take-over Offer to be front Single Company.....................................................15
(e)Adequacy of Information................................................................................... 15
(f)Notice of Acquisition.......................................................................................... 15
IMPACT OF TAKEOVER OF SICK COMPANIES ON ECONOMY.......................................16
CONCLUSION............................................................................................................ 20
BIBLIOGRAPHY.......................................................................................................... 22

INTRODUCTION
The incidence and magnitude of ill effects of sickness and the resultant closure of industrial
companies such as loss of production, loss of employment, loss of revenue to the central and
state Government and locking up of investible funds of banks and financial institutions, was a
matter of serious concern to the Government. It was recognized that in order to fully utilize the
productive industrial assets, to afford maximum protection of employment and optimize the use
of the funds of banks and financial institutions, it would be imperative to revive and rehabilitate
the potentially viable sick industrial companies as quickly as possible. However, the multiplicity
and complexity of laws and agencies present made the adoption of a co-ordinated approach in
dealing with sick industrial companies, difficult.
It was realized that the measures, till then adopted by the government, viz. nationalization or
takeover of management, had not been able to achieve the desired results. Both these measures
needed periodic and constant financial and other support. In spite of all the possible investment
and support, many sick industrial undertakings did not show any symptoms of viability. A large
number of undertakings did not become healthy in spite of their management being continued
with the Government or a Government nominated agency for several years as huge sums of
money were required to meet their past liabilities of unpaid wages, taxes, duties etc., and for
working capital. Hence, even the sick industrial undertakings whose management were taken
over were forced to be wound up.
Therefore timely and advance measures should be taken either by legislation or by administrative
orders and machinery, to keep a strict vigil on the symptoms of corporate sickness with particular
reference to such companies as are prone to any kind of corporate sickness, so that preventive
and remedial measures can be taken before a company goes sick. A need was therefore felt, to
enact in public interest, a legislation to provide for timely detection of sickness in industrial
companies and for expeditious determination by a body of experts of the preventive,
ameliorative, remedial and other measures that would need to be adopted with respect to such
companies and for enforcement of the measures considered appropriate. Based on the
recommendation of a Committee of Experts under the Chairmanship of Shri T.Tiwari, the

Government enacted a special legislation named as the Sick Industrial Companies (Special
Provisions) Act, 1985 commonly known as SICA.
The Board of Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for
Industrial and Financial Reconstruction (AAIFR) were also established in 1987 to look after the
matters covered under the purview of SICA. SICA was further amended in 1991 to bring
government companies under its purview and again in 1993 certain changes were brought out in
the act for the determination of industrial sickness1.
The legislation was predominantly remedial and ameliorative, in so far as it empowered the quasi
judicial body, the BIFR to take appropriate measures for revival and rehabilitation of potentially
viable sick companies and for liquidation of non-viable companies and was regulatory only to a
certain extent. The latter aspect was reflected in the provisions of the Act providing for
obligation of sick industrial companies and potentially sick industrial companies, to make
reference to the Board and treating any non-compliance as a punishable offence.

1 The Tiwari Committee on Rehabilitation of Sick Units was constituted by RBI in

1981. The committee has examined the legal and other difficulties faced by banks
andfinancial institutions in the rehabilitation of sick industrial undertakings and
suggested remedial measures, including changes in law and submitted its report
in1983.
6

TAKEOVERS UNDER THE SCHEME OF REVIVAL

AND REHABILITATION
(i) Emergence of the concept of takeover
Corporate Sector is an attractive medium for carrying on business as it offers lots of benefits.
Raising money from public has its own positive features and it helps setting up big projects.
When promoters of a company desire to expand, they take a quick view of the industrial and
business map. If they find there are opportunities, they will always yearn for capitalizing such
opportunities. Compared to the efforts required, cost and time needed in setting up a new
business, it would make sense to them to look at the possibilities of acquiring an existing entity.
While the possibility of takeover of a company through share acquisition is desirable for
achieving certain strategic objectives, there has to be well defined regulations so that the interests
of all concerned are not jeopardized by sudden takeover threats. In this perspective, if one were
to analyse, it would be clear that there has to be a systematic approach enabling and leading the
takeovers, while simultaneously providing adequate opportunity to the original promoters to
protect / counter such moves. Thus, while the acquirer should a discipline method with proper
disclosure of intentions so that not only the original promoters who are in command are
protected but also the investors. It would be in the interest of all concerned that the takeover is
carried out in a transparent manner.
When adequate checks and balances are introduced and ensured, takeover becomes a good tool.
That is the reason why regulations have been put in place and these regulations require sufficient
disclosure at every stage of acquisition. These regulations take so much care that they cover not
only the direct acquisition of the acquirer but also include acquisitions through relatives and
associates and group concerns.
In India, the process of economic liberalization and globalization ushered in the early nineteen
ninetys created a highly competitive business environment, which motivated many companies to
restructure their corporate strategies. The restructuring process led to an unprecedented rise in

