Professional Documents
Culture Documents
STUDY 1
CORPORATE RESTRUCTURING
Introduction
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In accordance with sub-section (3) of Section 391, the order of the Court
becomes effective only after a certified copy thereof is filed with the Registrar of
Companies in e-form 21.
STUDY 2
Strategy has been defined as the very soul of any action and activity.
Every executive and owner needs to be a strategist.
Three types of Strategy
- Long term
- Medium term
- Short term / tactic
The famous 5 Ps of strategy include a plan, a ploy, a pattern, a position
and a perspective.
The three levels of strategies are at corporate level, business level and
operational level.
- Corporate strategy is concerned with overall purpose and is known as
grand or root strategy.
- Business strategies devolve from grand strategies and are directly
concerned with the future plans of the profit centres.
- Operational strategy targets the departmental or functional aspects of
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the operations.
Strategic planning will leave the organisation Long range planning means development of
with focus, accountability and more time for a plan for accomplishing a goal set over a
the important activities. The benefits of period of several years, with the assumption
strategic planning include better decisions, that current knowledge about future
increased energy, increased capacity, conditions is sufficiently reliable to ensure
improved customer satisfaction, competitive the plans reliability over the duration of its
advantage, better solution, market implementation.
recognition etc.
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not functioning profitably but which have a good base and are capable of
being put to profitable use through meaningful and strategic alliance.
To give a simple example of amalgamation, we may say A Ltd. and B Ltd. form C
Ltd. and merge their legal identities into C Ltd. It may be said in another way that A
Ltd. + B Ltd. = C. Ltd.
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companies.
It also helps companies in choosing Amalgamation signifies the transfer of all
business partners with a view to advance or some part of the assets and liabilities
long term corporate strategic plans. of one or more existing business entities
to another existing or new company.
Mergers are also considered as a revival An amalgamation is an organic
measure for industrial sickness. unification or amalgam of two or more
legal entities or undertakings or a fusion
of one with the other. There is no bar to
more than two companies being
amalgamated under one scheme.
Market Leadership
Improving Economies of Scale
Operating Economics
Financial Benefits
Acquiring a new product or brand name
Diversifying the Portfolio
Strategic Integration
Synergies
Taxation or Investment Incentives
Limiting Competition
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Transfer Date: This is usually the first day of the financial year preceding the
financial year for which audited accounts are available with the companies. In other
words, this is a cut-off date from which all the movable and immovable properties
including all rights, powers, privileges of every kind, nature and description of the
transferor-company shall be transferred or deemed to be transferred without any
further act, deed or thing to the transferee company
.
Effective Date: This is the date on which the transfer and vesting of the undertaking
of the transferor-company shall take effect i.e., all the requisite approvals would have
been obtained.
- Approval of Scheme
- Application to High Court seeking direction to hold meetings
- Jurisdiction of High Court
- Obtaining order of the court for holding class meeting(s)
- Notice by Advertisement
- Information as to merger or amalgamation
- Holding meeting(s) as per Courts direction
- Convening of General Meeting
- Reporting of the Results
- Petition to court for confirmation of scheme
- Obtaining order of the court sanctioning the scheme
- Filing of copy of Courts order with ROC
- Conditions precedent and subsequent to courts order sanctioning
scheme of arrangement
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R Taxation aspects of merger and acquisition especially come into play during
the merger of a sick industrial company with another company in order to reap
the benefits of the facility for carrying forward and setting off of accumulated
losses and unabsorbed depreciation.
STUDY 4
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out takeover.
Takeover bids may be -
Mandatory - This type of bid has arisen due to regulatory requirement.
partial - Partial bid covers a bid made for acquiring part of the shares of a
class of capital where the offeror intends to obtain effective control of the
offeree through voting power.
competitive bids - This type of a bid envisages the issue of a competitive
bid so that when a bid is announced by a prospective acquirer, if any other
person finds interest in acquiring the shares, such acquirer should offer a
competitive bid.
Consideration for takeover could be in the form of cash or in the form of
shares or acquisition by a new company or acquisition of minority held
shares of a company.
