CS Professional Corporate Restructuring, Insolvency, Liquidation & Winding-Up Question Paper

Question 1(a)
Mango Communications Ltd. is a new company that is willing to take over Telecommunication licenses to operate in 20 telecom circles and get itself listed on the stock exchange but present Government policy does not permit issuing new licenses. There is another telecom company by name Tango Telecom Limited having listed with BSE and NSE holding licenses for 22 telecom circles. Latter Company is looking for some 1 external reconstruction through merger or acquisition due to its operational ineffectiveness. As a Company Secretary, you are asked to find out the way through which a merger deal can happen so that Mango Communications Ltd. could resolve the issues relating to listing and licenses. (5 Marks)
Answer:
→ In 2014, the Department of Telecommunications, Government of India issued ‘Guidelines for Transfer/Merger of various categories of Telecommunication service licenses/authorization under Unified License (UL) on compromise, arrangements and amalgamation of the companies.

→ Further, the Telecom Regulatory Authority of India (TRAI) has released ‘Recommendations on Ease of Doing Telecom Business.’ As a result, the telecom sector permits 100% FDI for better management and funding, as well as permits trading of spectrum and telecom licenses.

→ However, the scheme of compromise, arrangements and amalgamation of telecom companies is governed by the various provisions of the Companies Act, 2013.

→ As per a scheme of merger or acquisition, there shall be transfer of assets/licenses/authorization held by Transferor Company to the Transferee (Acquiring) Company.

→ Consequently, due to such merger or acquisition and transfer of licenses thereon, the total spectrum held by the Transferee entity shall not exceed 25% of the total spectrum assigned for access services and 50% of the spectrum assigned in a given band.

→ Where, due to merger or acquisition, the total spectrum held by the relevant entity is beyond these prescribed limits, the excess spectrum must be surrendered within one year of the permission being granted.

→ Where, due to transfer of telecom licenses in a service area, the Transferee entity becomes a ‘Significant Market Power’ (SMP), then the rules and regulations applicable to SMPs would apply to the Transferee entity.

→ In the given case, Mango Communications Ltd. wishes to acquire telecom licenses to operate in 20 telecom circles. On the other hand, Tango Telecom Ltd. (listed company and holding 22 telecom licenses) is considering corporate restructuring through merger or acquisitions.

→ In the given case, Mango Communications Ltd. should propose a merger with Tango Telecom Ltd. The proposed merger shall be approved by the honourable National Company Law Tribunal (NCLT), as per sections 230-232 of the Companies Act, 2013, along with applicable rules.

→ Post-merger, Mango Communications Ltd. shall be dissolved and the management team of the Transferee company (Tango Telecom Ltd.) shall be revamped with better management practices.

→ Tango Telecom Ltd. shall continue to be a listed company and licenses shall be used by the combined entity. Due to synergy benefits the operational ineffectiveness of Tango Telecom Ltd. can be rectified, and the combined entity shall reap higher benefits.

→ Thus, Mango Communications Ltd. may plan a scheme of merger with Tango Telecom Ltd., subject to the legal compliances, as mentioned above.

Question 1 (b)
It is said that ‘corporate restructuring’ always has motives. Elaborate on the ‘financial motives’ that are prevalent. (5 Marks)
Answer:
→ Corporate Restructuring means re-arranging business of a company for increasing its efficiency and profitability.

→ Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the organization. It involves dramatic changes in an organization.

→ The strategy adopted shall depend on the motive or organizational goals and hence a different strategy shall apply to different companies.

→ Corporate Restructuring aims at different motives at different times for different companies.

→ Thus, it is said that corporate restructuring always has motives. Following are the financial motives of corporate restructuring
1. Increase Operational Efficiencies: A scheme of amalgamation leads to operational efficiencies. The combination of operations creates integration, which in turn increases earnings potential and reduces cost. It results to focused operational efforts, rationalization, standardization, rise in productivity, and eliminate duplication (for example: HLL and TOMCO, Flipkart.com and Myntra.com).

2. Economies of scale: A combination of two or more companies increases scale of production. The input-output ratio improves with larger scale of operations. Economies of scale are obtained when increase in volume of production leads to a reduction in cost of production per unit. This gives the company a competitive advantage by gaining an ability to reduce the prices to increase market share, or earn higher profits while maintaining the price, (for example: Reliance Industries and Reliance Petroleum).

3. Tax benefits: Companies use mergers and amalgamations for tax management. Especially, where there is merger between profit making and loss-making company. Major income tax benefit arises from set-off and carry forward provision u/s 72A of the Income-tax Act, 1961.

4. Reduced Competition: Horizontal merger results in reduction in competition. Competition is one of the most common and strong reasons for mergers and acquisitions, (for example: Sun Pharmaceutical and Ranbaxy).

5. Reduced Risk: Amalgamation with companies involved into unrelated business areas leads to diversification. It facilitates the smoothening of business cycles effect on the company due to multiplicity of businesses, thereby reducing risk, (for example: Reliance Industries and Network TV18, NetMeds).

6. Maximize Value of Assets: Due to corporate restructuring companies are able to utilize their assets and capacities to better effect. It results in maximizing the value of assets and its efficiencies.

7. Access to Capital Markets – Mergers and amalgamations increase the size of companies and they become a dominant force in the market. Due to their large size their capitalization is higher and hence its bargaining power rises. This facilitates raising funds in the market, either through equity or debt funds.

8. Increase in Market Share: A merger facilitates increase in market share of the merged entity. Rise in market share leads to higher turnover and enhanced profits. Horizontal merger is the key to increasing market share. Mergers can increase the value of shareholders of both companies through utilization of combined resources, (for example: Idea and Vodafone).