strategies like amalgamations, mergers in reverse mergers, demergers, takeovers, reverse

takeovers and other alliances.
The concept of takeover picked up and in the meantime the Securities Exchange Board of India
(SEBI) also notified the SEBI (Substantial Acquisition of Shares and Takeover) Regulations,
1997 which laid down a procedure to be by an acquirer for acquiring majority shares or
controlling interest in another company. The main objective is to ensure equal opportunity to all
shareholders and offer protection to them, in the event of substantial acquisition of shares and
takeovers.

(ii) Objects of takeover

The objects of a takeover may inter alia be
a. To effect savings in overheads and other working expenses on the strength of combined
resources;
b. To achieve product development through acquiring firms with compatible products and
technological/manufacturing competence, which can be sold to the acquirer's existing
c.

marketing areas, dealers and end users;

To diversify through acquiring companies with new product lines as well as new market
areas, as one of the entry strategies to reduce some o risks inherent in stepping out of the

acquirer's historical core competence;

d. To improve productivity and profitability by joint efforts of technical and other personnel
of both companies as a consequence of unified control;
e. To create shareholder value and wealth by optimum utilization of the resources of both
f.
g.

companies;
To achieve., economy of numbers by mass production at economical costs;
To secure advantage of vertical combination by having under one command and under
one roof, all the stages or processes in the manufacture of the end product, which had
earlier been available in two companies at different locations, thereby saving loading,
unloading, transportation costs and other expenses and also by affecting saving of time

and energy unnecessarily spent on excise formalities at different places and stages;
h. To secure substantial facilities as available to a large company compared to smaller
companies for raising additional capital, increasing market potential, expanding
consumer base, buying raw materials at economical rates and for having own combined

and improved research and development activities for continuous improvement of the
products, so as to ensure a permanent market share in the industry;
i. To increase market share;
j. To achieve market development by acquiring one or more companies in new,
geographical territories or segments, in which the activities of acquirer are absent or do
not have a strong presence.

(iii) Kinds of takeovers

a) Friendly takeovers
A "friendly takeover" is an acquisition which is approved by the management. Before a bidder
makes an offer for another company, it usually first informs the company's board of directors. In
an ideal world, if the board feels that accepting the offer serves the shareholders better than
rejecting it, it recommends the offer be accepted by the shareholders.2
In a private company, because the shareholders and the board are usually the same people or
closely connected with one another, private acquisitions are usually friendly. If the shareholders
agree to sell the company, then the board is usually of the same mind or sufficiently under the
orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the
UK concept of takeovers, which always involve the acquisition of a public company.
b) Hostile takeovers
A "hostile takeover" allows a bidder to take over a target company whose management is
unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target
company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the
offer directly after having announced its firm intention to make an offer. Development of the
hostile tender is attributed to Louis Wolfson.
A hostile takeover can be conducted in several ways. A tender offer can be made where the
acquiring company makes a public offer at a fixed price above the current market price. Tender
offers in the United States are regulated by the Williams Act. An acquiring company can also
engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple
majority, to replace the management with a new one which will approve the takeover. Another
method involves quietly purchasing enough stock on the open market, known as a "creeping
2 Eur-lex.europa.eu, LexUriServ-PDF
9

tender offer", to effect a change in management. In all of these ways, management resists the
acquisition, but it is carried out anyway.
The main consequence of a bid being considered hostile is practical rather than legal. If the board
of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the
target company, providing the bidder with a comprehensive analysis of the target company's
finances. In contrast, a hostile bidder will only have more limited, publicly available information
about the target company available, rendering the bidder vulnerable to hidden risks regarding the
target company's finances. An additional problem is that takeovers often require loans provided
by banks in order to service the offer, but banks are often less willing to back a hostile bidder
because of the relative lack of target information which is available to them.
A well known example of an extremely hostile takeover was Oracle's hostile bid to
acquire PeopleSoft.3
c) Reverse takeovers
A "reverse takeover" is a type of takeover where a private company acquires a public company.
This is usually done at the instigation of the larger, private company, the purpose being for the
private company to effectively float itself while avoiding some of the expense and time involved
in a conventional IPO. However, in the UK under AIM rules, a reverse take-over is an
acquisition or acquisitions in a twelve-month period which for an AIM company would:

exceed 100% in any of the class tests; or

result in a fundamental change in its business, board or voting control; or

in the case of an investing company, depart substantially from the investing strategy
stated in its admission document or, where no admission document was produced on
admission, depart substantially from the investing strategy stated in its pre-admission
announcement or, depart substantially from the investing strategy.