Takeover of Unlisted and Closely Held Companies When a company
intends to take over another company through acquisition of 90% or more
in value of the shares of that company, the procedure laid down under
Section 395 of the Act could be beneficially utilised. Transferor and
transferee companies are required to take care of the check points as
specified in the chapter.
In Bailout Takeovers the lead institution, which is a public financial
institution or a bank, appraises the financially weak company, which is not
a sick industrial company, taking into account its financial viability, its
requirement of funds for revival and draws up a rehabilitation package on
the principle of protection of interests of minority shareholders, good
management, effective revival and transparency.
Takeover of companies whose securities are listed or one or more stock
exchanges is regulated by the provisions of listed agreements and SEBI
(Substantial Acquisition of Shares and Takeovers) Regulation, 1997. The
disclosure requirements to be complied with.
Besides being beneficial to the concerned companies, takeovers are also
beneficial to the economy in the following manner:
- Disciplining the capital market
- Consolidation of efforts and capacities
- Concentrating on core competencies
Taxation aspect is not involved in a takeover at the time of acquisition of
shares by the holding company in the company which becomes its
subsidiary company by virtue of acquisition of majority of shares.
Stamp duty is payable on each transfer instrument at Re.0.5 per one
hundred rupees or a fraction thereof of the sale value of the shares. No
stamp duty is payable in case of transfer of shares through Depository.
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The Crown Jewel Strategy - The central theme in such a strategy is the
divestiture of major operating unit most coveted by the bidder-commonly
known as the crown jewel strategy. There are limitation under the
Companies Act, 1956 to undertake this strategy to overturn the take over
bid. Thus, the above defense can only be used before the predator/bidder
makes the public announcement of its intention to takeover the target
company.
The Packman Defence
This strategy, although unusual, is called the packman strategy. Under this
strategy, the target company attempts to purchase the shares of the raider
company. This is usually the scenario if the raider company is smaller than
the target company and the target company has a substantial cash flow or
liquidable asset.
Targeted Share Repurchase or Buyback
This strategy is really one in which the target management uses up a part
of the assets of the company on the one hand to increase its holding and
on the other it disposes of some of the assets that make the target
company unattractive to the raider. The strategy therefore involves a
creative use of buyback of shares to reinforce its control and detract a
prospective raider.
Golden parachutes refer to the separation clauses of an employment
contract that compensate managers who lose their jobs under a change-
of-management scenario. But in India its applicable only to the Managing
Director, a director holding an office of manager or a whole time director.
Therefore, golden parachute contracts with the entire senior
management, as is the practice in the U.S., is of no consequence in India.
An increasingly used defense mechanism is anti takeover amendments,
which is called Shark Repellants.
Poison Pill Defenses : A controversial but popular defense mechanism
against hostile takeover bids is the creation of securities called poison
pills.
Cross Border Takeover is a much sort after term in recent years.
Competitiveness among the domestic firms forces many businesses to go
global. There are various factors which motivate firms to go for global
takeovers. Apart from personal glory, global takeovers are often driven by
market consolidation, expansion or corporate diversification motives. Also,
financial, accounting and tax related matters inspire such takeovers.
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STUDY 5
Mode of payment for mergers and acquisition to be selected from an optimum mix of
available modes of payment of consideration and the alternatives are
(i) Payment of cash or by issue of securities.
(ii) Financial package of loans etc. involving financial institutions and banks.
(iii) Rehabilitation finance.
(iv) Management buyouts.
Selection of financial package depend on many considerations such as: to suit the
financial structure of acquirer and acquiree, to provide a desirable gearing level, to
be acceptable to vendors. Further it should prove economic to acquirer.
Issue of fresh Equity: Raising moneys from the public by issue of shares to them is
a time consuming and costly exercise. The process of issuing equity shares or
bonds/debentures by the company takes a lot of time. Therefore planning an
acquisition by raising funds through a public issue may be complicated and a long
drawn process. One cannot think of raising moneys through public issue without
identifying the company to be acquired.
PREFERENTIAL ALLOTMENT: Private placement in the form of a preferential
allotment of shares is possible and such issues could be organized in a much easier
way rather than an issue of shares to public.
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Merger: The most common method of acquisition is a merger where the transferee
company issues shares to the shareholders of transferor company. A merger need
no deployment of additional funds, either from internal accruals or from outside
agencies like banks, financial institutions etc.