9. Financial Management: Financial synergy benefits include liquidity, eliminating financial constraints, deployment of surplus cash, enhancing debt capacity, lowering cost of capital etc. Sometimes, companies with surplus cash may merge to create investments opportunities, thereby enhancing market value.

10. Improving Debt-Equity position: Companies with high debt (leverage) prefer to merge with equity-oriented companies to balance their debt-equity position. This reduces risk and creates stability. This will allow better tax shield and improving share-holders’ wealth.

Question 1(c)
John Ltd. is in the process of taking over Tony Ltd. Turnover of Tony Ltd. as per latest financial statements is ₹ 800 crore and assets value is ₹ 280 Crore. There are no material changes in the value of assets and projected turnover for the current financial year. The Board of Director seek your opinion for obtaining approvals in terms of Competition Act, 2002. (5 Marks)
Answer:
→ As per section 5 of the Competition Act, 2002, ‘combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business.

→ Thus, the term ‘combination’ includes every scheme of merger, amalgamation, acquisition, takeover, strategic alliance and joint-venture etc.

→ Section 6 of the Competition Act, 2002 regulates combinations. Any combination which causes or likely to cause appreciable adverse effect on competition within the relevant market in India is prohibited and such combination is void.

→ The Competition Act, 2002 has prescribed certain threshold limits to ascertain the nature, scale and economic bearing of a combination.
The threshold limits are based on combined assets and combined turnover of the entities.

→ Any person or enterprise, who or which proposes to enter into a combination, and crosses such threshold limits, shall notify the Competition Commission of India (CCI). No combination shall come into effect until 210 days have passed from the day on which CCI is notified or the CCI has passed orders, whichever is earlier.

→ In the given case, John Ltd. plans to takeover Tony Ltd. which results in a combination. Where, the combined assets or combined turnover crosses the prescribed threshold limits, approval of the Competition Commission of India is mandatory.

→ For seeking approval to the proposed combination, John Ltd. and Tony Ltd. shall give notice to the CCI by filing Form I or Form II, whichever applicable, along with prescribed filing fees.

→ The Competition Commission of India shall approve the combination based on following steps:

Upon receipt of such application, the CCI shall form its prima facie opinion as to whether combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India within 30 working days of the receipt of such notice.
Where CCI observes any adverse effect of competition, it shall issue a (SCN) Show Cause Notice to the parties to the combination, about initiating an investigation in respect of such combination.
The CCI shall, within 7 days, direct the parties to publish the details of the combination, to the public and persons likely to be affected by such combination.
The Commission may invite any persons affected or likely to be affected by the said combination, to file their written objections within 15 working days of the public notice.
The CCI may, within 15 working days of filing of written objections, call for such additional information from parties.
After receipt of all information and within 45 days from expiry of period for filing additional information, the CCI shall proceed to deal with the case.

→ The Commission, after considering all relevant facts and circumstances of the case and assessing the effect of any combination on the relevant market in India, may
(a) Approve the combination, where the CCI comes to a conclusion that the combination does not, or is not likely to, have an appreciable adverse effect on the competition.
(b) Reject the combination, where the CCI is of the opinion that the combination has, or is likely to have an adverse effect on competition.
(c) Modify the scheme of combination, where the CCI is of the opinion that the adverse effect on competition can be eliminated by modifying such combination.

→ As per section 31(11), where the CCI does not, on expiry of a period of 210 days from the date of filing of notice, pass an order or issue any direction in accordance with the provisions of the Act, the combination shall be deemed to have been approved by the Commission

Question 1(d)
The paid-up Equity Share Capital of Zumba Ltd. is 100000 shares of ₹ 10 each as on 1st April, 2019. The promoters hold 37000 shares as on 1st April, 2018, which is 37% of the paid-up capital. The promoters are three shareholders, Ram holding 21000 (21%), Shyam holding 12000 shares (12%) and Mohan holding 4000 shares (4%).

The company makes a preferential allotment to its directors as follows: Ram 7000 shares and Mohan 1000 shares.

Define creeping acquisition and evaluate the requirement of public announcement in above case as per Securities and Exchange Board of India (Substantial Acquisition of Securities and Takeovers) Regulations, 2011. (5 Marks)
Answer:
→ Takeover implies acquisition of control and management of an existing company, through the purchase or exchange of shares. Generally, takeovers take place where shares are acquired from the shareholders of a company at a specified price to gain control of that company

→ In India, takeover of listed companies is regulated by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST).

→ The SEBI (SAST) Regulations provides certain trigger events where the Acquirer is required to make a public announcement and an open offer to the shareholders of Target Company.

→ As per Regulation 3(3) of SEBI (SAST) Regulations, an acquirer who (along with PACs) already holds 25% or more voting rights in a target company, but less than maximum permissible non-public shareholding, is allowed to acquire additional voting rights in the target company to the extent of upto 5% within a financial year ending on 31st March, without making an open offer.

→ Any acquisition beyond 5% of the voting rights of the target company can be made only after making a public announcement of an open offer for acquiring shares of such a target company. Such event is known as ‘Creeping Trigger.