An individual or organization, sometimes known as corporate raider, can purchase a large

fraction of the company's stock and, in doing so, get enough votes to replace the board of
3 Oracle's Hostile Takeover of PeopleSoft (A) - Harvard Business Review
10

directors and the CEO. With a new agreeable management team, the stock is a much more
attractive investment, which would likely result in a price rise and a profit for the corporate
raider and the other shareholders.

(iv) Legal aspects of takeovers

The legislations/regulations that mainly govern takeover is as under
1. SEBI (SAST) Regulations 2011
2. Companies Act, 1956
3. Listing Agreement
SEBI Regulations 2011 lays down the procedure to be followed by an acquirer for acquiring
majority shares or controlling interest in another company. As far as Companies Act is
concerned, the provisions of section 395 of the companies act lays down legal requirements for
the purpose of takeover of an unlisted company through transfer of undertaking to another
company. The takeover of a listed company is regulated by clause 40A and 40B of the Listing
agreement. These clauses in the Listing Agreement seek to regulate seek to regulate takeover
activities independently and impose certain requirements of disclosure and transparency.

11

TAKEOVER AND ACQUISITION OF MINORITY

INTEREST
(a)Takeover of Unlisted and Closely Held Companies
Section 395 of the Companies Act deals with the, Power and duty to acquire shares of
shareholders dissenting from scheme or contract approved by majority.4 It contains a

compulsory acquisition mode of the transferee company to acquire the shares of minority
shareholders of Transferor Company.
Where the scheme is approved by the holders of not less than nine tenth in value of the shares of
the transferor company whose transferor is involved, it shall be binding on all the shareholders of
the company, unless the court orders otherwise. Powers of Acquisition of Shares of dissentient
minority shareholders is not ultra vires the constitution of India. 5 Where the scheme or contract
has been approved by 90% of the shareholders, the offer of the transferee company will be
treated as prima-facie a fair one and the onus will be on the dissentients to show the contrary.6
The following are the important ingredients of the Section 395 route:
The Company, which intends to acquire control over another Company acquiring share,
held by shareholders of that another Company is known under Section 395 of the Act as
the 'Transferee Company".
The Company whose shares are proposed to be acquired is called 'Transferor Company".
The 'Transferee Company" and "Transferor Company" join together at Board level and
come out with a scheme or contract.
Every offer or every circular containing the terms of the scheme shall be duly approved
by the Board of Directors of the companies and every recommendation to the members of

4 http://indiankanoon.org/doc/274449/
5 S.Vishwanathan vs. East India Distilleries &Sugar Factories Limited(1957) 27 Com
Cases 175:AIR 1957 Mad 341
6Benarsi Das Saraf vs. Dalmia Dadri Cement Ltd(1958)28 Com cases 435 (Punj)
12

the transferor Company by its directors to accept such offer. It shall be accompanied by
such information as provided under the said Act.
Every offer shall contain a statement by or on behalf of the Transferee Company,
disclosing the steps it has taken to ensure that necessary case will be available. This
condition shall apply if the terms of acquisition as per' the scheme or the contract provide
for payment of cash in lieu of the shares of the Transferor Company which are proposed
to be acquired.
Every circular containing or recommending acceptance of the offer made the transferee
Company shall be duly accompanied by e-Form No. 35A of the Companies (Central
Government) General Rules and Forms, 1956. They shall be filed with the Registrar for
registration.
The Registrar may refuse to register any such circular, which does not contain the
prescribed information, if such information is given in a manner likely to give a false
impression.
An appeal shall lie to the court against an order of the Registrar refusing to any such
circular.
Any person issuing a circular containing false statement or giving any false impression or
containing any omission shall be punishable with fine which may extend to five hundred
rupees.
After the scheme or contract and the recommendation of the Board of Directors of the
transferor Company, if any, shall be circulated and approval of not less than 9/10th in
value of "Transferor Company' should be obtained within 4 months from the date of
circulation.
Once approval is available, the 'Transferee Company' becomes eligible for the right of
compulsory acquisition of minority interest.
Once the acquisition of shares in value, not less than 90%has been registered in the books
of the transferor Company, the transferor Company shall within one month of the date of
such registration, 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.
The transferee Company having acquired shares in value not less than 90% is under an
obligation to acquire the minority stake as stated aforesaid and hence it is required to
transfer the amount or other consideration equal to the amount or other consideration
required for acquiring the minority stake to the transferee Company. The amount or
consideration required to shall not be so transferred by the transferee Company to the
13

