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CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 1

CORPORATE RESTRUCTURING

Introduction

Corporate Restructuring may be a one-time exercise for an organisation but it has a


lasting impact on the business and other concerned agencies due to its numerous
considerations and immense advantages viz., improved corporate performance and
better corporate governance.

Corporate restructuring is an expression, by which a company can consolidate its


business operations and strengthen its position for achieving its short-term and long-
term corporate objectives - synergetic, dynamic and continuing as a competitive and
successful entity.
Types of Corporate Restructuring: The most commonly applied tools of corporate
restructuring are amalgamation, merger, demerger, acquisition, joint venture,
disinvestments etc.

Mergers and amalgamations, we mean a merger of two or more distinct entities.


The merging entities might have similar or dissimilar activities.
Mergers take place for various reasons and simple cost benefit analysis would tell
whether the merger proposal is beneficial or not.
In mergers new shares are usually issued. Payment of consideration by issue of
shares of transferee company to the members of transferor companies is the usual
method.
Acquisitions refer to acquisition of ownership, control and management right over
enterprises. Acquisitions take place by acquisition of voting shares.
In acquisitions new shares do not come into existence.
In consolidation, the promoter group attempts to garner more stake in order to
strengthen their position and thereby achieve predominance.

NEED AND SCOPE OF CORPORATE RESTRUCTURING


Corporate Restructuring is concerned with arranging the business activities of the
corporate as a whole so as to achieve certain predetermined objectives at corporate
level. Such objectives include the following:

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orderly redirection of the firm's activities;


deploying surplus cash from one business to finance profitable growth in
another;
exploiting inter-dependence among present or prospective businesses within
the corporate portfolio;
risk reduction; and
development of core competencies

Restructuring may be financial restructuring, technological, market and


organizational restructuring.

Chapter V of the Companies Act containing Sections 390 to 396A is a complete


code in itself which provides for law and procedure to be complied with by the
companies for compromises, arrangements and reconstruction.

If a compromise or arrangement is not bona fide but is intended to cover mis


deeds of delinquent directors, the Court shall not sanction the scheme.

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.

Compliance of Accounting standards is mandatory requirement under the


Companies Act, 1956 in accordance with Section 211(3A).

CORPORATE RESTRUCTURING AND INSOLVENCY

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.

Strategy is nothing but a game plan of an enterprise to overcome the


strategies of its competitors.

Strategic planning is a management tool, used to help an organisation do


a better job to assess and adjust the organisation's direction in response to
a changing environment.

Strategic planning is a disciplined effort to produce fundamental decisions


and actions that shape and guide what an organisation is, what it does,
and why it does, with a focus on the future at the same time.

In strategic planning, key ingredients include creating vision and direction,


creating clear and simple plan, great execution and clearly communicating
to individuals their roles.

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.

Strategic management can be defined as formulation and implementation


of plans and the carrying out of activities relating to matters which are of
vital, pervasive or continuing importance to the total organisation.

Various corporate restructuring strategies are mergers, acquisitions,


takeovers, disinvestments, strategic alliances, demergers, joint ventures,
slump sale, franchising etc.

Merger is the fusion or absorption of one thing or right into another.

In amalgamation, two or more existing companies merge together to form


a new company keeping in view their long term interest.

In acquisition, A corporate action in which a company buys most, if not


all, of the target companys ownership stakes in order to assume control of
the target firm.

Takeover is a strategy of acquiring control over the management of


another company. Disinvestment is strategic initiative from point of view of
public sector enterprises. It refers to restructuring of enterprises which are

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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.

Strategic alliance is any arrangement under which two or more parties


co-operate in order to achieve certain commercial objectives.

In demerger, the demerged company sells and transfers one or more of


its undertakings to the resulting company for an agreed consideration.

Joint venture means an enterprise formed with participation in the


ownership, control and management of a minimum of two parties.

In slump sale, a company sells or disposes of the whole or substantially


the whole of its undertaking for a lump sum predetermined consideration.