→ In the given case,

Ram, Shyam and Mohan are promoters of Zumba Ltd. (having 100,000 equity shares)
Ram holds 21000 shares (21%), Shyam holds 12000 shares (12%) and Mohan holds 4000 shares (4%), together amounting to 37% shareholding.
The company makes a preferential allotment of equity shares to Ram 7000 shares and Mohan 1000 shares, total amounting to 8000 shares.
Hence, post issue shareholding of Ram 28000 shares and Mohan 5000 shares. Further, the total paid-up equity shares of Zumba Ltd. shall become 108000 shares.
As a promoter group, their shareholding has become 45000 paid-up equity shares out of total 108,000 paid-up equity shares. The shareholding percent has become 41.67% from the earlier 37%. Hence, the additional acquisition at promoter group level is 41.67% – 37% = 4.46%
Since the acquisition by all the promoters together does not exceed 5% in a financial year there is no creeping trigger.
However, we need to check what would be the post issue holding of individual promoters.
Post issue, Ram holds 28000 paid-up equity shares out of 108,000 paid-up equity shares. Hence, percentage shareholding is 25.93% as compared to 21 % prior to preferential issue. Hence, individually, Ram has crossed the threshold limit of 25% as per Regulation 3(1) of SEBI (SAST) Regulations, 2011. Hence, Ram shall be liable to make public announcement.
Post issue, Mohan holds 5000 paid-up equity shares out of 108,000 paid-up equity shares. Hence, percentage shareholding is 4.63% as compared to 4% prior to preferential issue. Hence, there is no trigger for Mohan as per the SEBI (SAST) Regulations, 2011. Hence, Mohan is not liable to make public announcement.

Attempt all parts of either Q. No. 2 or Q. No. 2A

Question 2(a)
Payment of stamp duty under Indian Stamp Act, 1899 is required even in cases of orders made by National Company Law Tribunal (NCLT) in terms of Sections 230 to 240 of the Companies Act, 2013. Are there any exceptions or exemptions? (5 Marks)
Answer:
→ Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.

→ As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.

→ In the landmark case of Li-taka Pharma, v. State of Maharashtra, it was held that National Company Law Tribunal (NCLT) order for sanctioning a merger (under sections 230-240) and requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.

→ However, there are certain following exceptions and exemptions from payment of stamp duty:
1. No stamp duty is payable on an instrument sanctioning an amalgamation for rehabilitating business and undertaking of a sick industrial company.

2. Further, the Central Govt, has exempted payment of stamp duty for cases of amalgamation between Holding and Subsidiary company, subject to fulfilment of following conditions

When at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company, or
When the transfer is between a parent and a subsidiary company, one of which is beneficial owner of not less than 90% of the issued share capital of the other, or
When transfer takes place between two subsidiary companies each of which is having not less than 90% of the share capital in the beneficial ownership of the parent company.
However, since stamp duty is a State matter, the exemption for Holding Subsidiary company will be applicable only where the State Govt, follows Central Govt, notification.

Question 2(b)
‘Buy-back strategy’ is now-a-days being adopted by leading corporate bodies. Mention one case that has happened recently specifying the benefits of buy-back. (5 Marks)
Answer:
→ Buy-back means the purchase of its own shares or other specified securities by a company. Section 68 of the Companies Act, 2013 enables a company to re-purchase its own securities.

→ In case of listed companies, along with Companies Act, 2013, there shall be compliance of the SEBI (Buy-Back of Securities) Regulations, 2018.

→ Buy-back results in returning the funds to the shareholders and a reduction of the floating stock of the company’s securities in the market.

→ Following are the benefits of buy-back of equity shares
(a) To increase earnings per share (EPS).
(b) To improve return on capital employed (ROCE), return on equity (ROE) and to enhance long-term shareholder value.
(c) To compensate shareholders in case of low trading volumes, le., to provide exit route.
(d) To increase control by consolidating the Promoters’ stake in the company.
(e) To prevent/protect from any hostile takeover bid. Buy-back acts as a defence mechanism against hostile takeovers by increasing Promoters’ shareholding.
(f) To return surplus cash to shareholders.
(g) To achieve optimum capital structure, le., a mix of borrowing and own funds.
(h) To reduce cost of capital, thereby increasing future profitability.
(i) To ensure optimum allocation of funds generated, by avoiding any unproductive investments.
(j) To support share price during periods of dull market conditions.

→ In the recent past, many companies have adopted buy-back strategy to return funds to the shareholders and reduce its paid-up equity capital.

→ Following are example of buy-back in 2020

WIPROLtd.
Tata Consultancy Services Ltd. (TCS)
Ajanta Pharma Ltd.
NMDC Ltd. (National Mineral Development Corporation)
NTPC Ltd. (National Thermal Power Corporation)

Question 2(c)
“Competition Commission of India takes into consideration various factors while assessing the adverse effect on competition.” – Analyse briefly. (5 Marks)
Answer:
→ As per section 5 of the Competition Act, 2002, ‘combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business.

→ Thus, the term ‘combination’ includes every scheme of merger, amalgamation, acquisition, takeover, strategic alliance and joint-venture etc.

→ The Competition Act, 2002 has prescribed certain threshold limits to ascertain the nature, scale and economic bearing of a combination. The threshold limits are based on combined assets and combined turnover of the entities.

→ Any person or enterprise, who or which proposes to enter into a combination, and crosses such threshold limits, shall notify the Competition Commission of India (CCI) and get its approval.

→ It is mandatory for the Commission to enquire whether the combination referred to in that notice, has caused or is likely to cause an appreciable adverse effect on competition in India. CCI shall verify whether the benefits of combination are more or less than the adverse effects.

→ Following factors are considered by the Competition Commission of India while evaluating appreciable adverse effect of combinations on competition in the relevant market-
(a) actual and potential level of competition;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) chances that the combination would result increases prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) potential market share, in the relevant market;
(h) chances that combination would result in the removal of strong and effective competitor(s);
(i) nature and extent of vertical integration in the market;
(j) nature and extent of innovation; and
(k) relative advantage, through the contribution to the economic development.