transferor company, in any way, less than the terms of acquisition offered under the
scheme or contract.
Any amount or other consideration received by the Transferor Company to the manner
aforesaid shall be paid into a separate bank account. Any such sums and any other
consideration so received shall be held by the transferor Company in trust for the several
persons entitled to the shares in respect of which they said sums or other consideration
were respectively received.
The takeover achieved in the above process through this Section 395 of the Act will not fall
within the meaning of amalgamation under the Income Tax Act and as such benefits of
amalgamation provided under the said Act will not be available to the acquisition under
consideration. The takeover in the above process will not enable carrying forward of unabsorbed
depreciation and accumulated losses of the transferor Company in the transferee Company for
the reason that the takeover does not result in the transferor Company losing its identity.

(b) Takeover Bids

Takeover bid , is an offer to the shareholders of a company whose shares are not closely held,
to buy their shares in the company at the offered price within the stipulated period of time. It is
addressed to the shareholders with a view to acquiring sufficient number of shares to the offered
company, voting control of the target company.
A takeover bid is a technique, which is adopted by a company for taking over the control of the
management and affairs of another company by acquiring its controlling shares.

(c)Fairness of takeover bids

Section 395 confers a very wide discretion on the court to sanction or disallow the attempt to
acquire.7 The two guiding principles are that the scheme should be fair and that onus lies to show
its unfairness upon the dissenter8. The court will infer fairness from the very fact that the scheme

7 See H.Rajak , Minority Rights and the Take-over bid ,(1970) 87 SALJ 12.
8 Hoare &Co Ltd ,Re ,(1933) 150 LT 374:[1933] All ER Rep105
14

has been approved by ninety percent of the members. 9 But the burden to prove unfairness may
be reversed where the court finds that take over bidder and the accepting majorities are the same
parties.

(d)Take-over Offer to be front Single Company

It has been held by the Privy Council in Blue Metal Industries Ltd Dilley10 that the power of
acquisition can be exercised only when the offer of take-over is made by a single company. Lord
MORRIS said: The significance of the 90% figure is, on this view, that once a company has
become so nearly a total power or parent of another company as a shareholding of 90% would
represent, it should not be prevented from converting the other company into a wholly owned
subsidiary by so small a dissenting minority as 10% or less, but should be entitled to acquire the
holding of that minority. Their Lordships consider it important to bear in mind that the statutory
procedure is one that involves the acquisition by a private interest of the property of another
an exceptional interference with the rights of individual ownership. It leads almost inevitably to
the consequence that the powers of the section can only be invoked by a single company, for the,
objective is to allow a 90% owned subsidiary to be converted into a 100% subsidiary, that presupposes a single parent..

(e)Adequacy of Information
Inadequacy of information may be another ground for the Tribunal to withhold its sanction. In
one of the cases, however, the court refused to help a minority shareholder although it believed
with him that the information given to him was too meager.11 Now the Central Government has
the power to prescribe the information that ought to be given in an offer of takeover.12

9 Grierson Oldham & Adams Ltd, Re, [1967] 1 All ER 192

10 [969] 3 All ER 437: 1970 AC 827.
11 Evertite Locknuts Re , [1945] Ch.220.
12 S.395(4-A)
15

(f)Notice of Acquisition
When, in pursuance of any scheme or contract of this kind, shares or shares of a class in a
company, have been transferred to another member or its nominee, and those shares together
with other shares or any other shares of the same class are already held of the transferee
company or its nominee company or its subsidiary to the extent of nine-tenths in value of the
shares or the shares of that class, the transferee company is required to give a notice of the fact to
the holders of the remaining shares who have not assented to the scheme. The notice must be
given within one month from the date of the transfer, except when a notice has been given in
pursuance of the scheme. Any such holder within three months from the giving of the notice to
him, require them transferee Company to acquire the shares in question. The transferee company
then becomes entitled as well as bound to acquire those shares on the same terms on which the
shares of approving share holders were transferred or on such terms as the court may, on the
application of the shareholder or transferee company, think fit to order.

