IBC as a trigger for M&A activities

Contributed by: Juris Legal





Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) is landmark legislation consolidating the regulatory framework governing the restructuring and liquidation of a ‘corporate person’ such as (i) a Company, and (ii) Limited Liability Partnership,. Additionally, the Ministry of Corporate Affairs, vide notification dated November 15, 2019, made IBC applicable to the personal guarantors of corporate debtors.

Unlike the erstwhile Sick Industrial Companies Act, 1985, which focused more on the winding up of a corporate body in order to discharge its debt, the IBC emphasizes on selling non-performing assets as a ‘going concern’. The IBC separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects and empowers and facilitates the stakeholders and the Adjudicating Authority viz National Company Law Tribunal (“NCLT”) to decide matters within their respective domains expeditiously. Therefore, one of the main objectives of the IBC is to revive debt laden corporates as far as possible and if the revival is not possible, then to liquidate.

CIRP Leading To M&A

A Corporate Insolvency Resolution Process (“CIRP”) can be initiated against a ‘corporate debtor’ on default of repayment of debt by a financial or an operational creditor. Subsequent to the initiation of CIRP, there is a period of moratorium. The purpose of the moratorium is to keep the assets of the corporate debtor intact, while the NCLT takes a view on the possibility of rehabilitation of the corporate debtor. During the moratorium period inter alia the corporate debtor is prohibited from transferring, encumbering, alienating or disposing its assets and no action to foreclose, recover or enforce any security interest may be taken against the corporate debtor.

Subsequent to the initiation of the CIRP under the IBC, any qualified resolution applicant can submit a resolution plan to the resolution professional for revival of the company. A ‘resolution plan’ invited by the resolution applicant, has been defined under Section 5(26) of the IBC 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;” [emphasis supplied]

Therefore, the IBC provides for a wide option for mergers/demergers of the corporate debtor or its business /undertaking to any person, not specifically prohibited under the IBC.

The resolution applicant can therefore propose substantial acquisition of the shares of the corporate debtor or a distressed merger or amalgamation of the corporate debtor with other organization; in order to maintain the entity as a ‘going concern’ for maximisation of the value of the corporate debtor. Once the resolution plan is approved by the Committee of Creditors, it needs to be subsequently backed by the NCLT.

Regulation 29(3) of Insolvency and Bankruptcy Board of India (“IBBI”) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 states as follows:

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.” [emphasis supplied]

Therefore, by means of this provision, any bona fide purchaser of the assets of the corporate debtor has a free and marketable title and is shielded from legal challenges arising out of the non-implementation of the existing charter documents or other contracts or agreements.

If the corporate debtor goes into liquidation, Regulation 32 of the IBBI (Liquidation Process) Regulations, 2016 is invoked, which states as follows:

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…” [emphasis supplied]

Therefore, even the liquidator has the power to sell the corporate debtor as a going concern, creating further M&A opportunities.

Conclusion

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 M&A activity in distressed assets and entities with transactions.

Given the current situation of COVID - 19, the government recently enacted the IBC Amendment Ordinance, 2019, wherein the default limit for instituting a CIRP has been increased to INR 1 Crore, from INR 1 Lakh.

Furthermore, the timelines for completion of CIRP that have already been initiated, have been relaxed by means of the aforesaid Ordinance.


Contributed by Juris Legal


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