Alternative Q. No. 2A

Que. 2A
(i) Ram Ltd. is considering merger with Shyam Ltd. Ram Ltd. shares are currently traded at ₹ 20. It has 1,70,000 shares and its Profit after Taxes (PAT) amounts to ₹ 8,50,000. Shyam Ltd. has 40,000 shares having market price of ₹ 15 and its PAT is ₹ 3,00,000.
(a) If the merger goes through by exchange of equity shares and the exchange ratio is based on the current market price, what would be the new earning per share of Ram Ltd.?
(b) Shyam Ltd. wants to ensure earnings available to its shareholders are not reduced due to proposed merger. What would be the exchange ratio in such a case? (5 Marks)
Answer:

Particulars	Ram Ltd.	Shyam Ltd.
Profits after Tax (PAT)	₹ 8,50,000	₹ 3,00,000
Number of Equity Shares	1,70,000	40,000
Hence, EPS (PAT/No. of Equity shares)	₹ 5.00	₹ 7.50
Market Price per share	₹ 20	₹ 15

(a) The merger goes through by exchange of equity shares and the ex-change ratio is based on the current market price.

Share Exchange (Swap) Ratio = Market Price of Shyam Ltd. (Target company)
Market Price of Ram Ltd. (Acquirer company)

Share Exchange (Swap) Ratio = 0.75 times

Number of shares of Ram Ltd. to be issued to shareholders of Shyam Ltd.	Shares in Shyam Ltd. (x) Swap ratio = 40,000 shares (x) 0.75 = 30,000 shares
Total equity shares of Ram Ltd. after the merger	Existing equity shares of Ram Ltd. (+) New equity shares issued to shareholders of Shyam Ltd. = 170,000 shares (+) 30,000 shares = 200,000 shares
Combined PAT of Ram Ltd. after the merger	PAT of Ram Ltd. (+) PAT of Shyam Ltd. = ₹ 8,50,000 + ₹ 3,00,000 = ₹ 11,50,000
Hence, EPS of Ram Ltd. after the merger	Total PAT post merger/Total shares post merger = ₹ 11,50,000/200,000 shares = ₹ 5.75

(b) Shyam Ltd. wants to ensure earnings available to its shareholders are not reduced due to proposed merger. In such case, the exchange ratio shall be based on the pre-merger EPS of both the companies. Let us verify the same from the following calculations
Share Exchange (Swap) Ratio = Pre-merger EPS of Shyam Ltd. (Target company)
Pre-merger EPS of Ram Ltd. (Acquirer company)

Share Exchange (Swap) Ratio = 1.50 times

Number of shares of Ram Ltd. to be issued to shareholders of Shyam Ltd.	Shares in Shyam Ltd. (x) Swap ratio = 40,000 shares (x) 1.50 = 60,000 shares
Total equity shares of Ram Ltd. after the merger	Existing equity shares of Ram Ltd. (+) New equity shares issued to shareholders of Shyam Ltd. = 170,000 shares (+) 60,000 shares = 230,000 shares
Combined PAT of Ram Ltd. after the merger	PAT of Ram Ltd. (+) PAT of Shyam Ltd. = ₹ 8,50,000 + ₹ 3,00,000 = ₹ 11,50,000
Hence, EPS of Ram Ltd. after the merger	Total PAT post merger/Total shares post merger = ₹ 11,50,000/230,000 shares = ₹ 5.00

Hence, where the share exchange ratio is 1.50 times, the total earnings of Shyam Ltd. is not reduced after the merger.

Question 2A(ii)
A meeting of members of Jwala International Ltd. was held as per the orders of the Tribunal for considering a scheme of compromise and arrangement in which 300 members holding 10,00,000 shares were present. 130 members holding 6,00,000 shares voted in favour, 120 members holding 1,00,000 shares voted against and remaining 50 members with 3,00,000 shares abstained. Examine with reference to provisions of the Companies Act, 2013 as to whether the scheme is approved? (5 Marks)
Answer:
→ Section 230 of the Companies Act, 2013 enables a company to enter into scheme of compromise and arrangement, including merger and amalgamation.

→ As per section 230(1) of the Companies Act, 2013, an application shall be made to National Company Law Tribunal (NCLT) for sanctioning a scheme of compromise and arrangement.

→ As per section 230(6) of the Companies Act, 2013, a scheme of com-promise or arrangement shall require approval by simple majority of members (present and voting) representing three-fourth (3/4th) in value of the members or class thereof, as the case may be.

→ Thus, a simple majority in number, and not less than three-fourth (3/4th) in value of members (present and voting) at the meeting must approve the scheme. Hence, section 230(6) requires dual majority, in number as well as in value.

→ In the given case of Jwala International Ltd., (assuming 1 share = 1 vote)

Particulars	Number of Members	Number of Shares held
Total members present at meeting	300	10,00,000
Total members abstained from voting	50	3,00,000
Total members voted at the meeting	250	7,00,000
Total members voted in favour of the resolution	130	6,00,000
Total members voted against the resolution	120	1,00,000

→ From the above table, we observe that 130 members voted in favour of the resolution, out of the total 250 members (present and voting). 120 members voted against the resolution. Hence, the first condition of simple majority in number of members is satisfied. The members voting in favour are more than the members voted against the resolution.

→ The shareholding of members voting is favour is 6,00,000 shares out of the total 7,00,000 shares of member (present and voting). Hence, there is 6/7 majority (approx. 86%) in terms of value of shares in favour of the resolution. Hence, the second condition under section 230(6) is fulfilled.