Funding through preference share capital, unlike equity share capital, involves
the payment of fixed preference dividend like interest on debentures or bonds or a
fixed rate of dividend.
Funding through shares with differential voting rights gives the companies an
additional source of fund without interest cost and without an obligation to repay, as
these are other form of equity capital.
Funding can also be done through swaps and employees stock option scheme.
The share capital that may be raised through the scheme of employees stock option
can only be a fraction of the entire issue.
The other modes of funding are through financial institutions and banks,
rehabilitation finance and management and leveraged buy outs. All these have got
its own merits and demerits.
STUDY 6
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NAV - Under this method, a business is valued on the basis of its net assets i.e.
total assets less liabilities and preferred claims and by dividing the remainder by
the number of equity shares outstanding on a particular date. Valuation of
property is generally done at a) Book values, (b) Net replacement values, or (c)
Net realizable values. If its done at present value it may not reflect the correct
valuation of the property
NAV = (total assets total liabilities preferred claim) / no. of outstanding equity
shares on a given date
6. Relevant Date for the purpose of valuation is the date thirty days prior to the date
on which the meeting of general body of shareholders is held under the
respective section of the Companies Act, 1956.
7. Chapter XIII of SEBI (Disclosure and Investor Protection) Guidelines, 2000
provide the pricing in case of preferential allotment of shares.
8. SEBI (Issue of Sweat Equity) Regulations, 2007 provides for price for the
purpose of Sweat Equity Shares.
9. SEBI takeover regulations provide for pricing of shares for the purpose of
takeover of company.
10. SEBI (Employee Stock Option Scheme) Guidelines, 1999 provide for the pricing
method where these guidelines are attracted.
11. Likewise, SEBI delisting guidelines; Unlisted Public Companies (Preferential
Allotment) Rules, 2003; Sweat Equity Rules, 2003; FEMC Transfer or Issue of
Security by a person Resident Outside India) Regulation, 2000 provide for pricing
of shares.
12. MCA has also recommended the valuation principles in its report.
13. Many factors have to be assessed to determine fair valuation for an industry, a
sector or a company.
14. A Fair Market Value: a companys fair market value is the price at which the
business would change hands between a willing buyer and a willing seller when
neither are under any compulsion to buy or sell, and both parties have knowledge
of relevant facts. To arrive at the value the factors included are detailed
comprehensive analysis which takes into account past, present and the future
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earnings and prospects of the Company, an analysis of its mix of physical and
intangible assets and the general economic and industry conditions.
15. In practice, investors attach a lot of importance to the earnings per shares and
the price earning ratio. The product of EPS & P/E ratio is market price per share.
16. Valuation based on earnings : The P/E ratio of a listed company can be
calculated by dividing the current price of the share by earning per share (EPS).
Therefore, the reciprocal of P/E ratio is called earnings - price ratio or earning
yield.
P
Thus P/E =
EPS
18. Valuation based on super profits: This approach is based on the concept of the
company as a going concern. The value of the net tangible assets is taken into
consideration and it is assumed that the business, if sold, will in addition to the
net asset value, fetch a premium. The super profits are calculated as the
difference between maintainable future profits and the return on net assets.
The Value can be calculated using the following formula:
V = T + Pc rT
Where T = value of net tangible assets
P = maintainable future profits
r = normal return expected on assets
c = rate at which super profits are capitalized.
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19. Dividend Payout Ratio (DPR) : The dividend paid in immediate past by the two
companies is important as the shareholders want continuity of dividend income.
In case offeree company was not paying dividend or its DPR was lower than the
offerors, then its shareholders would opt for share exchange for the growth
company by sacrificing the current dividend income for prospects of future growth
in income and capital appreciation.
20. Price Earning Ratio (PER) of both the offeror and offeree companies be
compared to judge relative growth prospects. Company with lower PER show a
record of low growth in earning per share which depresses market price of shares
in comparison to high growth potential company. Future growth rate of combined
company should also be calculated.
21. Debt Equity Ratio Company with low gearing offers positive factor to investors for
security and stability rather than growth potential with a geared company having
capacity to expand equity base.
