The Insolvency and Bankruptcy Code, 2016 (IBC) has gradually evolved but, following a number of amendments, now offers a value route for M&A transactions. Corporate insolvency prior to 2016 was a disordered process but the IBC brought a breath of fresh air, offering robust and timebound solutions. Business transactions thrive on stability, clarity and dependability and each change to the IBC dispelled ambiguities, allowing it to become clearer and more dependable. M&A transactions under the IBC are cleaner and benefit from a time-bound mechanism that is free from the risk of existing and unknown liabilities obstructing acquisitions.
Companies under financial stress are brought under the IBC framework by aggrieved creditors with claims exceeding INR10 million (USD135,000). Once the National Company Law Tribunal (NCLT) is satisfied the proceedings are properly brought under the IBC, the first step is to appoint a resolution professional (RP), who takes over the role of the management as well as that of the board of directors of the company. The RP prepares a resolution plan that helps the company repair its finances and restores it to financial health. This plan must be prepared and finalised within 180 days, although an extension of 90 days may be allowed.
Consultation and discussions then take place with the financial and operational creditors of the company. Their co-operation helps to have the resolution process approved without liquidating the company. A potential acquirer of the company can enter the process and make an offer that is acceptable to the committee of creditors (CoC). Once the financial creditors are happy with the process the resolution plan can be finalised, with the RP implementing it under the supervision of the CoC. The plan is filed with the NCLT to take the company out of the IBC framework and the new management can take over the company without any changes or further damage to its market standing.
If the CoC and the RP are unable to agree on a resolution plan the next step is to start the liquidation process, under which the company’s assets are sold piecemeal to realise the maximum value from the sale. The RP informs the NCLT of the failed resolution process and commences the liquidation. The liquidator at that stage is obliged to issue a public notice advertising the liquidation. A potential acquirer can enter the acquisition process at this stage, looking to take advantage of the provisions of section 32(A), a bold insertion in the IBC in 2019 made with the intention of saving a company as a going concern for the benefit of its stakeholders and employees. The liquidator may, through an open and transparent bid process, invite offers from interested M&A players and sell the company to the highest bidder with the consent of the NCLT. Section 32(A) relieves the acquirer of liability for claims or proceedings brought against the company before the acquisition.
Working with the RP and the resolution plan would seem to be the most practical option. However, over the last few years, it has become apparent that buying during the resolution process opens the acquirer to risk. The CoC must approve the resolution plan and goodwill deposits must be paid, taking time and tying up resources until the plan is approved. The application to the NCLT for approval adds to the delay. Entering the process at the liquidation stage offers better value and clearer visibility to the acquirer. As the Supreme Court in Manish Kumar v UOI and the National Company Law Appellate Tribunal in JSW Steel v Mahender Khandelwal made clear, section 32(A) is intended to make acquisition during liquidation a clean process, with no past claims affecting the transfer. This gives the acquirer a company that, after the resolution process, is a healthy, going concern.
Sales of companies by liquidators to the highest bidders are approved by the NCLT, the liquidator and the creditors, making it a superior process under the IBC for M&A acquisitions. Such sales provide relief from past company liabilities and government proceedings. The sale process is time-bound and the approval of the NCLT allows the newly-acquired company to re-enter the market with fresh management and enthusiasm.
M&A players in India and abroad should look at the IBC options closely and decide which approach better suits their plans.
Gautam Khurana is the managing associate at India Law Offices
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