→ Since, all conditions as per section 230(6) of the Companies Act, 2013, are fulfilled, the scheme is. said to be approved by the members of Jwala International Ltd.

Question 2A(iii)
Woodland Telecommunication Ltd., listed with National Stock Exchange, is willing to acquire the business of Iron Finance Ltd., a Nonbanking Financial Company listed with BSE through a scheme of arrangement in terms of the Companies Act, 2013. Woodland Telecommunications Ltd. has an outstanding loan of ₹ 2,000 crores from ICICI Bank. Combined assets post-merger would be ₹ 10,000 crores. Suggest the list of approvals required for getting the scheme of merger considered by the Tribunal? (5 Marks)
Answer:
→ Section 230 of the Companies Act, 2013 enables a company to enter into scheme of compromise and arrangement, including amalgamation.

→ Thus, section 230 is an empowering section, which provides an oppor-tunity for companies to enter into corporate restructuring transactions such as mergers and acquisitions.

→ In the given case, Woodland Telecommunication Ltd. is willing to acquire Iron Finance Ltd., (NBFC) through a scheme of arrangement in terms of the Companies Act, 2013.

→ Following approvals are mandatory for getting the scheme of merger considered by the Tribunal:
1. Board of Directors:
The first step in carrying out a scheme of merger is approval by the Board of Directors of both the companies. The scheme shall be sanctioned through a valid Board resolution, passed in a valid Board meeting.

2. Members:
Members’ approval (both companies) to the scheme of merger is important for the Tribunal’s sanction. As per section 230(6), the scheme of arrangement is required to be approved by a simple majority in number of members (present and voting) and three- fourth (3/4th) in value of the members or class thereof.

3. Stock Exchange:
In the given case, Woodland Telecommunication Ltd. is listed on National Stock Exchange, while Iron Finance Ltd. is listed on Bombay Stock Exchange. Since both companies are listed, approval from NSE and BSE is mandatory.

As per SEBI (LODR) Regulations, 2015, both companies are required to file the scheme of merger with the respective stock z exchange. The companies shall obtain ‘Observation Letter’ or ‘No Objection’ from the respective stock exchange.

Woodland Telecommunication Ltd. shall apply for listing of additional shares on NSE (based on agreed share exchange ratio).
On the other hand, Iron Finance Ltd. shall apply for delisting of its shares from BSE and subsequent compliances.

4. Banks and Financial Institutions:
As per given data, Woodland Telecommunication Ltd. has an outstanding loan of ₹ 2,000 crores from ICICI Bank. Hence, approval from ICICI Bank shall be taken. Further, approval shall be also needed where there is any financial assistance sanctioned but not yet disbursed.

5. Competition Commission of India (CCI):
As per given data, the combined assets of both companies’ post-merger would be ₹ 10,000 crores. As per sections 5 and 6 of the Competition Act, 2002, where the combined assets post-merger exceeds ₹ 2000 crores (at enterprise level) and exceed ₹ 8000 crores (at group level), approval from the CCI is mandatory. Woodland Telecommunication Ltd. shall notify the CCI and obtain its approval.

6. Reserve Bank of India (RBI):
As per given data, Iron Finance Ltd. is a Non-Banking Financial Company (NBFC). Generally, approval of the RBI is not needed for merger of an NBFC. However, if an NBFC had license (authorization) to accept deposits from the public, RBI approval shall be needed. The same shall be verified prior to the merger.

7. Telecom Regulatory Authority of India (TRAI):
As per given data, Woodland Telecommunications Ltd. is a telecom sector company. Hence, approval from Telecom Regulatory Authority of India shall be needed. The Govt, of India has issued ‘Guidelines for Transfer/Merger of various categories of Telecommunication service licenses/authorization under Unified License (UL) on compromise, arrangements and amalgamation of the companies.

8. Foreign Exchange Management Act (FEMA):
Where a scheme of merger includes issue of shares/funds to Non-Resident Indians (NRI), the Transferee company is required to obtain prior permission of RBI and FEMA compliance.

9. Income-tax Act, 1961:
The Income Tax Department shall be intimated about the proposed scheme of compromise or arrangement and their objections suggestions are invited. Where income tax benefits are to be obtained, the scheme of merger shall comply with the conditions laid down under the Income-tax Act, 1961.

→ Hence, in the scheme of merger – acquisition between Woodland Telecommunication Ltd. and Iron Finance Ltd., the above approvals shall be mandatory for getting the scheme considered and sanctioned by the Tribunal.

Question 3(a)
Between outbound merger and inbound merger, which one appears more beneficial to Corporate India? (3 Marks)
Answer:
→ Section 234 of the Companies Act, 2013, deals with merger between a Foreign Company and an Indian Company. A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.

→ In case of cross-border mergers, there shall be compliance of Foreign Exchange Management (Cross Border Merger) Regulations, 2018, along with the Companies Act, 2013.

→ An inbound merger is one where a Foreign company merges with an Indian company resulting in an Indian company being formed. Here, the Foreign company is dissolved and the Indian company continues to exist.

→ An outbound merger is one where an Indian company merges with a Foreign company resulting in a foreign company being formed. Here, the Indian company is dissolved and the Foreign company continues to exist.

→ Inbound mergers are more beneficial to corporate India due to following reasons
a. Geographical Diversification – An inbound merger leads to geographical diversification (entry in new markets).
b. Global Presence – Inbound mergers help Indian companies in making their global presence felt. It increases their goodwill and reputation.
c. Cost Effectiveness – Through inbound mergers, Indian companies can access existing infrastructure and resources in the foreign country, thereby reducing its costs.
d Technological Advancement – Inbound mergers enable Indian companies to use intellectual properties, hence enhancing technical know-how.
e. Efficient Distribution – Inbound mergers help Indian companies to create large distribution network beyond global boundaries.
f. Tax revenue – Since the Indian companies continues to exist, the Indian Govt, shall get higher tax revenues.