22. Net Assets Value (NAV) Net assets value of the two companies be compared as
the company with lower NAV has greater chances of being pushed into
liquidation.
23. Fair value of shares : The fair value of shares is arrived at after consideration of
different modes of valuation and diverse factors. There is no mathematically
accurate formula of valuation. An element of guesswork or arbitrariness is
involved in valuation. The following four factors have to be kept in mind in the
valuation of shares. These are:
(1) Capital cover,
(2) Yield,
(3) Earning capacity, and
(4) Marketability.
For arriving at the fair value of share, three well-known methods are applied:
(1) the manageable profit basis method (the earning per share method).
(2) the net worth method or the break-up value method, and
(3) the market value method.
The fair value of a share is the average of the value of shares obtained by the net
assets method and the one obtained by the yield method. This is, in fact not a
valuation, but a compromise formula for bringing the parties to an agreement.
The average of book value and yield-based value incorporates the advantages of
both the methods and minimizes the demerits of both the methods. Hence, such
average is called the fair value of share or sometimes also called the dual
method of share valuation.
The fair value of shares can be calculated by using the formula:
Value by net assets method + Value by yield method
Fair value of shares =
2
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24. Dividend Yield method The shareholders in a company are entitled to receive
dividends as and when declared. Since investors in company get their return in
the form of a dividend the amount of dividend paid out gives some indication of
how valuable the shares will be to the potential buyer. If dividend is one of the
key factors determining how valuable shares are it is possible to look at the
relationship between level of dividend and price in other companies and base a
price on what dividend is normally paid.
This concept can be represented as a formula for any individual company
compared to an accepted average for similar businesses.
STUDY 7
Demerger Reconstruction
A scheme of demerger, is in effect a reconstruction involves the winding up
corporate partition of a company into two of an existing company and the transfer
undertakings, thereby retaining one of its assets and liabilities to a new
undertaking with it and by transferring company formed for the purpose of
the other undertaking to the resulting taking over the business and undertaking
company. It is a scheme of business of the existing company.
reorganization
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There are 3 types of demerger: spin off, split off and split up
Demerger under voluntary winding up, A company, which has split into
several companies after division can be wound up voluntarily pursuant to
Section 484 to 498 of the Companies Act, 1956.
The appointed date is the date taken The effective date, is the date on
for identification and quantification of the which all consents and approvals
assets and liabilities of the existing required under the scheme were to be
company and new company consequent obtained and transfer effected.
upon proposed spin off. This
identification is done on the basis of the
audited balance sheet of the existing
company for the financial year.
The date on which things are identified The date on which effect for transfer is
given
Prior to effective date Its always follows, its post all approvals
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STUDY 8
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STUDY 9
FINANCIAL RESTRUCTURING
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I The buy back of securities of listed companies are guided by SEBI (Buy-back
of Securities) Regulations, 1998.
J The buy-back in respect of securities which are not listed on any recognized
stock exchange must be in accordance with Private Limited Company and
Unlisted Public Limited Company (Buy-back of Securities) Rules,1999.
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(i) Buying-back
(ii) Contents of explanatory statement
(iii) Filing of letter of offer with Registrar
(iv) Offer Procedure
(v) Payment to shareholders
(vi) General obligations of the company
(vii) Return to be filed with Registrar
(viii) Extinguishment of certificates
(ix) Register of shares
STUDY 10
REVIVAL AND RESTRUCTURING OF SICK COMPANIES
As per Tiwari committees report following are the major causes of industrial
sickness:
A. Internal Causes
1. Planning
(a) Technical feasibility
(b) Economic viability
2. Implementation
(a) Cost overruns resulting from delays in getting licences/sanctions.
(b) Inadequate mobilisation of finance.
3. Production
(a) Production management
(b) Labour management
(c) Marketing management
(d) Financial management
(e) Administrative management
B. External Causes
1. Infrastructural bottlenecks
2. Financial bottlenecks
3. Government controls, policies, etc.
4. Market constraints
5. Extraneous factors
SICA was enacted to evaluate the viability of sick industrial companies with a
view to rehabilitate them and to protect the interest of employees as far as
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practicable.
