The Insolvency and Bankruptcy Code, 2016 (IBC) is landmark legislation consolidating the regulatory framework governing the restructuring and liquidation of persons (including incorporated and unincorporated entities). The previous liquidation regime before the incorporation of the IBC focused more on winding up of the corporate body in discharge of its debt, whereas the IBC lays emphasis on keeping the entity as a ‘going concern’ with further emphasises on commercial determination over judicial determination. The Code is inter alia intended to revive sick corporates as far as possible and if the revival is not possible, then to liquidate the same.
“In a recent judgment of this Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, this Court had categorically laid down that, IBC was not intended to be substitute to a recovery forum. It was also laid down that, whenever there was existence of real dispute, IBC provisions could not be invoked.”
A Corporate Insolvency Resolution Process (“CIRP”) can be instituted against the corporate debtor on default of repayment of debt by financial or operational creditors. Subsequent to the initiation of CIRP, a moratorium period is declared by the tribunal during which creditor action will remain stayed, while the bankruptcy court takes a view on the possibility of rehabilitation and all legal actions are prohibited or stayed as the can may be. Once Corporate Insolvency Process is initiated under the Code, any qualified resolution applicant can submit resolution plan to the Insolvency professional for revival of the company. This peculiarity of the Code gives wider options for mergers/demergers by sale of Company or its business /undertaking to outside public.
Further, a resolution plan is invited by the resolution applicant and has been defined in Section 5(26) of the IBC, 2016[ii] as:
“a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II.
Explanation.- For removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;”
The resolution applicant, being any person(s), can thereby propose a distressed merger or amalgamation of the corporate debtors with other organisation. Several waivers are given to facilitate such resolution and once such resolution is approved by the Committee of Creditors (“CoC”), the contents of resolution plan are backed by judicial approval upholding the requirement to maintain the entity as a ‘going concern’ for maximisation of the value of the corporate debtor.
Thus CIRP Resolution Plan may include substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with 1 or more persons; transfer of all or part of the assets of the corporate debtor to 1 or more persons[iii], among other things.
Regulation 32 of the Insolvency And Bankruptcy Board Of India (Liquidation Process) Regulations, 2016[iv] states:
“The liquidator may sell-
(a) an asset on a standalone basis;(b) the assets in a slump sale; (c) a set of assets collectively; (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern…”
Further, Regulation 29(3) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations[v], 2016 states:
“A bona fide purchaser of assets sold under this Regulation shall have a free and marketable title to such assets notwithstanding the terms of the constitutional documents of the corporate debtor, shareholders’ agreement, joint venture agreement or other document of a similar nature.”
This deemed sanctity before law creates Mergers & Acquisition (“M&A”) opportunities for an acquirer to acquire assets during the insolvency and yet, ring fence the acquisition from subsequent legal challenges.
A M&A opportunity may also arise as a part of the CIRP when a Resolution Plan is invited by the Resolution Professional. The plan can provide for[vi]:
i. transfer of all or part of the assets of the corporate debtor to one or more persons;
ii. sale of all or part of the assets whether subject to any security interest or not; and
iii. substantial acquisition of shares, or the merger or consolidation of corporate debtor with one or more persons.
A M&A opportunity could also arise following the CIRP when as part of the Resolution Plan, the Resolution Applicant has taken approval to divest all or parts of the corporate debtor’s assets through M&A activity over a pre-agreed period of time following the conclusion of the CIRP.
The efficiency of the Code in respect to its time frame for the recovery of the distressed assets and as an initiatives to prevent the erosion of value of such assets during the entire insolvency process makes it all the attractive M&A dealers in the market. The initial hesitation of investing in M&A has all the more subsided with the effective information gathering during the CIRP helps in providing valuable insights into the distressed assets without much hassle of the interested investors searching for opportunities.[vii] The IBC has driven massive M&A momentum in the country, led by deals involving Bhushan Steels (USD 7.4 billion), Reliance Communications (USD 3.7 billion), Fortis Healthcare (USD 1.2 billion). The IBC has accelerated activity in distressed merger and acquisitions (M&As) in India with the transaction involving Indian companies reaching $104.5 billion in 2018[viii].
In the given situation of COVID – 19, recent amendments have been introduced into IBC wherein the default limit for instituting a CIRP has been increased to INR 1 Crore, from INR 1 Lakh[ix] which would provide a buffer period to the corporate debtors for repayment of debts, thereby in process halting some M&As through the IBC. However, given the timelines for completion of CIRP that have already been initiated have been relaxed, it can entail the M&A of an organisation already undergoing the CIRP, following a more thorough examination leading to better and more effective mergers.
[i] (2019) 12 SCC 697
[vi] Section 37, Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.