Franchising is a business relationship in which the franchisor (the owner


of the business providing the product or service) assigns to independent
people (the franchisees) the right to market and distribute the franchisors
goods or service, and to use the business name for a fixed period of time.
CORPORATE RESTRUCTURING AND INSOLVENCY
STUDY 3 & 3A

A Concept of Merger and Amalgamation

A Merger can be defined as the fusion or absorption of one company by another.

In a case of Company A and Company B, a merger can take place by Company A


and Company B merges into a third entity to be called as Company AB and
Company A and B ceases to be legal entity, OR Company A transfers its business
and undertakings including assets and liabilities into Company B and Company A
ceases to be in existence.

Amalgamation is an arrangement or reconstruction. Amalgamation is a legal


process by which two or more companies are joined together to form a new entity or
one or more companies are to be absorbed or blended with another and as a
consequence the amalgamating company loses its existence and its shareholders
become the shareholders of new company or the amalgamated company.

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.

Merger is normally a strategic vehicle to Amalgamation is an arrangement for


achieve expansion, diversification, entry bringing the assets of two companies
into new markets, acquisition of desired under the control of one company, which
resources, patents and technology. may or may not be one of the original two

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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.

B Major Objectives of Merger and its benefits are:

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

C Mergers may be broadly classified as follows:


(i) Cogeneric within same industries and taking place at the same level of
economic activity exploration, production or manufacturing wholesale
distribution or retail distribution to the ultimate consumer.
- horizontal merger
- vertical merger
(ii) Conglomerate between unrelated businesses.
- Cash merger
- Defacto merger
- Down stream merger
- Up stream merger
- Short-form merger
- Triangular merger
- Reverse merger

D Steps for Merger


1. Identifying Industries
2. Selecting sectors
3. Choosing companies

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4. Comparative cost and returns


5. Short-listing good companies
6. Assessing the suitability
7. Appropriateness of timing
8. Negotiation stage
9. Approval of proposal by Board of Directors
10. Approval of Shareholders
11. Approval of Creditors / financial Institutions / Banks
12. Approvals of Respective High Court(s)
13. Integration Stage

E The salient features of Sections 391 and 394 are


There should be a scheme of compromise or arrangement for restructuring or
amalgamation.
An application must be made to the court for direction to hold meetings of
shareholders/creditors. However, as per clause 24(f) of the Listing
Agreement, a copy of the scheme has to be filed with all the stock exchanges
where the shares of the company are listed at least one month prior to it
being submitted to the court.
Court may order a meeting of shareholders/creditors.
Meeting(s) of shareholders/creditors should be held as per courts order.
Scheme of compromise or arrangement must be approved by 3/4th in value
and majority in number of creditors, class of creditors, members, class of
members.
Another application must be made to the court (after the results of the
meetings are submitted with the court) sanctioning the scheme of
compromise or arrangement.
An approved scheme duly sanctioned by court is binding on all the
shareholders/creditors/company(ies).
Courts order takes effect only after a certified copy of it has been filed with
the Registrar of Companies. This filing date being called as the effective date.
Copy of courts order should be annexed to every copy of memorandum of
association of the company.
Court may stay commencement or continuation of any suit or proceeding
against the company after application has been moved in the court.
Courts order is appealable in a superior court.

F Approvals required for Scheme of Amalgamation


Board of Directors Shareholders / Creditors
Stock Exchange Financial Institutions
Landholders High Court
Reserve Bank of India Central Government under MRTP Act
Combination under the Competition Act, 2002

G PROCEDURAL ASPECTS, INCLUDING DOCUMENTATION FOR


MERGER/ AMALGAMATION
- Authority to amalgamate, merger etc. The memorandum of
association of most of the companies contain provisions in their objects
clause, authorising amalgamation, merger, absorption, take-over and

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other similar strategies of corporate restructuring. If the memorandum of


a company does not have such a provision in its objects clause, the
company should alter the objects clause.
- Observing Memorandum of Association of Transferee Company It
has to be ensured that the objects of the Memorandum of Association of
the transferee company cover the objects of the transferor company or
companies.
- Convening a Board Meeting
- Preparation of Valuation Report
- Preparation of scheme of amalgamation or merger

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

H BIFR Company: Under the Sick Industrial Companies (Special Provisions)


Act, 1985, (SICA) amalgamation is a method of rehabilitation of the business
and undertaking of a sick industrial company.

