ABSTRACT
A company has indeterminate growth by law. There is, however, a constant threat to its life from the ‘market’. It loses business to others when it fails to compete with its peers. Every other company is its predator – a company swallows another company for its own growth, through a variety of hostile or friendly reforms. Creative destruction often destroys more companies than it creates!
Therefore, it is necessary to rescue a company, with a viable business, from premature death, and nurse it back to normal life, while also aiming for higher growth by stimulating competition and innovation and eliminating anti-competitive conduct at marketplace.
Here comes the role of corporate governance from the starting of the company till its indefinite growth or death whichever is lead by a good corporate governance. As the Corporate governance is the system of rules, practice, and processes by which a firm or a company is directed and controlled. It majorly involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financers, the government and the community as whole. A bad corporate governance can cast doubt on a company’s operations and its ultimate profitability which can even lead to the insolvency of the company and ultimately posing a high risk for the creditors.
Perhaps a more effective method of corporate governance would be enhanced monitoring of whom loans are given to, and how they are used, instead of whether they are repaid.
The Insolvency and Bankruptcy were implemented with a view to consolidate the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals. The first objective of the code is rescuing a company in distress, the second order objective is maximising value of the company’s assets and the third objective is balancing the interests of the stakeholders. These objectives and reason for the implementation of the code is in compliance to the corporate governance goals and objectives.
Therefore, a good corporate governance method if implemented by a company it will never lead to insolvency, as the corporate governance is nothing but a way to run a corporate company in the rustic corporate world, which includes each and every aspect a company. From the rules, practices a company must possess while initiating its corporate journey, the processes, and balancing a company’s and its various shareholders and creditors interest, till the ultimate profitability of the company, so that the interest of the creditors/lenders and shareholders must maintain in the company and there comes no day that a company comes in the situation of the insolvency which would lead to its bankruptcy.
INSOLVENCY AND RESTRUCTURING
The insolvency and restructuring process is something which every company needs to gain knowledge about, as a company/entrepreneurship is a process of taking risk, with an ultimate aim of earning profits and growth of the company. The risk, even calculated, also has the other side, of failing, and consequently loosing of a company. So, a company needs some regulations and provisions, through which it runs, a management team which governs these companies, and do their best to achieve the highest possible achievements and accomplishments for a company. But sometimes, the risk, comes out to be a bad calculation of thoughts and ideas, resulting in high losses, and expenses, lending’s and other such bad decisions, which can lead a company to be bankrupt, consequence of which the company either results in some other hands, or just shuts its operations, which is even worse for the human resources engaged with that company. The purpose of the governance totally becomes obsolete.
This kind of situation is seen in many companies, mostly the start-ups and the micro and small enterprises. Thus, there comes the need of a good restructuring process to be followed, which shall have regularities and legalities to save not just the company, but also the people and the resources engaged with it, that is, the employees, the creditors and the public associated with it in the scenarios of large companies having shares publicly floated.
When a corporate is not able to pay its lenders and creditors, it is said to be in a distressed position and is called a distressed corporate debtor, and when the lenders who do not get their share or profits back, they are called creditor, which includes a financial creditor, operational creditors, a secured creditor and unsecured creditor.
When a company owes money to its creditors and is making continuous losses and has high expenses, is not able to meet its daily expenses, does not have enough resources and liquidity to pay even its employees, then a corporate is said to be becoming an insolvent company, which if not handled properly and not managed by good corporate leaders, due to any circumstances owned by the human minds, the corporate can lead to become a bankrupt company. In some corporates the foreign creditors are also involved which possess a higher risk for a corporate to satisfy its creditors and lenders, which are not governed by the domestic legalities, and some of them have assets in foreign jurisdictions, which are not governed and legalised by the domestic provisions and regulations, they need to have an international prospective and cross border applicability of laws and legislations.
