Author: Purti Srivastava, V Year of B.B.A.,LL.B(Hons.) From Bennett University, Greater Noida.
Co-author: Indrayudh Chowdhury, V Year of B.B.A.,LL.B(Hons.) From Bennett University, Greater Noida.
ABSTRACT
Corporate Restructuring is a process wherein a corporate entity modifies its operational and/or financial structure either due to a merger, acquisition, bankruptcy, etc. or some other problems. A corporate entity can either opt for a financial restructuring of the company, which may be necessary due to a fall in sales and revenues because of adverse economic conditions, or an organizational restructuring of the company, which may occur due to a situation of a takeover, merger, over-employed personnel, overlapping levels of hierarchy and various other reasons.
The proposed research paper intends to study and examine the respective roles, rights, and responsibilities of various stakeholders in a corporate restructuring. The broad term stakeholders would include shareholders, creditors (both secured and unsecured), employees, key managerial personnel in the company, adjudicatory authorities, and other such stakeholders according to the corresponding laws. The purpose of such an analysis is to clearly mark the boundaries of the different stakeholders to affix responsibility to the proper personnel and clearly state the claims and rights of the various other stakeholders mentioned.
The paper would be subdivided into the following chapters –
Corporate Restructuring and the Stakeholders
In this chapter the researchers would explain the concept of corporate restructuring and define the parameters of research which they would be limited to in the paper. They would also lay down the stakeholders they would like to highlight in the paper.
The Role, Rights, and Responsibilities of the Stakeholders
The next chapter would explore the numerous roles and responsibilities of the stakeholders in corporate restructuring and how they go about fulfilling it along with the various rights attached to the roles needed to be fulfilled by the stakeholders.
The conclusion would discuss the findings established in the previous chapters and highlight various essential elements, while also analysing the law in place to determine whether any loopholes or gaps exist in the present system and give various recommendations to patch such gaps in the legal system.
CHAPTER I: CORPORATE RESTRUCTURING AND THE STAKEHOLDERS
“Restructuring is the first step and that’s the easy part, but if you don’t have a viable business model, the market won’t allow you to survive with hollow promises.”
Carlos Dimas
The beginning of the 20th century oversaw a significant transition from the conventional business model to the modern models in the corporate arena, wherein the business shifted from a brick mortar situation to the current digital and efficient business systems. The advent of the technological and digital age bought about a lot of changes in how individuals go about their businesses, and one of these new changes was the concept of corporate restructuring. Corporate Restructuring is defined as the process of significantly changing a company’s business model, management team or financial structure to address various challenges related to the business’s financial output, long term vision of the business and shareholder value.
Business owners have recognised that external as well as internal factors affect the output of an enterprise, and if they can’t control the external factors, they can affect the outcome of the internal factors to produce results favourable to their business. Sometimes a business may not be able to produce adequate results due to the management structure of the enterprise, or there may be a problem with the operational structure or have difficulty with any one of the thousand internal factors that impact a business, and the option of closing the enterprise doesn’t appeal to anyone who has put in their time, effort, and resources into the workings of the business. Therefore, what do they do? This is where the concept of corporate restructuring comes into the effect. Instead of applying for Insolvency and Bankruptcy proceedings, an enterprise has the option of going through a restructuring in order to remedy the problems that ail it. The objectives of corporate restructuring are:
(a) redirection of the firm’s activities, (b) redistribution of finances from one business to another in order to finance profitable growth, (c) risk reduction, and (d) development of core competencies. A Corporate restructuring can be undertaken by an enterprise under the following situation –
To concentrate on core competencies, operational synergy, and effective management capability and infrastructure allocation.
Capital restructuring using a suitable mix of debt and equity funds to lower the service costs and increase the return on invested capital.
A sick unit’s resuscitation and rehabilitation by balancing the sick unit’s losses with the revenues of the healthy company.
Consolidation and economies of scale through growth and diversion to take advantage of the expanded local and international markets.
Adopt fundamental changes brought about by information technology to improve company performance and bring it up to the line with its rivals.
Secure a continuous supply of raw material, as well as gain access to various scientific research and technological advancements.
A restructuring doesn’t just mean the restructuring of the operational and managerial structure of the business but may also mean revaluating the business strategy or putting into effect a merger, takeover, joint venture, strategic alliance, or amalgamation of the enterprise. Chapter XV of the Companies Act 2013, which lays down the provisions (Section 230 to 240) on ‘Compromises, Arrangements, and Amalgamations’, personify this concept of restructuring embraced in the modern business era. Under these provisions, the company looking for a restructuring provides an application to the National Company Law Tribunal (hereinafter referred to as the NCLT) along with a scheme of their proposed merger (if they are applying for a merger or amalgamation). The Company would also have to take permission from its shareholders and creditors by having a vote, which must be ratified by at least 75% of the stakeholders. Thereafter, the NCLT passes a final order allowing or denying the proposed restructuring by the company.