Question 3(b)
Is external reconstruction superior to internal reconstruction? (3 Marks)
Answer:
→ Corporate Reconstruction means re-arranging business of a company for increasing its efficiency and profitability. It involves dramatic changes in a company to achieve its objectives.

→ Reconstruction is a process of significantly changing a company’s business model, management team or financial structure to meet the challenges and increase shareholders’ value.

→ Following are types of reconstruction –
1. External Reconstruction

External reconstruction is a process where a company undergoes a change, through mergers, amalgamations acquisitions etc.
It is an arrangement whereby the assets and liabilities of two or more companies come under the control of newly formed company.
External reconstruction is a situation where an existing company is liquidated and taken over by another company and there is transfer of assets and liabilities.
Shareholders of transferor company are issued shares in the newly formed Transferee company, based on agreed share exchange ratio.
External reconstruction facilitates growth of a company, through economies of scale, reducing competition, technological advantage, higher profitability, synergy benefit etc.

2. Internal Reconstruction

Internal reconstruction is a method where an arrangement is made by a company to improve its financial position without going through liquidating.
When a company incurs loss for number of years, the balance sheet does not reflect the true position of the business. Generally, a higher net worth is depicted, than the real one.
Here, the assets are overvalued and it has many intangible assets and fictitious assets. Such a situation does not depict a true picture of financial statements.
In this case of internal reconstruction, the assets are revalued, liabilities are negotiated, and losses suffered are written-off by reducing the paid-up value of shares and/or varying the rights attached to different classes of shares.
However, the existing company is not liquidated.
Internal reconstruction may be done through cost reduction through closure of units, termination programs, or organizational restructuring involving decentralization etc.

→ We observe that external reconstruction is a much wider and complex activity as compared to internal reconstruction. Basically, external reconstruction is growth-oriented process whereas internal reconstruction is survival-oriented process. Both are vital for specific business scenario.

Question 3(c)
Suggest the regulations to be referred to in respect of Combinations under the Competition Act, 2002. (3 Marks)
Answer:
→ Competition Act, 2002 was passed to prevent practices having adverse effect on competition, to promote and sustain competition, and to ensure freedom of trade in Indian markets. A statutory body is formed known as the Competition Commission of India (CCI).

→ As per section 5 of the Competition Act, 2002, ‘a combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business. Combination includes merger and amalgamation.

→ Section 5 provides certain financial thresholds (combined assets and combined turnover) and all combinations exceeding these financial thresholds are required to be mandatorily approved by the Competition Commission of India (CCI).

→ As per section 6 of the Competition Act, 2002, any combination which causes or likely to cause appreciable adverse effect on competition within the relevant market in India is prohibited and such combination is void.

→ The process of combination analysis undertaken by the CCI is broken down into:
(a) defining the relevant market (product and geographic);
(b) identification of overlap in the relevant market; and
(c) subjecting the combination to competition analysis to ensure that there is no appreciable adverse effect on competition in the relevant market.

→ To facilitate the procedural and substantive provisions, the CCI has provided for informal non-binding pre-merger consultative process and has also provided for guidance notes in order to assist the combining entities in drafting the proposed scheme merger.

→ Basically, sections 5 and 6 of the Competition Act, 2002 stipulate the operative and substantive provisions dealing with the regulation of combinations, along with the CCI (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2011.

→ No combination shall come into effect until 210 days have passed from the day on which notice has been given to the CCI or the CCI has passed orders, whichever is earlier.

→ The CCI has the power to investigate the proposed combination and its effect on the relevant markets in India. Hence, the period of 210 days is extendable based on the number of information requests issued by the CCI.

→ In addition to Combination Regulations, the applicable provisions in relation to confidentiality under Section 57 of the Competition Act and CCI (General) Regulations, 2009 are applicable.

→ Section 43A provides for penalties where any person or enterprise fails to notify the CCI, about a proposed combination.

Question 3(d)
“It would be almost impossible to use the Packman Defence in India” Comment. (3 Marks)
Answer:

A hostile takeover is an offer made directly to a target company’s shareholders, without any previous proposal to the target company’s management. It is a corporate attack on a company.
However, there are various defence tactics against such hostile takeover bid. Packman defence is one such takeover defence strategy.
In a Packman Defence strategy, the target company attempts to purchase the shares of the acquirer (raider) company. This is usually the scenario if the acquirer company is smaller than the target company and the target company has a substantial cash flow or liquid assets.
A Packman Defence strategy can be successful where the target company acquires the shares of the raider company prior to making the public announcement.
Once the acquirer (raider) company makes a public announcement, SEBI imposes certain restrictions on the listed target company.
Regulation 26(2) of the SEBI (SAST) Regulations, 2011, prohibits the target company to enter into any agreement which is not in the ordinary course of business during the offering period (which commences once the public announcement is made).
Hence, after the public announcement is made, it would be almost impossible to use the Packman Defence strategy as a defence mechanism in India.