16

17

IMPACT OF TAKEOVER OF SICK COMPANIES

ON ECONOMY
In a takeover, the management of the acquirer may maintain the legal identity of both the
companies and operate them under the direction of separate Board of Directors (having common
directors) or the management may decide that both the companies should merge or amalgamate
in a new company or one may amalgamate or merge with the other so that there is only one
company, either the new company or the merged or the amalgamated company functioning under
a unified command of one BODs.
In either case, the object of successful takeover of a sick company should be the overall
economic betterment of the shareholders, the management , the staff and all other employees,
suppliers of raw materials and other consumable , personnel engaged in the marketing network,
the ultimate consumer, the public at large and the government.
By virtue if better management of the business and affairs of the company, with active and
dedicated association of qualified and experienced technical, managerial, financial and marketing
personnel, the value of shares should increase, employees feel assured of timely payment of their
salaries and other dues, suppliers get timely payment for their supplies, end products of the
company are freely available. Government dues are paid on time and the company contributes o
the society in which it operates and the areas whereof it serves. Socially conscious management
of such a unified company is supposed to look after the surrounding and the environment of the
place where it works. Besides being beneficial to the concerned companies, takeovers are also
beneficial to the economy in the following manner:a) Disciplining the capital market: Takeovers help in disciplining the market as inefficient and
errant companys get taken over due to their book value and share price. This process also helps
in discovering the potential of the sick companies, if any.
b) Consolidation of efforts and capacities: In the yester years, government authorities had issued
licenses to units with capacities much below the minimum economic size. Due to increased
competition in markets, many of these are either incurring losses or earning marginal profits.
18

Also, in the light of stringent control standards and emergence of multinational, small units have
realized the importance of conservation of resources and reduction of coasts. However, due to
lack of proper infrastructure and sufficient capacity they are unable to implement their schemes
efficiently. In such circumstances, takeovers can be an effective mode of consolidating splintered
capacities to reach the minimum economic size. This will be resulted into not only revival of sick
units but also prevention of sickness. Consolidation of capacities enables the industries to gain
competitive strength in domestic as well as international markets.
c) Concentrating on core competencies: Due to restrictive licensing policies followed by the
government, in the past, large companies were not allowed to grow and diversify easily.
Rigorous provisions of MRTP posed serious obstacles. The companies were required to diversify
into totally unrelated areas. However, due to recent developments like liberalization and
increasing pressure of competition, they are realizing the need to focus on core competition, for
which mergers and takeovers offer green pastures. This is because these strategies enable the
companies to rationalize their portfolios, enhance entity value and increase leveraging capability.
The unified command of the company in a takeover transaction should ensure creation of more
wealth through optimum competence, improved productivity and higher profitability. All
initiatives to enhance productivity, performance and market capitalization should be supported.
Thus the takeover strategy has been conceived to improve general economic wellbeing of all
those who are, directly or indirectly, connected with the corporate sector .It is adopted to increase
the corporate value, achieve better productivity and profitability by making optimum use of the
available resources in the form of men, materials and machines.13
Efficient equity markets are fundamental to the operation and indeed existence of large
companies in modern economies. This capacity to raise equity capital also underlies companys
ability to borrow loan funds; it thus underpins the capital base for virtually the whole of the
corporate sector. The existence of efficiently functioning equity markets inherently provides
opportunities for takeovers. Takeovers provide a means by which entrepreneurs who believe that
they can use the assets of a company more efficiently than its existing management can bid for
13 http://www.icsi.in/study%20material%20professional/cri.pdf
19

