Corporate Restructuring Short Notes

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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, expression , by which a company can consolidate its business operations and strengthen its position for achieving its short-term and longterm 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, 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 – cost – benefit 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 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, 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:

Professional program LMR/Short Notes

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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 among present or prospective prospective businesses within within the corporate portfolio; — risk reduction; and — development of core core competencies competencies Restructuring may be financial organizational restructuring.

restructuring,

technological,

market

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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 

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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 – Strategy – - Long term - Medium – Medium – term term - Short term / tactic The famous 5 P‘s 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 strategy is concerned with overall purpose and is known as grand or root strategy. - Business strategies strategies devolve from grand strategies and are directly concerned with the future plans of the profit centres. - Operational strategy targets strategy targets the departmental or functional aspects of


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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 among present or prospective prospective businesses within within the corporate portfolio; — risk reduction; and — development of core core competencies competencies Restructuring may be financial organizational restructuring.

restructuring,

technological,

market

and

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 

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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 – Strategy – - Long term - Medium – Medium – term term - Short term / tactic The famous 5 P‘s 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 strategy is concerned with overall purpose and is known as grand or root strategy. - Business strategies strategies devolve from grand strategies and are directly concerned with the future plans of the profit centres. - Operational strategy targets strategy targets the departmental or functional aspects of


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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 t o assess and adjust the organisation's direction i n 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 with focus, accountability and more time for the important activities. The benefits of strategic planning include better decisions, increased energy, increased capacity, improved customer satisfaction, competitive advantage, better solution, market recognition etc. 

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Long range planning means development of a plan for accomplishing a goal set over a period of several years, with the assumption that current knowledge about future conditions is sufficiently reliable to ensure the plan‘s reliability over the duration of its its implementation.

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 is the fusion or absorption of one thing or right into another. In amalgamation, amalgamation, two or more existing companies merge together to form a new company keeping in view their long term interest.

In acquisition, acquisition, A corporate action in which a company buys most, if not all, of the target company‘s 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. 

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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 franchisor‘s goods or service, and to use the business name for a fixed period of time. CORPORATE RESTRUCTURING AND INSOLVENCY STUDY 3 & 3A

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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 achieve expansion, diversification, entry into new markets, acquisition of desired resources, patents and technology.


Amalgamation is an arrangement for bringing the assets of two companies under the control of one company, which 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

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C

D

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 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 court‘s 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). — Court‘s 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 court‘s 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. — Court‘s order is appealable in a superior court.

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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 Court‘s 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 Court‘s order with ROC - Conditions precedent and subsequent to court‘s 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.

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The incidence of stamp duty is an important consideration in the planning of any merger.

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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.

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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 t o reap the benefits of the facility for carrying forward and setting off of accumulated losses and unabsorbed depreciation.

CORPORATE RESTRUCTURING AND INSOLVENCY STUDY 4

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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 company‘s 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. 

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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 changeof-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 t akeovers. 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. It‘s a scientific method by which business valuation is arrived at. 4. Valuation / Acquisition Motives : (a) either purely financial (taxation, assetstripping, 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 Professional program LMR/Short Notes

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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 company‘s 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 part ies 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. Thus P/E =

P 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 f ormula: 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 offeror‘s, then it‘s 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: Fair value of shares =


Value by net assets method + Value by yield method 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 dividend

Total value of business =

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 corporate partition of a company into two undertakings, thereby retaining one undertaking with it and by transferring the other undertaking to the resulting company. It is a scheme of business reorganization

―reconstruction‖ involves the winding up of an existing company and the transfer of its assets and liabilities to a new company formed for the purpose of taking over the business and undertaking of the existing company.

There are 2 companies

There is only one company

Both companies continues to operate

Old company goes into liquidation

Shareholders company

Shareholders get money back for its holding in old company and/or get new stake in new company.

gets

shares

in

new

―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 Professional program LMR/Short Notes

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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 for identification and quantification of the assets and liabilities of the existing company and new company consequent 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 ‗effective date‘, is the date on which all consents and approvals required under the scheme were to be obtained and transfer effected.

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 Professional program LMR/Short Notes

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1. Preparation of scheme of demerger 2. Application to court for direction to hold meetings of members/creditors 3. Obtaining court‘s 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. Court‘s order on petition sanctioning the scheme of demerger

Amalgamation / Merger

Reverse Merger

an existing company under a scheme of amalgamation or merger, loses its own legal identity and is dissolved without being wound up and its assets, properties and liabilities are transferred to another existing company

a healthy company merges with a financially weak company. The main reason for this type of reverse merger is the tax savings under the Income-Tax Act, 1961.

Its driven under the Companies Act

Its purely from the taxation point of view

May or may not have sick company as part of it

Its essentially driven by sick and healthy company‘s 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 company‘s 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 company‘s position. The earning performance of the merged company can be measured by return on total assets and return on net worth. In general, gr owth in profit, dividend payouts, company‘s 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 B

C

D E

Financial restructuring of a company involves a rearrangement of its financial structure to make the company‘s finances more balanced. 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. 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 criteria‘s 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. Buy-back of shares means the purchase by the company of its own shares. 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. 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.

H


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I

The buy back of securities of listed companies are guided by SEBI (Buy-back of Securities) Regulations, 1998. 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.

J

K 

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L

M

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. 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 announcement—Filing 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 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 committee‘s 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


23

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


24

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: 

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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

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Even if the scheme under preparation u/s 17


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Even if the appeal is pending u/s 25

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Even if the Management has changed u/s 18

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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

It‘s 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

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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 (Obligor)

Originator (Lender) Securing assets

Cash

Transferring Secured Assets

Cash Investors (QIB)

SPV (SCO/RCO) Security receipt

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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. 

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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 whereby assets are realised, liabilities are paid off and the surplus, if any, distributed among its members. The liquidator appointed by the company or the Court carries out the winding up proceedings According to the Companies Act the liquidator can represent the company in the process of winding up.


Dissolution is the final stage whereby the existence of the company is withdrawn by the law. the order for dissolution can be passed by the Court only. Once the Court passes dissolution orders the liquidator can no longer represent the 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

Dissolution is an act which puts an end to the 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 assigne e 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 f or the purpose of winding up of the com pany. 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 company‘s 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 member‘s 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 control of the liquidation, as the company is deemed to be solvent;

the company is deemed to be insolvent and, therefore, the control of liquidation remains in the hands of the creditors

There is no meeting of creditors in a members‘ voluntary winding up and the liquidator appointed by the company acts in the liquidation of its affairs

meetings of creditors have to be called at the beginning and subsequently the liquidator is appointed by the creditors.

the liquidator can exercise some of his powers with the sanction of a special resolution of the company

The liquidator can exercise some of his powers with the sanction of the Court or the Committee of Inspection or of a meeting of creditors

Where the creditors are interested and the directors are not able to guarantee the company‘s solvency

the creditors are entitled to secure control of the winding up, so that their interests may be safeguarded

CORPORATE RESTRUCTURING AND INSOLVENCY STUDY 15 CROSS-BORDER INSOLVENCY 

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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 representative‘s access to courts of the enacting State; recognition of foreign proceedings; cross-border cooperation; and coordination of


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concurrent proceedings. 

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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 

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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.


Corporate Restructuring Short Notes

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