Question 3(e)
“There are certain practicalities which should be kept in mind while entering into a cross border merger.” Briefly comment. (3 Marks)
Answer:

A cross border merger refers to any merger, amalgamation or arrangement between an Indian Company and Foreign Company.
Cross border mergers shall comply with Section 234 of the Companies Act, 2013, along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
Basically, a cross border merger helps in global expansion of companies. It facilitates technology advancements, geographical diversification, cost reduction and higher profitability.
However, cross border mergers are complex transactions subject to many compliances and dynamic variables.
Hence, certain practicalities shall be kept in mind at the time of entering into cross border mergers. Following are the points to be considered
(a) Conduct due diligence on the other firm.
(b) Conduct a risk-benefit analysis before entering into the merger.
(c) Valuation of both the firms is essential to predict the competition law treatment of the merger.
(d) Make sure that when you enter into an outbound merger it is with a company from one of the prescribed jurisdictions.
(e) Have an in-depth analysis of the host country’s regulatory and political background ready before you take the decision of the merger.
(f) Study the tax structure of the other country to understand future tax liabilities.
(g) Study the culture of the other country to avoid future conflicts.

PART II

Question 4(a)
Corporate Insolvency Resolution Process (CIRP) against A Ltd. was initiated on application by its Financial Creditors but the process was not completed within the time limit prescribed in terms of section 12(1) of the Insolvency and Bankruptcy Code, 2016 (IBC). Before completion of the CIRP timeline, the Committee of Creditors in its meeting voted at 70 per cent voting share in favour of a proposal to seek extension for a period of 60 days. Can the Resolution Professional file application, seeking extension of CIRP on the basis of voting results so obtained? (5 Marks)
Answer:

The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering corporate debtors. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
As per section 12( 1) of IBC, 2016, the Corporate Insolvency Resolution Process (CIRP) shall be completed within a period of 180 days from the date of commencement of the CIRP.
However, Section 12(2) provides that a Resolution Professional can file an application with the NCLT, upon instructions from the Committee of Creditors.
The Committee of Creditors have the power to apply for extension of the basic time limit prescribed under section 12(1). The Committee of Creditors shall pass a valid resolution in a duly convened meeting by a vote of not less than 66% of the voting shares.
Upon passing such resolution, the Committee of Creditors shall instruct Resolution Professional to apply to the NCLT, for extension of CIRP beyond 180 days.
On receipt of application, if the NCLT is satisfied that the subj ect matter of the case is such that Corporate Insolvency Resolution Process cannot be completed within 180 days, it may by order extend the duration of such process by such further period as it thinks fit. However, such period of extension cannot exceed 90 days. [Section 12(3)]
In the given case, the financial creditors initiated a Corporate Insolvency Resolution Process against ‘A’ Ltd. But the process was not completed within 180 days (prescribed time limit). The Committee of Creditors have sought extension of the CIRP. The Committee of Creditors passed a resolution in its meeting with 70% votes in favour of the extension for a period of 60 days.
Based on the provisions of section 12(2) and 12(3) of IBC, 2016, and the valid resolution passed in the meeting of Committee of Creditors, the Resolution Professional can file an application with the NCLT for extension of the time limit of CIRP.

Question 4(b)
Laxmi Bank Ltd. acquired 10 per cent convertible debentures in Bhaskar Ltd. In terms of the issue, in the year 2012 these debentures were converted into the equity shares in Bhaskar Ltd. Consequent to conversion, Laxmi Bank Ltd. became the owner of 5 per cent equity holding in Bhaskar Ltd. Further, Laxmi Bank Ltd. provided a loan of ? 10 crores to Bhaskar Ltd. that became due in the year 2018. Bhaskar Ltd. became defaulter in repayment of loans not only to Laxmi Bank Ltd. but also some other Banks. On the application by ICID Bank, the Adjudicating Authority initiated Corporate Insolvency Resolution Process (CIRP) and appointed Interim Resolution Professional (IRP). The Committee of Creditors, constituted by the IRP include Laxmi Bank Ltd. ICID Bank objected on the ground that Laxmi Bank Ltd. is a related party that should not have any right of representation, participation or voting. Examine the issue and offer your views. (5 Marks)
Answer:
→ As per Section 21 of Insolvency and Bankruptcy Code (IBC), 2016, an Interim Resolution Professional is responsible for the constitution of the Committee of Creditors. He shall collate all claims received against a Corporate Debtor, determine the financial position of the Corporate Debtor and then constitute a Committee of Creditors.

→ Basically, the Committee of Creditors shall comprise of all financial creditors of the Corporate Debtor. A Financial Creditor may appoint its agent/trustee/representative to act on its behalf and participate and vote in the meetings of Committee of Creditors.

→ Where a Financial Creditor is related party of the Corporate Debtor, he shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors.

→ Related party includes the following –
(a) director or partner of the corporate debtor or a relative of such director or partner;
(b) key managerial personnel (KMP) of the corporate debtor or a relative of such KMP;
(c) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;
(d) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;
(e) any person who controls more than 20% of voting rights in the corporate debtor on account of ownership or a voting agreement etc.

→ However, where a Financial Creditor is regulated by a financial sector regulator (such as RBI, SEBI, IRDA) and is a related party of the Corporate Debtor solely due to conversion of debt into equity shares, shall be allowed to participate and vote in the meetings of Committee of Creditors.

→ In the given case, Laxmi Bank Ltd. (regulated by RBI) holds 596 equity shares in Bhaskar Ltd. due to conversion of 1096 Debentures into equity shares. Further, Laxmi Bank Ltd. is a financial creditor of Bhaskar Ltd. due to loan granted ₹ 10 crores.

→ Bhaskar Ltd. defaulted in repayment of loans. On application of ICID Bank, the NCLT initiated the corporate insolvency resolution process, and appointed an Interim Resolution Professional.