I Reverse merger takes place when a healthy company merges into a


financially weak company.

J Section 396 of Companies Act, 1956 confers on the Central Government


special power to order amalgamation of two or more companies into a single
company, if the Government is satisfied that it is essential in the public
interest that two or more companies should amalgamate.

K Methods of Accounting for Amalgamation


There are two main methods of accounting for amalgamations:

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(a) the pooling of interests method; and


(b) the purchase method.
The pooling of interest method is used in case of amalgamation in the nature
of merger. The purchase method is used in accounting for amalgamations in
the nature of purchase.

L Goodwill arising on amalgamation represents a payment made in anticipation


of future income and it is appropriate to treat it as an asset to be amortised to
income on a systematic basis over its useful life.

M Valuation of shares of each company involved in amalgamation, merger or


share-for-share takeover is imperative.

N The incidence of stamp duty is an important consideration in the planning of


any merger.

O Amalgamation of one banking company with another banking company is


governed by the provisions of Banking Regulation Act, 1949.

P Cross Border Amalgamation / Merger : There has been a substantial increase


in the quantum of funds flowing across nations in search of takeover
candidates. A variety of strategic imperatives has been driving companies
towards mergers and acquisitions. They include globalisation, consolidation,
product-differentiation and customer demands, vertical integration,
deregulation, technology integration and re-fashioning, market expansion.

Most of the cross border mergers are unsuccessful. Therefore, it is imperative


that proper preparation and evaluation before merger takes place which
includes market evaluation, operational evaluation and financial evaluations.

Q Human aspects of mergers and amalgamations have been nicely


elucidated by way of two classic cases acquisition of Welcome group by
Glaxo and HLL and Tomco merger.

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.

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 4

Takeover is a corporate device whereby one company acquires control


over another company, usually by purchasing all or a majority of its
shares.
Takeovers may be classified as friendly takeover, hostile takeover and bail

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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.

A hostile tender offer made directly to a target companys shareholders,


with or without previous overtures to the management, has become an
increasingly frequent means of initiating a corporate combination.
The factors which make a company vulnerable are:
Low stock price with relation to the replacement cost of assets or
their potential earning power;

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A highly liquid balance sheet with large amounts of excess cash, a


valuable securities portfolio, and significantly unused debt capacity;
Good cash flow in relation to current stock prices;
Subsidiaries and properties which could be sold off without
significantly impairing cash flow; and
Relatively small stockholdings under the control of an incumbent
management.

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.

CORPORATE RESTRUCTURING AND INSOLVENCY

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STUDY 5

FUNDING OF MERGERS AND TAKEOVERS

Financing of mergers and takeovers involve payment of consideration money to the


acquire shares for acquiring the undertaking or assets or controlling power of the
shareholders as per valuation done and exchange ratio between shares of acquiring
and merging company arrived at.

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.

Funding: Mergers and takeovers may be funded by a company


(i) out of its own funds, by fresh issue of equity or preference shares to its
existing shareholders or
(ii) out of borrowed funds, which may be raised by issuing various financial
instruments.
(iii) A company may borrow funds through the issue of debentures, bonds,
deposits from its directors, their relatives, business associates, shareholders
and from public in the form of fixed deposits,
(iv) external commercial borrowings, issue of securities, loans from Central or
State financial institutions, banks,
(v) rehabilitation finance provided to sick industrial companies under the Sick
Industrial Companies (Special Provisions) Act, etc.

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.

External commercial borrowings are permitted by the Government as a source of


finance for Indian corporates for expansion of existing capacity as well as for fresh
investment in the form of ADR, GDR or IDR.

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.