Though it was conceived very well, SICA, failed as it could not be successfully
implemented. Section 32 of SICA gave overriding provisions to the Act, whereby
BIFR could pass orders even if they were against provisions of other laws. Also,
rehabilitation of sick companies was with BIFR; while winding up was with High
Court.
Therefore, when BIFR passed an order recommending winding up, the matter went
to High Court and the whole process had to be started again thereby delaying the
matter. The overall experience under SICA was not satisfactory and hence these
provisions are now merged in Companies Act, 1956, vide Companies (Second
Amendment) Act, 2002.
Accordingly, powers of BIFR (Board for Industrial and Financial Reconstruction) will
now be exercised by NCLT (National Company Law Tribunal) to be constituted
under Section 10FB of Companies Act, 1956 and appeal against order of NCLT may
be referred to NCLAT (National Company Law Appellate Tribunal) to be constituted
under Section 10FR of Companies Act, 1956.
Though amendments in Companies Act have been passed by Parliament, SICA has
not yet been repealed. Till SICA is repealed, the sick companies (including
government companies) will continue to be under BIFR.
Net worth means the sum total of the paid-up capital and free reserves. For this
purpose, free reserves means all reserves credited out of the profits and share
premium account but does not include reserves credited out of re-valuation of
assets, write back of depreciation provisions and amalgamation.
Operating agency means any public financial institution, State level institution,
scheduled bank or any other person as may be specified by general or special order
as its agency by the Board for Industrial and Financial Reconstruction (BIFR).
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STUDY 11
STUDY 12
STUDY 13 A & B
the main purpose of the Securitisation Act, is to enable and empower the
secured creditors to take possession of their securities and to deal with
them without the intervention of the court and also alternatively to
authorise any securitisation or reconstruction company to acquire financial
assets of any bank or financial institution.
"Non-Performing Asset" means an asset or account of a borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset
(a) in case such bank or financial institution is administered or
regulated by an authority or body established, constituted or appointed by
any law for the time being in force, in accordance with the directions or
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FINANCIAL ASSISTANCE
Borrower Originator
(Obligor) (Lender)
Securing assets
Transferring
Cash Secured Assets
Cash
Investors SPV
(QIB) (SCO/RCO)
Security receipt
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STUDY 14
WINDING UP
There are fundamental differences between winding up and dissolution as regards the legal
procedure is involved.
Winding up is the first stage in the process Dissolution is the final stage whereby the
whereby assets are realised, liabilities are existence of the company is withdrawn by the
paid off and the surplus, if any, distributed law.
among its members.
The liquidator appointed by the company or the order for dissolution can be passed by the
the Court carries out the winding up Court only.
proceedings
According to the Companies Act the liquidator Once the Court passes dissolution orders the
can represent the company in the process of liquidator can no longer represent the
winding up. company.
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Creditors can prove their debt Creditors can not prove their debts
Winding up in all cases does not culminate in Dissolution is an act which puts an end to the
dissolution life of the company.
A company may be wound up by the Court i.e. compulsory winding up; by voluntary winding up
(members voluntary winding up or creditors voluntary winding up) or winding up subject to the
supervision of the Court.
A creditor or creditors (including any contingent or prospective creditor) may make petition, and the
Court would make a winding up order on such petition if the creditor proves that the claims are
undisputed debt and any of the contingencies stated in Section 433 (grounds of winding up) had
arisen to justify the order. The expression creditors includes the assignee of debt, a decreeholder, a
secured creditor, a debenture holder or the trustee for debenture holders. But a creditor whose debt is
unliquidated cannot apply for winding up order. A contingent or prospective creditor can present
petition on giving security for costs and showing that a prima facie case has arisen. A petition by a
secured creditor for winding up may not be allowed by the Court where the security is ample and the
petition is not supported by the other creditors.
Section 428 of the Companies Act defines a contributory as every person liable to contribute to the
assets of a company in the event of its being wound up, and includes holders of any shares which are
fully paid-up and for the purposes of all proceedings for determining, and all proceedings prior to the
final determination of, the persons who are deemed to be contributories, includes any person alleged
to be a contributory. In terms of the provisions of this section, the holder of fully paid-up share is also
a contributory though he has no further liability to contribute to the assets of the company in winding
up. The holder of a fully paid-up shares is included in the list of contributories for distribution of the
residuary assets of the company after satisfying the claims of the creditors. He is also entitled to file a
winding up petition.