For saving the corporates and the economy of the business industry, the process of restructuring and insolvency has been made with provisions and laws, which is the Insolvency and Bankruptcy Code, 2016 of India. The aim of this code is to save the companies from going bankrupt and becoming insolvent. To save the corporates from being insolvent to the position of being bankrupt, there is a process which involves restructuring of the company’s goals, management, governance, strategies and other such elements which are required to save a company form being bankrupt. The process of restructuring involves the reorganisation of companies, the challenges and goals to be amended, amalgamations, mergers or acquisitions, liquidation of assets in the home country or the in the foreign lands, where it is necessary, to get the financial help, within a time bound manner for maximisation of the value of assets of the company and maximising the profits of the corporates with the aim of saving the financially distressed debtors from the creditors. There are many committees and restructuring process involves, that is the Committee of creditors (CoC), the Corporate Insolvency Resolution Process, which is a recovery mechanism for the creditors of a corporate debtor, the involvement of Insolvency and Bankruptcy Board of India (IBBI), which is the regulator for overseeing the insolvency proceedings and entities like professional agencies, insolvency professionals and other insolvency and restructuring professionals and committees, with the help and guidance of National Company Law Tribunal (NCLT).
CORPORATE GOVERNANCE
The corporates are not made in one day, it takes huge amount of time to become a company profitable and to come at a dominating and leading position in the whole lot of competition involved across the globe. The most important aspect of any company is its human resources and the minds involved with it, the people of a company make or destroy a company, as they are managed by them only, their thoughts, their ideas and the material resources they put in a company to make it profitable and for the best possible achievements in the market they are involved.
The governance is the key element of any organisation, which is handled by the senor most authorities of a company, the managers, the directors, the CEOs, and other top-level employees to apply their minds to manage and handle a corporate with the collusion of high risk taking and the selections of decisions form good to bad, with an approach of failing forward. The system of rules and objectives the corporate leaders take and implements in their companies, this only allows the companies to establish a good corporate governance. It is with experiences, be it good or bad, which decides and lighten up the good corporate governance in the process of taking a company from top to bottom. The need of a governance is initiated from the starting of company till the indefinite growth of it. The process of governance captivates the bottom level till the top most level management of the company, its customer handling, its way of generating profits, the path of financial fundings, the right time of monetary help from the lenders, and other such business decisions which shall be taken with utmost care and diligence to improve and maintain the roots and revenues of the corporates.
Basically, the corporate governance is the collection of mechanism, processes and relations used by various parties to control, operate and manage a corporate, with a sense of achieving the highest achievement of a corporate. Shleifer and Vishny (1997) define corporate governance as the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. Taking a broad perspective on the issues, Gillan and Starks (1998) define corporate governance as the system of laws, rules, and factors that control operations at a company.[1]
CORPORATE GOVERNANCE AND INSOLVENCY AND RESTRUCTURING
Insolvency and corporate governance are part of a continuum in the life of a corporate entity (Nestor, 2002)[2] The corporate governance system and the insolvency and restructuring process go hand in hand. These mechanisms work for the benefit of the company, one from the starting to the scratch and till the indefinite growth and the latter, when the first one tends to lose the path and derail from its objectives and goals. This continuity can be gauged by looking at 3 key attributes of the insolvency system: A. Its close relationship to corporate finance arrangements in specific countries. B. Its function as a key benchmark for corporate attitudes towards risk. C. Its function as a set of governance norms for insolvent going- concerns[3]
The corporate governance mechanism is the base of a company and the insolvency and restructuring process can be treated as a second chance given to a loss-making company, which shall go bankrupt if not dealt and handled by a good corporate governance. When a corporation tends to go into a state of loss and stops generating profits and revenues, then the governance of the company is alleged and accused of mis-governance, their ability to handle a corporate is challenged and doubted, they are accused of some or many irregularities happening in the company, accused of taking bribes, alleged of engaging in problematic corporate governance practices. This is the sole and absolute reason that the corporate governance is given in the hands of highly experienced, able and efficient people, who can challenge any doubt casted on them or the company. It becomes the duty of the corporates to have a good corporate governance team, in order to handle not only the material and ideological prospects, but also to look after the minds behind them, be it the financial creditors, operational creditors, secured or unsecured creditors, the employees of the company, as they are totally dependent on the life, well being and growth of the company. Officers and directors of a troubled corporate enterprise can expect to face a host of complex decisions as they attempt to restructure the corporation’s affairs. These decisions may be made more difficult because officers’ and directors’ fiduciary duties extend to all stakeholders, including creditors, when the corporation is in the zone of insolvency. The examples of the types of governance complications that stakeholders sometimes raise include boards that have not dedicated satisfactory time for careful consideration and contemplation of strategic options, boards that are deeply uninformed about their own companies’ businesses and competition, submissive boards that are subjugated by strong-willed chairmen, chief executive officers, or senior management; and boards and senior management distracted by securities litigation or government investigations. Stakeholders often allege that governance practices of this sort disguise and even amplify companies’ financial and operational distress[4].