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 6

FUNDING OF MERGERS AND TAKEOVERS

1. There are number of situations in which a business or a share or any other


property may be repaired to be valued. Valuation is an exercise to assess the
worth of an enterprise or a property.
2. Valuation is essential for (i) strategic partnerships, (ii) mergers or acquisitions of
shares of a company and / or acquisition of a business. (iii) Valuation is also
necessary for introducing employee stock option plans (ESOPs) and joint
ventures.
3. Valuation is done as being a part of win win situation for parties involved. Its a
scientific method by which business valuation is arrived at.
4. Valuation / Acquisition Motives : (a) either purely financial (taxation, asset-
stripping, financial restructuring involving an attempt to augment the resources
base and portfolio-investment) or (b) business related (expansion or
diversification) or (c) The behavioural reasons have more to do with the

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personnel ambitions or objectives (desire to grow big) of the top management.


5. According to valuation guidelines issued by Ministry of Finance, Department of
Economic Affairs, there are three methods of valuation namely net asset value,
Profit Earning Capacity value and Market value.

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

Earnings based method: Under this method, a reasonable estimate of the


average future maintainable operating profits is made by taking (a) past earnings,
and (b) the trend and the future plans of the company as a base. This, after
deducting preferred rights, if any, is capitalized at an appropriate rate to arrive at
the value of the equity shares of the company.
Market Value method : Under this method, the average market prices of quoted
shares for a certain length of time is taken as the value.

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.

The other salient factors include:


(1) The stock exchange price of the shares of the two companies before the
commencement of negotiations or the announcement of the bid.
(2) Dividends paid on the shares.
(3) Relative growth prospects of the two companies.
(4) In case of equity shares, the relative gearing of the shares of the two
companies.
(5) Net assets of the two companies.
(6) Voting strength in the merged (amalgamated) enterprise of the shareholders
of the two companies.
(7) Past history of the prices of shares of the two companies.

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

Where P is the current price of the shares


The share price can thus be determined as
P = EPS x P/E ratio
17. Discounted cash flow analysis consists of projecting future cash flows, deriving
a discount rate and applying this discount rate to the future cash flows and
terminal value. This detailed analysis depends on accurate financial projections
and discount rate assumptions. The resulting company valuation is the sum of
discounted future cash flows and the discounted terminal value.

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.

Dividend per share = Total dividend declared


Number of shares

Value per share = Dividend per share


Average dividend per share

Value of business = Value per share x Total number of shares


The same result can be obtained using figures for the business as whole
rather than per share if information is available in that form.

Total value of business = Total dividend


Average dividend per share

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 7

CORPORATE DEMERGERS AND REVERSE MERGERS

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

There are 2 companies There is only one company


Both companies continues to operate Old company goes into liquidation
Shareholders gets shares in new Shareholders get money back for its
company holding in old company and/or get new
stake in new company.
Resulting company means one or more companies (including a wholly owned
subsidiary thereof) to which the undertaking of the demerged company is transferred
in a demerger and, the resulting company in consideration of such transfer of

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undertaking, issues shares to the shareholders of the demerged company and


includes any authority or body or local authority or public sector company or a
company established, constituted or formed as a result of demerger.

There are 3 types of demerger: spin off, split off and split up

There are 2 modes of demerger: partial demerger and complete demerger


Partial demerger: In the case of a partial demerger, the existing company also
continues to maintain its separate legal identity and the new company being a
separate legal identity, carries on the separated or spun off business and undertaking
of the existing company.
Complete demerger: In the case of a complete demerger, the existing company is
voluntarily wound up and its entire business, undertaking etc. are transferred to one or
more new companies.
There are three ways of demerger:
Demerger by agreement between promoters, in this type of demerger, all the
assets / properties and liabilities are transferred into the new company on an
appointed date and the consideration paid in by the new company on
happening of that event, or
Demerger under the scheme of arrangement with approval by the court under
Section 391, in this type of demerger, pursuant to the provisions of
memorandum of association can carry out a demerger by a division or split of
its undertaking, in the same manner as it can accomplish an amalgamation,
through a scheme of arrangement as per the procedure laid down in chapter
V of the Companies Act, 1956 relating to compromise, arrangement and
reconstruction.