In the course of such restructuring, there are various stakeholders who are deeply involved in the workings of the restructuring. For the sake of clearly defining the scope of the current research paper, the authors would list out the stakeholders whose roles, rights, and responsibilities would be discussed in the upcoming chapters –
The Company (which is the debtor)
The directors of the company
The shareholders of the company
Creditors of the company
Employees of the company
Insolvency officeholder
Adjudicating Authority
CHAPTER II: THE ROLE, RIGHTS, AND RESPONSIBILITIES OF THE STAKEHOLDERS
Under the Indian legal system, corporate restructuring can occur under one of the two laws passed by the legislature of the country, the Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the IBC code) and the Companies Act 2013. Under the IBC Code, once the company (also known as a corporate debtor) faces insolvency, the NCLT starts the corporate insolvency resolution process. First, an interim resolution professional is appointed by the adjudicatory authority to oversee the workings of the company (the interim professional may later be reaffirmed as the resolution professional via a vote by the committee of creditors). The powers of the board of directors of the company are suspended and a period of moratorium begins. The interim professional then constitutes a committee of creditors comprised of the financial creditors of the corporate debtor. Thereafter, the resolution professional invites eligible individuals to submit resolution plans (which discuss in detail how the company would be restructured). This plan is submitted before the committee of creditors who, if they like the proposed plan, will approve it via a vote passing the resolution by 2/3rd of the committee. If approved, the plan is forwarded to the NCLT which passes a final order on the restructuring plan. This resolution process needs to be completed within a time frame of 330 days, otherwise, the NCLT would direct the corporate debtor for mandatory liquidation if no plan has been approved within the period given.
On the other hand, restructuring can be done under chapter XV of the Companies Act, which lays down the provisions (Section 230 to 240) on ‘Compromises, Arrangements, and Amalgamations’. Any scheme of compromise, arrangement, amalgamation, and/or merger done under these provisions have to be approved by the NCLT. The NCLT further directs the company to constitute a meeting of its creditors and shareholders, wherein the constituted committee would then vote on the proposed scheme. The scheme passes if 3/4th or 75% of the committee agree to the proposed scheme. If the scheme is accepted, then a petition is filed with the NCLT which would allow the scheme to be implemented by the way of an order.
In the previous chapter, we have already defined the scope and purview of the current research paper by defining the extent of the stakeholders whose role, rights, and responsibilities would be discussed in this paper. Each of the above-mentioned stakeholders is an integral and essential part of every corporate restructuring, and the authors would endeavour to suitably present and explain the sub-topics –
The Company
The whole purpose of a corporate restructuring is to fix the problems of the corporate debtor, i.e., the company itself. A company looking to improve its financials, or one that is not reaching its projected target or growth, such companies are the ones for whom the corporate restructuring process is the most lucrative option. Under the IBC Code, companies have not been assigned any roles, rights, or responsibilities as once proceedings are started, the company does not have control over its own workings but must work according to the resolution professional. Under the Company Act, the debtor (which refers to the company) has the responsibility to propose a scheme for the purpose of the restructuring and files an application for the approval of the scheme with the NCLT. The company has the right to select a scheme that it believes would best serve its purpose of achieving the most efficient and effective method of restructuring and inform the adjudicating authority of the same. The company’s role cannot be overstated in this situation as the entity is the one that has to take it upon itself to find an appropriate scheme for restructuring that would help solve its problems.
Directors of the Company
Under the IBC Code, once the company has entered insolvency proceedings, all the powers of the board of directors for the company are suspended and all such powers are then transferred to the interim resolution professional, who then has the duty to carry on the operations of the company. It is the duty of the directors to assist the interim professional in all of his duties and ensure the smooth workings of the company. In turn, the directors have the right to attend the meetings with the committee of creditors and provide any comments and suggestions on the proposed resolution plans they believe to be in the best interest of the company. However, they would not have any voting rights while attending the meetings. Under the Companies Act, no specific role or rights are mentioned under the legislation, except that the scheme must be ratified by the board of directors.
Shareholders of the Company
Shareholders are one of the most integral members of a company, as they provide the capital on which a company carries out its day-to-day operations. Despite this, the IBC Code does not list any of the roles, rights, and responsibilities of the shareholders in the process of a corporate restructuring. In contrast to this, the company act allows shareholders with at least a holding of 10% or more to have a seat in the meeting wherein the committee approves of a scheme for the restructuring. It is the responsibility of these shareholders to approve of a scheme that they believe would be in the best interest of the company and help implement the same in any manner that they can.
Creditors of the Company
Creditors of a company are divided into two categories, secured and unsecured creditors, though this distinction does not matter as they both have the same rights, roles, and responsibilities. A secured creditor is one whose debt to the company has been secured against one of the assets of the company, while an unsecured creditor is one whose debt is not secured against any other asset. Under the IBC Code, a creditor cannot take any action against the corporate debtor once the period of moratorium begins, as the assets and liabilities of the company are kept on temporary hold to determine their division among the claimers. A creditor has the right to submit their claims to the interim resolution professional who deals with such claims during the resolution process.