When a corporate is in a distressed position, it tends to find the options to save itself from the creditors and lenders, to save its company from being bankrupt, and is the prey of a bad corporate governance, then the option left with it is the filling for the insolvency and restructuring process under the Insolvency and Bankruptcy Code of India in the National Company Law Tribunal for the sake of its company and the people associated with it. After filing the application for the insolvency and restructuring process under the NCLT, a Committee of Creditors if formed associated with it, and with the due permission and acceptance of the creditors, the company is allowed to initiate the process of insolvency and restructuring with the common aim of creditors and the corporate to save the company from being bankrupt. A stipulated time limit of 180 days is given to the company by the NCLT under the code, to restructure its formation, goals, objectives, strategies, governance, management and to apply the best possible minds to pay the debts of the creditors by liquidating the assets (foreign or domestic), by amalgamation with any other company, by mergers and acquisitions, hostile takeovers, and by doing restructures in the company so that it can generate profits or revenues, have liquidation on money, or become financially stable enough to repay the debts and lending. This is the most crucial and life changing time for a company which shall decide its fate of further growth.
For the restructuring process and to stop the company from being insolvent and finally bankrupt, there is a dire requirement of a good corporate governance, which can handle its matters, employees, make new strategies, goals, objectives, negotiations, deals, mergers, try to earn revenues and get cash by selling the appropriate and substantial assets of the company,
In some countries the directors and the senior most management are not held accountable for any of the bad business decisions taken by them, it is perceived and assumed that the business decision taken by the directors is taken in consideration and in the betterment of the company and that it cannot be a bad decision, therefore the directors are not held accountable for nay of there decisions, even if the company becomes insolvent also, this is called the business judgement rule, practices mostly in the US. But this rule is not applicable in many countries such as India, and here the directors and the senior most authorities of the corporates are doubted and are relied upon their decision for the betterment of a company, but if a bad decision is taken then also, they are relied upon and are blamed for the bad corporate governance, if the company goes insolvent. When a corporation becomes insolvent, the directors’ and officers’ fiduciary duties expand and extend to the firm and its “entire community of interests,” including creditors. What this means as a practical matter is that directors and officers must manage an insolvent company and maximize its value for the benefit of creditors as well as shareholders. The duty to stakeholders runs to all of them, not to any particular groups of them or to any particular individuals. Thus, di- rectors and officers of an insolvent corporation should focus on maximizing the value of the enterprise, rather than on attempting to maximize recoveries for any one particular constituency[5] .
Ther are many instances of famous companies which became bankrupt due to bad corporate governance. Many small businesses in the world are hit due to the pandemic of Covid-19, and have been forced to shut down, as they were unable to generate profits, and the corporate leaders were not able to handle the situation, some of them took bad loans, some were hit by their bad decisions and governance.
Corporate governance failures have resulted in the closure and bankruptcy of flashy businesses and absconding of business tycoons, like Jet Airways, DHFL, YES Bank, IL&FS, Kingfisher Airlines collapsed, and arrest of heavyweight corporates, such as Rana Kapoor, Chanda Kochhar and the Singh brothers and many more.