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

Steps to be taken for Demerger

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1. Preparation of scheme of demerger


2. Application to court for direction to hold meetings of members/creditors
3. Obtaining courts order for holding meetings of members/creditors
4. Notice of the meetings of members/creditors
5. Holding meeting(s) of members/creditors
6. Reporting the result of the meeting by the Chairman to the court
7. Petition to the court for sanctioning the scheme of demerger
8. Obtaining order of the court sanctioning the scheme
9. Courts order on petition sanctioning the scheme of demerger

Amalgamation / Merger Reverse Merger


an existing company under a scheme of a healthy company merges with a
amalgamation or merger, loses its own financially weak company. The main
legal identity and is dissolved without reason for this type of reverse merger is
being wound up and its assets, the tax savings under the Income-Tax
properties and liabilities are transferred Act, 1961.
to another existing company
Its driven under the Companies Act Its purely from the taxation point of view
May or may not have sick company as Its essentially driven by sick and healthy
part of it companys combination

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 8

POST MERGER RE-ORGANISATION

Post-merger reorganization is a wide term which encompasses the


reorganization of each and every aspect of the companys functional areas
to achieve the objectives planned and aimed at.
Factors post merger / amalgamation reorganization
A Gain or Loss to Stakeholders
B Implementation of Objectives A key challenge in mergers and acquisitions
is their effective implementation as there are chances that mergers and
acquisitions may fail because of slow integration. The key is to formulate in
advance integration plans that can effectively accomplish the goals of the
M&A processes.
(i) Legal Requirements: there are no. of compliance requirement to be
fulfilled depending size and volume of the Companies involved
(ii) Combination of operations, integration of two different modes of

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operation requires special attention with continuation of existing


businesses.
(iii) Top Management Changes: A cohesive team is required both at the
board level as well as at senior executive level.
(iv) Management of financial resources: , it is important to revamp the
financial resources of the company to ensure optimum utilisation of the
financial resources available and the liquidity requirements.
(v) Financial Restructuring: . Replacement of costlier fundings by cheaper
borrowings on a long and short term basis as per requirement is one of
the several ways and means of financial restructuring for a company.
(vi) Rationalisation of Labour Cost as it forms the primary factor of prime
cost of any product and service, it requires special attention post
merger
(vii) Production and marketing management, With regard to the size of
the company and its operational scale, its product mix should be
adjusted during post-merger period by dropping or adding the new
products.
(viii) Corporate planning and control
There are certain parameters to measure post merger efficiency. Some of
them are - successful merger creates a larger organization than before, net
profit is more, there is sustained increase in earnings, continuous dividend
distribution etc.
There are broadly four possible reasons for business growth and
expansion which is to be achieved by the merged company. These are (1)
Operating economies, (2) Financial economies, (3) Growth and
diversification, and (4) Managerial effectiveness.
There is a spurt of mergers and acquisitions in the last two to three years
as is evident from the recent acquisition of Anglo Dutch steel company
Corus by India based Tata Steel. Other recent examples are suitably
discussed under the chapter.
To implement the objectives of mergers or acquisitions, some factors are
required to be considered for post merger integration legal requirements,
combination of operations, top management changes, management of
financial resources, rationalization of labour cost, production and
marketing management and corporate planning and control.
Human and cultural integration is central to the success of any merger.
Fair market value is one of the valuation criteria for measuring the success
of post merger company. In valuing the whole enterprise, one must seek
financial data of comparable companies in order to determine ratios that
can be used to give an indication of the companys position.
The earning performance of the merged company can be measured by
return on total assets and return on net worth.
In general, growth in profit, dividend payouts, companys history and
increase in size provides the base for future growth and are also the
factors which help in determining the success or failure of a merged
company.
CORPORATE RESTRUCTURING AND INSOLVENCY