the company and put their beliefs to the test. The expectation that they can generate higher
returns will mean that the assets will be worth more to them and they will be prepared to offer a
higher price. Takeovers can thus contribute to promoting the most efficient use of existing
corporate assets.
Apart from that potential of increasing the efficiency of assets in existing uses, takeovers can
also assist allocative efficiency by facilitating the reallocation of capital between industries.
Many firms are often reluctant to invest outside their own or closely-related industries, even
though returns may be substantially higher elsewhere, as their managers' skills and experience
are often highly industry-specific.
The existing managements of companies may at times devote considerable effort to resisting
takeover attempts, including organizing 'white knights' to purchase strategic shareholdings and
arranging defensive share swaps with friendly companies. In some cases, these activities may
serve no economic purpose but merely entrench existing management. If management becomes
preoccupied with such defensive activities, other managerial tasks may be neglected with
consequent adverse effects on the efficiency of the firm. On the other hand, the best form of
defense is a high share price and much defensive activity may take forms, such as revaluing
assets and rationalizing and diversifying activities, which act to raise returns and increase
efficiency.
The effects of takeovers on the efficiency of the corporate sector are thus considerably more
pervasive than may appear from the consideration of individual instances. In that respect, they
may be compared to the effects on efficiency of competition in product markets. In either case,
measures taken to restrict the free operation of markets may reduce the incentives and pressures
on managements to perform. Any assessment of the overall costs and benefits of takeovers needs
.The dual concern with the loss of tax revenue from two opposing situations - 'excessive' resort to
either debt or equity - indicates a need to look to the principles involved and cautions against
hasty adoption of 'solutions'.
Similar caution is required in responding to the claim that takeover activities involve the
exploitation of tax loopholes which must be closed. Where loopholes exist they should, of
20

course, be closed - but it is always essential to ensure that a loophole does, in fact, exist. There
will be occasions, for example, where the tax advantage derives from a justifiable reaction to
unintended or undesirable features of the tax law or its interpretation. In other cases, competing
principles may be involved or the tax system may be being expected to serve competing
objectives. In some cases, 'solutions' which yield the highest revenue may be quite contrary to
basic economic or social.

21

CONCLUSION
For the first time, initiative has been taken for creditor say in the revival and rehabilitation
process. The initiative is welcome as the erstwhile procedure for rehabilitating sick companies
was plagued by procedural delays and rampant misuse of procedures. Creditors, apart from
scheduled banks and public financial institutions, virtually had no say. The automatic stay of
legal proceedings against the sick company under the erstwhile legislation was often used by
promoters to block recoveries endlessly, much to the suffering of the creditors as a class. With
the new legislation, creditors have not only been empowered but have been given a voice in the
revival and rehabilitation process. Measures have also been taken to ensure that proceedings
reach a culmination within a time-bound frame. The government has tried to modernize the
legislative framework for the revival of sick units to protect creditor interests. The new
legislation introduces many provisions aimed at securing the position of creditors in case of
impending sickness of a company.
First, a new tribunal called the National Company Law Tribunal is proposed to be set up to
unclog the legal system and fast-track corporate rehabilitation. The provisions allow secured
creditors representing 50% or more of the outstanding debts of a company to file an application
with the National Company Law Tribunal for declaring a company sick. The application can be
filed if a company fails to pay such creditors within 30 days of a notice of demand. The right to
allow secured creditors to file such applications is a radical move that is likely to keep a check on
promoter behaviour. The coverage of these provisions has also been expanded. The earlier law
applied only to industrial units but the new provisions will also apply to service enterprises or
enterprises engaged in other business activities. Secured creditors have also been allowed to
make applications to the tribunal for determination of measures for revival and rehabilitation of
such company.
One of the important measures taken by the new legislation is to do away with the concept of
automatic stay on legal proceedings against a sick company. The tribunal has been empowered
with discretion to order a stay of legal proceedings in relation to the winding up of a sick
company, appointment of receiver, and suits for money recovery or enforcement of securities.
Such a stay, if granted, would only operate for 120 days.
22

With discretionary and time-bound stays, only genuine cases of rehabilitation would get the
benefit. Dilatory tactics by promoters to avoid recoveries can be effectively countered by
creditors under the new legal framework. The new Act also prescribes specific timelines in the
revival and rehabilitation process that will avoid endless litigation.
At the same time takeover has played a major role by impacting the economy as Takeovers
provide a means by which entrepreneurs who believe that they can use the assets of a company
more efficiently than its existing management can bid for the company and put their beliefs to
the test. The expectation that they can generate higher returns will mean that the assets will be
worth more to them and they will be prepared to offer a higher price. Takeovers can thus
contribute to promoting the most efficient use of existing corporate assets.
Also, the takeover strategy has been conceived to improve general economic wellbeing of all
those who are, directly or indirectly, connected with the corporate sector .It is adopted to increase
the corporate value, achieve better productivity and profitability by making optimum use of the
available resources in the form of men, materials and machines.
Overall what we can see is that by acquiring the assets of the sick company or by taking over the
sick company , benefits the shareholders of the both companies as well as the employees of both
the companies. It enhances the production of the company and as results further ads to the
economy of the country.
In this way the hypothesis made in this project has been answered that, yes, takeovers of the
sick companies have positive impact on the economy.

23

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