The case of Yes Bank
In the absence of a credible revival plan, and in the interest of YES Bank’s creditors, the RBI (Reserve Bank of India) took control of YES Bank in March 2020. It was founded as an NBFC (non-bank financial company) in 1999, and became a full-fledged bank in 2003. Its board members battled continually for the top spot, with former Managing Director and CEO Rana Kapoor being popular for sustaining up the market by approving to disburse loans to corporate borrowers rejected by other banks. The bank would charge a huge upfront fee and most borrowers were defaulters at will. It is an utter failure of corporate governance and a good corporate leader
The case of Enron
The case of Enron broke out in October, 2001, subsequently leading to the bankruptcy of the corporation. It was an American company based in Texas and was the biggest reorganization in the American history at that time. The main reason for the fall out of the company was carved out to be an audit failure. The situation and problem faced was having no good corporate governance and instead focusing more in the structures and mechanisms. No one acknowledged the rules and regulations and the directors kept a blind eye on the flouting of rules and to the violation of the code. The auditors failed to identify suspicions and faults in the accounts and did not even examine the special purpose entities transactions. This resulted in the filing of bankruptcy in December, 20021.
The case of Bhushan Power Steel
Bhushan Power and Steel was founded in 1970 and became one of the top steel manufacturing companies in India. During the years and mostly between 2007 and 2014 the company took huge loans and credits from the banks and other creditors, for its expansion and meeting daily operational expenses. The company began missing deadlines for the repayment and many litigations and cases were filed on the company, subsequently which the CBI found out that the money was diverted into more than 200 shell companies. This caused the bank to suffer from huge NPAs forcing the company into National Company Law Tribunal and eventually get auctioned. The company was then sold to JSW Steel.
These are some of the instances in which the corporations faced huge losses due to their corporate leaders and bad corporate governance practices, resulting in the bankruptcy of these companies and either being shut down or being bought by some other company.
These instances of fall out of the companies is the reason for extensive research and analysis of corporate governance has dramatically increased over the years.
The governments of different nations also have brought stricter regulations and laws to implement the proper functioning of the companies, in India the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, the Chapter 11 of the US, and such other jurisdictions which have attempted to save their companies from being the prey of corrupt and bad corporate governance, which has often resulted in the losses of creditors and the human resources associated with that company.
The best use and the best implementation of the Insolvency and Bankruptcy Code is no use of it at all. That would be the ultimate corporate governance.
BIBLIOGRAPHY
- Recent Developments in Corporate Governance: An Overview Stuart L. Gillan
- Insolvency and Corporate Governance: Linkages and limitations by AZB & Partners
- https://www.oecd.org/corporate/ca/corporategovernanceprinciples/2085780.pdf
- Stakeholders are increasingly focused on good corporate governance on a global basis. See, e.g., B. hutton et al., changing the game! reforming american bus
- J. (Jan) Baker, et al. “Corporate Governance of Troubled Companies and the Role of Restructuring Counsel.” The Business Lawyer, vol. 63, no. 3, American Bar Association, 2008, pp. 855–79, http://www.jstor.org/stable/40688514.
- Corporate Governance in the Context of Corporate Restructuring by Mr Li, Xiao
- https://www.mondaq.com/india/insolvencybankruptcyre-structuring/939078/restructuring-insolvency-comparative-guide
- https://tradebrains.in/biggest-bankruptcies-in-india/
- https://intouchnetworks.com/en-gb/blog/corporate-governance-failures
- https://www.oecd.org/corporate/ca/corporategovernanceprinciples/2085780.pdf
- https://www.business-standard.com/article/economy-policy/insolvency-law-s-success-needs-to-be-appreciated-say-experts-121090201341_1.html
Note:
[1] Recent Developments in Corporate Governance: An Overview Stuart L. Gillan
[2] Insolvency and Corporate Governance: Linkages and limitations by AZB & Partners
[3] https://www.oecd.org/corporate/ca/corporategovernanceprinciples/2085780.pdf
[4] Stakeholders are increasingly focused on good corporate governance on a global basis. See, e.g., B. hutton et al., changing the game! reforming american bus
[5] D. J. (Jan) Baker, et al. “Corporate Governance of Troubled Companies and the Role of Restructuring Counsel.” The Business Lawyer, vol. 63, no. 3, American Bar Association, 2008, pp. 855–79, http://www.jstor.org/stable/40688514.
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