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STUDY 9

FINANCIAL RESTRUCTURING

A Financial restructuring of a company involves a rearrangement of its financial


structure to make the companys finances more balanced.
B A company may reorganize its capital in different ways, such as reduction of
paid up share capital; conversion of one type of shares into another;
conversion of shares into debentures or other securities.
C Section 100 of the Companies Act deals with reduction of capital which
means reduction of issued, subscribed and paid up capital of the company.
The need for reduction of capital may arise in various circumstances for
example trading losses, heavy capital expenses and assets of reduced or
doubtful value. There is no limitation on the power of the Court to confirm the
reduction except that it must first be satisfied that all the creditors entitled to
object to the reduction have either consented or been paid or secured. The
Reduction of share capital is subject to approval of the Court and the Court
will examine following criterias before approving it:
(i) The interests of creditors are safeguarded;
(ii) The interests of shareholders are considered; and
(iii) Lastly, the public interest is taken care of.
D Buy-back of shares means the purchase by the company of its own shares.
E The reasons for buy-back may be one or more of the following:
(i) to improve earnings per share;
(ii) to improve return on capital, return on net worth and to enhance the
long-term shareholder value;
(iii) to provide an additional exit route to shareholders when shares are
under valued or are thinly traded;
(iv) to enhance consolidation of stake in the company;
(v) to prevent unwelcome takeover bids;
(vi) to return surplus cash to shareholders;
(vii) to achieve optimum capital structure;
(viii) to support share price during periods of sluggish market conditions;
(ix) to service the equity more efficiently.

F The decision to buy-back is also influenced by various other factors relating to


the company, such as growth opportunities, capital structure, sourcing of
funds, cost of capital and optimum allocation of funds generated.

G Section 77A of the Companies Act is an exception to the prohibition under


Section 77 as it allows companies to buy-back their own shares as well as
other specified securities, subject to the conditions specified therein.
H Under Section 77A, any company limited by shares or company Ltd. by
guarantee and having a share capital can buy-back its own securities,
whether it is a private, public, listed or unlisted company.

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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.

K RULES AND REGULATIONS FOR BUY-BACK OF SECURITIES


Authority in the Articles
Board resolution and quantum of buy-back
Shareholders resolution and quantum of buy-back
To fund the buyback, the companies can only utilize
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
Buy-back may be made out of the proceeds of an issue of securities other
than the same kind of securities as are proposed to be bought back.
L Process of buy-back of securities
(i) Amendment of Articles
(ii) Approval of Shareholders
(iii) Special Resolution and Explanatory statement to be annexed
(iv) Explanatory statement
(v) Nomination of compliance officer
(vi) Investor service centre
(vii) Appointment of merchant banker
(viii) Time limit for completion of buy-back
(ix)(a) Buy-back from existing security-holders through tender offer
Public announcementFiling of offer documents specified
Filing of offer documents with SEBI
Despatch of letter of offer to shareholders
Escrow account
Payment to the Security holders
Extinguishing of bought-back securities
Register of bought-back securities
(ix)(b) Buy-back from Open Market
(i) Buy-back through the stock exchange
(ii) Buy-back through book-building
(x) Declaration of solvency to be filed with SEBI
(xi) Filing of return of boughtback securities with Registrar
(xii) Punishment for default
(xiii) Transfer of certain sums to capital redemption reserve account
(xiv) Obligations of the company

M BUY-BACK PROCEDURE FOR PRIVATE LIMITED & UNLISTED PUBLIC


LIMITED COMPANIES

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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

CORPORATE RESTRUCTURING AND INSOLVENCY

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.

Once a company becomes sick, a reference is made to BIFR for determination of


measures to be adopted with respect to company. Enquiry under Section 16 into
working of sick industrial company is made. After being satisfied of sickness and
if there is a scope to make the networth exceed the accumulated losses, it
appoints an operating agency for preparation of scheme for revival under Section
18. Otherwise an opinion of Board is forwarded to High Court for winding up.

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).