While every member of a company becomes a contributory on the company going into
liquidation, every contributory need not be a member. Besides, the members presently borne on
the register, the past members of a company, who ceased to be members within one year of the
commencement of the winding up, are also liable as contributories by virtue of Section 426.
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A Liquidator is an agent employed for the purpose of winding up of the company. In some respects he
is a trustee, but he is not a trustee for each individual creditor. His principal duties are to take
possession of assets, to make out the requisite list of contributories and of creditors, to have disputed
cases adjudicated upon, to realize the assets subject to the control of the Court in certain matters and
to apply the proceeds in payment of the companys debts and liabilities in due course of
administration and having done that, to divide the surplus amongst the contributories and to adjust
their rights
Distinction between Members and Creditors Voluntary Winding Up
A members voluntary winding up results where, A creditors voluntary winding up is one where no
before convening the general meeting of the such declaration is filed.
company at which the resolution of winding up is
to be passed, the majority of the directors file with
the Registrar a statutory declaration of solvency.
the creditors do not participate directly in the the company is deemed to be insolvent and,
control of the liquidation, as the company is therefore, the control of liquidation remains in the
deemed to be solvent; hands of the creditors
There is no meeting of creditors in a members meetings of creditors have to be called at the
voluntary winding up and the liquidator appointed beginning and subsequently the liquidator is
by the company acts in the liquidation of its appointed by the creditors.
affairs
the liquidator can exercise some of his powers The liquidator can exercise some of his powers
with the sanction of a special resolution of the with the sanction of the Court or the Committee of
company Inspection or of a meeting of creditors
Where the creditors are interested and the the creditors are entitled to secure control of the
directors are not able to guarantee the winding up, so that their interests may be
companys solvency safeguarded
STUDY 15
CROSS-BORDER INSOLVENCY
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concurrent proceedings.
To fall within the scope of the Model Law, a foreign insolvency
proceeding needs to possess certain attributes. These include the basis
in insolvency-related law of the originating State; involvement of creditors
collectively; control or supervision of the assets and affairs of the debtor by
a court or another official body; and reorganization or liquidation of the
debtor as the purpose of the proceeding.
Article 15 defines the core procedural requirements for an application by a
foreign representative for recognition. In incorporating the provision into
national law, it is desirable not to encumber the process with additional
requirements beyond these requirements. A foreign representative may
apply to the court for recognition of the foreign proceeding in which the
foreign representative has been appointed.
CONCURRENT PROCEEDINGS
Commencement of a proceeding after recognition of a foreign main
proceeding (Article 28)
After recognition of a foreign main proceeding, a proceeding under the
laws of the enacting State relating to insolvency may be commenced only
if the debtor has assets in the state enacting the Model Law. The effects of
that proceeding shall be restricted to the assets of the debtor that are
located in such State and to the extent necessary to implement
cooperation and coordination under Articles 25, 26 and 27 to other assets
of the debtor that, under the law of such State, should be administered in
that proceeding.
EFFECTIVE INSOLVENCY AND CREDITOR RIGHTS SYSTEMS - WORLD BANK
PRINCIPLES
A brief summary of the key elements of the World Bank Principles for effective
insolvency and creditor rights systems is given below -:
1. Credit Environment
Compatible credit and enforcement systems. A regularized system of
credit should be supported by mechanisms that provide efficient,
transparent and reliable methods for recovering debt, including seizure
and sale of immovable and movable assets and sale or collection of
intangible assets, such as debt owed to the debtor by third parties.
Collateral systems. One of the pillars of a modern credit economy is the
ability to own and freely transfer ownership interests in property, and to
grant a security interest to credit providers with respect to such interests
and rights as a means of gaining access to credit at more affordable
prices.
Enforcement systems. A modern, credit-based economy requires
predictable, transparent and affordable enforcement of both unsecured
and secured credit claims by efficient mechanisms outside of insolvency,
as well as a sound insolvency system.
Credit information systems. A modern credit-based economy requires
access to complete, accurate and reliable information concerning
borrowers payment histories.
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