However, the IBC does distinguish creditors into two separate categories of Financial and Operational Creditors. Financial creditors refers to any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred, whereas an Operational creditor refers to a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. An Operational debt refers to a claim in respect of the provision of goods and services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, State Government, or any other authority. The IBC differentiates between these two classes of creditors as it is the financial creditor who has the right to sit on the committee of creditors who vote on resolution plans while the operational creditors have no such rights. Classifications of secured and unsecured creditors do not matter if it is the financial creditor who has the right to sit on the committee. The Supreme Court has also upheld the Constitutional validity of this distinction established by the IBC in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India. Under the Companies Act, the NCLT constitutes classes of creditors and calls those for a meeting who hold above 5% in outstanding debt with respect to the company in question. The NCLT invites both secured and unsecured creditors to sit in the meeting to approve or reject the scheme proposed by the company for the purpose of corporate restructuring. The responsibilities of the creditors under both legislations are to approve a proper scheme or resolution plan which helps the company the most. The creditors are given more powers as the legislature believes that the creditors have their own-self-interests to weigh and would therefore be invaluable to the company in the resolution process.
Employees of the Company
Under the IBC Code, the employees of the company have the same rights as the creditors of the company to submit their claims to the interim resolution professional who would later deal with those claims during the resolution process. It is the responsibility of the employees to assist the resolution professional in any manner that they can to help them manage the workings of the company. However, no such roles, rights, and responsibilities have been mentioned under the Companies act.
Insolvency Officeholder
The title refers to the interim resolution professional and resolution professionals appointed by the adjudicating authority during Corporate Insolvency Resolution Process (CIRP) under the IBC Code, and they have the following role, rights, and responsibilities –
Assume ownership and custody of the company and his assets for the time being.
Manage the company’s operations and keep the business running.
Invite, collect, and verify claims from creditors.
Appoint a Committee of Creditors and hold meetings for it.
Develop an information memorandum and ask potential applicants to submit resolution plans for the purpose of restructuring and deliver all such plans to the creditor’s committee.
Submit applications for the avoidance of transactions.
Submit the resolution plan to the NCLT if approved by the Committee of Creditors.
The Companies Act makes no such provisions for the appointment of an interim professional or resolution professional.
Adjudicating Authority
The National Company Law Tribunal and National Company Law Appellate Tribunal are the adjudicating authority for companies applying for the corporate restructuring process. Under the IBC Code, the NCLT first admits a petition for the commencement of CIRP proceedings laid down under its provisions. Thereafter, the authority appoints an interim resolution professional, who takes over the powers of the board of directors to keep the company running in their place. This interim resolution professional can be ratified by the committee to become the resolution professional, or they can appoint a new one. The authority also passes orders on various applications that may be filed by the resolution professional. Finally, the NCLT has the power to approve or reject the resolution plan approved by the committee of creditors according to its discretion. Under the Companies Act, all schemes proposed by the company are sent to the NCLT, who then calls for a meeting of classes of shareholders and creditors who vote upon the proposed scheme. If the proposed scheme is approved in the meeting, then the approved scheme goes to the NCLT for approval, who either accepts the scheme allowing the company to proceed with the restructuring or rejects it if they believe that the proposed scheme is unviable.
The next authority after the NCLT is the NCLAT, which acts as the appellate authority that hears appeals against the decisions of the NCLT, after which the Supreme Court is the final appellate authority.
CONCLUSION
The current research paper elucidated the roles, rights, and responsibilities of the stakeholders of a company in respect to the situation of a corporate restructuring. The authors of the paper have explained this topic using two different legislations, i.e., the Insolvency and Bankruptcy Code 2016 and the Companies Act 2013. The paper has laid down the different methods via which a company can use the process of corporate restructuring to benefit itself and have also provided an in-depth report on the stakeholders during this process.
The benefit of having two different laws which support the process of corporate restructuring is that an entity has two different options available to itself under which they would want to pursue the reconstruction process. If the entity is in trouble due to insolvency, they have the option of using the process laid down in the provisions of the IBC Code, otherwise a company trying to restructure itself due to any other reason can apply for the process mentioned under Companies Law, which allows them to apply for a compromise, arrangement, merger, amalgamation, joint venture, or one of the many other processes. These two acts do not contradict each other and are consequently able to exist simultaneously. However, if the proceedings for restructuring have begun under one of the above-mentioned legislations, new proceedings cannot be started under the other.
After analysing both of these laws properly, the authors have found that both of these laws have certain areas which are not addressed properly regarding the stakeholders related to corporate restructuring. The IBC Code does not address the rights, roles, and responsibilities of the Company in question nor its shareholders, whereas the Companies Act does not address the Directors and Employees of the company applying for restructuring, nor about the Insolvency professional. These flagged areas should be properly addressed by the respective legislations as a clear demarcation of the rights and duties allow an entity to operate smoothly without stopping to wait for instructions or clarifications. Thus, this area needs to be addressed by the legislature in order to avoid confusion and increase efficiency of the restructuring process.