Reference to the Board - Under Section 15 of SICA,


A the Board of Directors in the event of
an industrial company has become sick, within 60 days from the date of
finalization of duly audited accounts of the company for the financial year at
the end of which the company has become sick or
had sufficient reason even before such finalization to form opinion that the
company had become a sick unit after the Board of Directors shall, within 60
days after it has formed such opinion

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B the Central Government or Reserve Bank or State Government or a public


financial institution or a State level institution or a scheduled bank may
provide sufficient reason that any industrial company has become sick
industrial company,
make a reference to the Board for determination of measures which shall be adopted
in respect of the company.
The finalization of the accounts for the above purpose imply that the date on which
the accounts have been approved by the members at the Annual General Meeting of
the Company is in accordance to the Companies Act.
Once a company is determined to be referred to BIFR, it needs to file a
formal application as specified in BIFR Regulations, 1987 as amended from time to
time.
Winding up of Sick Industrial Company Section 20
The salient features of Section 20 of SICA are as follows:
After making necessary inquiry under Section 16 and after giving an
opportunity to all concerned parties, if BIFR is of the opinion that the sick
industrial company is not likely to make its net worth positive or turnaround
may file its opinion with the High Court for winding up
On the basis of opinion of the Board, the High Court will proceed further with
the formalities of winding up and order the winding up of the Company.
Once the High Court passes the Order for winding up, the powers are vested
with the concerned High Court and not with BIFR.
High Court will appoint Liquidator and vests with all the powers covered under
the Companies Act, in him as a liquidator.
Immunity from Certain Litigations Section 22
One of the most important provisions of SICA is Section 22.
In certain circumstances, no proceedings for the winding up of the industrial
company or for execution, distress or the like against any of the properties of the
industrial company or for the appointment of a receiver in respect thereof and no suit
for the recovery money or for the enforcement of any security against the industrial
company or of any guarantee in respect of any loans or advance granted to the
industrial company shall lie or be proceeded with further, except with the consent of
BIFR or, as the case may be, the Appellate Authority.
The protection under Section 22 of SICA is a superior protection as it operates
notwithstanding anything contained in the Companies Act, 1956, or any other law or
the memorandum and articles of association of the industrial company or any other
instrument having effect under the said Act or other law.
The above protection is available to any company
Even if the inquiry under SICA is ordered u/s 16
Even if the scheme under preparation u/s 17

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Even if the appeal is pending u/s 25


Even if the Management has changed u/s 18
Notwithstanding anything contained under the Companies Act or the
Memorandum and Articles of Association
(a) it shall not be lawful for the shareholders of such company or any other person to
nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall
be given effect to unless approved by BIFR.
However, Section 22 does not grant any immunity against criminal proceedings
against the company or its directors.

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 11

Its a Case Study refer to the study material


CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 12

They are all specimens please refer to study material

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 13 A & B

PART A SECURITIZATION ACT

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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guidelines relating to assets classifications issued by such authority or


body;
(b) in any other case, in accordance with the directions or guidelines
relating to assets classifications issued by the Reserve Bank.
The problem of non-performing loans created due to systematic banking
crisis world over has become acute. Focused measures to help the
banking systems to realise its NPAs has resulted into creation of
specialised bodies called asset management companies which in India
have been named asset reconstruction companies (ARCs).
ARC is to act as agent for any bank or financial institution for the purpose
of recovering their dues from the borrowers on payment of fees or
charges, to act as manager of the borrowers asset taken over by banks,
or financial institution, to act as the receiver of properties of any bank or
financial institution and to carry on such ancillary or incidental business
with the prior approval of Reserve Bank wherever necessary.
"Securitisation" means acquisition of financial assets by any securitisation
company or reconstruction company from any originator, whether by
raising of funds by such securitisation company or reconstruction company
from qualified institutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise

The following chart will illustrate this.

FINANCIAL ASSISTANCE
Borrower Originator
(Obligor) (Lender)
Securing assets

Transferring
Cash Secured Assets

Cash
Investors SPV
(QIB) (SCO/RCO)
Security receipt

PART B DEBT RECOVERY


The Act was passed to provide for the speedy adjudication of matters
relating to recovery of debts due to banks and financial institutions.
The Act provides that the Central Government shall by notification,
establish one or more Tribunals, to be known as the Debts Recovery
Tribunal, to exercise the jurisdiction, powers and authority conferred on
such Tribunal by or under the Act.
Composition of the Tribunal: The Act provides that a Tribunal shall consist

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of one person only, to be called the Presiding Officer, to be appointed, by


notification, by the Central Government. The Central Government may
also authorise the Presiding Officer of one Tribunal to discharge also the
functions of the Presiding Officer of another Tribunal. Any person eligible
to be qualified as the District Judge will be eligible to become Presiding
Officer. The term of office for the Presiding Officer is 5 years.
As of now, there are twenty nine Debt Recovery Tribunals and five Debt
Recovery Appellate Tribunals across the country constituted by the
Government of India.

Any person who is aggrieved by an order of Recovery Officer may prefer


an appeal to the Tribunal.
The Tribunal and the Appellate Tribunal shall have, for the purposes of
discharging their functions under this Act, the same powers as are vested
in a civil court under the Code of Civil Procedure, 1908, while trying a suit,
in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and
examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or
documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or
any order passed by it ex parte;
(h) any other matter which may be prescribed.

CORPORATE RESTRUCTURING AND INSOLVENCY

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.

Grounds on which a Company may be Wound up by the Court


A company under Section 433 may be wound up by the Court if
(a) the company has passed a special resolution of its being wound up by the Court; or
(b) default is made in delivering the statutory report to the Registrar or in holding the statutory
meeting; or
(c) it does not commence business within a year from its incorporation or suspends business for a
whole year; or
(d) the number of its members in the case of a public company is reduced below seven and in the
case of a private company, below two; or
(e) it is unable to pay its debts; or
(f) the Court is of the opinion that it is just and equitable that it should be wound up; or
(g) if the company has made a default filing with the Registrar its balance sheet and profit and loss
account or annual return for any five consecutive financial years; or
(h) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the state, friendly relations with foreign states, public order, decency or morality; or
(i) If the tribunal is of opinion that the company should be wound up under the circumstances
specified in Section 424G:

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

CORPORATE RESTRUCTURING AND INSOLVENCY

STUDY 15

CROSS-BORDER INSOLVENCY

A company is said to be insolvent when its liabilities exceed its assets


which results in its liability to pay off the debts. Cross border insolvency
issues arise when a non-resident is either a debtor or contributory or
creditor.

UNCITRAL MODEL LAW : Since National insolvency laws have by and


large not kept pace with the trend, they are often ill equipped to deal with
cases of cross border nature. It hampers the rescue of financially troubled
business. It hampers the administration of cross border insolvencies. This
gave the path for evolution of UNCITRAL Model law on Cross-Border
Insolvency in 1997.
UNICITRAL had also came out with the legislative guide on Insolvency
Law in 2004.
It offers solutions that help in several significant ways, including : foreign
assistance for an insolvency proceeding taking place in the enacting State;
foreign representatives access to courts of the enacting State; recognition
of foreign proceedings; cross-border cooperation; and coordination of

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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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Informal corporate workouts. Corporate workouts should be supported


by an environment that encourages participants to restore an enterprise to
financial viability. Informal workouts are negotiated in the shadow of the
law.
2. Insolvency Law Systems
Commercial insolvency. Though approaches vary, effective insolvency
systems have a number of aims and objectives.
3. Implementation: Institutional and Regulatory Frameworks
Strong institutions and regulations are crucial to an effective insolvency
system.
4. Overarching considerations of sound investment climates
Transparency, accountability and corporate governance. Minimum
standards of transparency and corporate governance should be
established to foster communication and cooperation.
Transparency and Corporate Governance. Transparency and good
corporate governance are the cornerstones of a strong lending system and
corporate sector. Transparency exists when information is assembled and
made readily available to other parties and, when combined with the good
behavior of corporate citizens,
Predictability. Investment in emerging markets is discouraged by the lack
of well defined and predictable risk allocation rules and by the inconsistent
application of written laws

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