→ The Interim Resolution Professional included Laxmi Bank Ltd. in the Committee of Creditors. However, ICID Bank contented that Laxmi Bank Ltd. is a shareholder of Bhaskar Ltd. and hence it is a related party. Laxmi Bank Ltd. shall not have any right of representation, participation or voting in the Committee of Creditors.

→ However, since Laxmi Bank Ltd. (a Financial Creditor) is regulated by financial sector regulator (Reserve Bank of India) and is a related party of Bhaskar Ltd. solely due to conversion of debt into equity shares, it shall be allowed to participate and vote in the meetings of Committee of Creditors.

→ Hence, the objection of ICID Bank is not tenable and Laxmi Bank Ltd. shall be included in the Committee of Creditors and shall have the right of representation, participation and voting.

Question 4(c)
Deepak was appointed as Interim Resolution Professional (IRP) by Adjudicating Authority on 1st July 2019 in respect of Corporate Debtor Bingo Ltd. Bingo Ltd. failed to file returns regarding Tax Deducted at source for Quarter 1 for the financial year 2019-20. Suspended Directors argued that they are not managing the affairs of the company and hence the responsibility of compliance lies with IRP. Offer your view referring to provisions of section 17(2) of Insolvency and Bankruptcy Code, 2016 and clarify whether the contention of the suspended directors is justified? (5 Marks)
Answer:

A Corporate Insolvency Resolution Process may be initiated either by financial creditors or operational creditors or the corporate debtor itself.
Where National Company Law Tribunal (Adjudicating Authority), admits the application, there is commencement of the formal Corporate Insolvency Resolution Process (CIRP).
As per section 16, the Adjudicating Authority shall appoint an Interim Resolution Professional on the insolvency commencement date.
The primary role of Interim Resolution Professional is constitution of Committee of Creditors, monitor assets and manage the business operations of the corporate debtor.
As per section 17(2) of the IBC, 2016, the management of the affairs of the Corporate Debtor shall vest with Interim Resolution Professional. The powers of the Board of Directors of the corporate debtor shall be suspended and be exercised by the Interim Resolution Professional.
The Interim Resolution Professional shall execute all deeds, receipts, and other documents, on behalf of the corporate debtor. He has access to books of account, records and other documents of corporate debtor available with Govt, authorities, statutory auditors, accountants etc.
Further, the Interim Resolution Professional shall be responsible for complying with the statutory requirements under any applicable laws on behalf of the Corporate Debtor.
As per section 19, every personnel and promoters of the corporate debtor shall extend all assistance and cooperation required by the Interim Resolution Professional in the management of the affairs of the corporate debtor. Personnel includes the directors, managers, key managerial personnel, designated partners and employees of the corporate debtor.
In the given case, Mr. Deepak was appointed as Interim Resolution Professional for Bingo Ltd. on 1st July 2019. Bingo Ltd. failed to file the returns regarding Tax Deducted at Source (TDS) for quarter one of financial year 2019-20. The suspended directors argued that this default in the statutory compliance is the responsibility of IRP.
As per section 17(2) of IBC, 2016, along with the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, the contention of the suspended directors is justified. The IBC, 2016, has assigned the responsibilities of statutory compliance to the Interim Resolution Professional.
However, the suspended directors shall provide all necessary support and assistance to the Interim Resolution Professional for ensuring all such statutory compliances.

Question 4(d) Omega Ltd. is a securitization and reconstruction company in terms of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). The certificate thus issued was cancelled by the competent authority. However, Omega Ltd. is holding certain investments of Qualified Institutional Buyers (QIB) at the time of cancellation. Offer your views regarding the authority that cancels the registration and the rights of Omega Ltd. against such cancellation. (5 Marks)
Answer:
→ Asset Reconstruction Company (ARC), means a company registered with Reserve Bank of India under section 3 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for the purposes of carrying on business of asset reconstruction or securitisation, or both.

→ Basically, an Asset Reconstruction Company is incorporated under provisions of the Companies Act, 2013, along with registration with the RBI.

→ As per section 4 of the SARFAESI Act, 2002, the Reserve Bank of India (RBI) has the power to cancel the ‘Certificate of Registration’ issued to an Asset Reconstruction Company.

→ The RBI is empowered to cancel the registration of an ARC for the following reasons –
(a) ceases to carry on the business of asset reconstruction or securitization,
(b) ceases to receive or hold any investment from a qualified buyer,
(c) fails to comply with conditions of registration,
(d) fails to comply with RBI directions/guidelines,
(e) fails to maintain accounts in the prescribed manner,
(f) fails to submit necessary documents to RBI,
(g) fails to inform RBI about any substantial change in management.

→ However, prior to cancelling the registration, the RBI shall give an opportunity to such ARC of being heard. Where the RBI cancels registration, the ARC may appeal to the Central Govt., within 30 days from date of communication of cancellation order.

→ An ARC, which is holding investments of qualified buyers and whose certificate of registration has been cancelled shall be deemed to be an ARC until it repays the entire investments held by it (together with interest, if any) within such period as the Reserve Bank may direct.

→ In the given case, Omega Ltd. is a securitization and reconstruction company, in terms of the SARFAESI Act, 2002. Its certificate of registration was cancelled by the Reserve Bank of India.

→ However, since Omega Ltd. is holding certain investments of Qualified Institutional Buyers at the time of cancellation, it shall continue to be treated as a deemed asset reconstruction company.

→ Hence, until all funds are repaid, along with interest by Omega Ltd., it shall be deemed to be a securitization and reconstruction company. Further, Omega Ltd. may appeal to the Central Govt, against the cancellation order.

Question 5(a)
A bank took over the management of a company in term of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and appointed 5 directors consequently removing Suresh, an executive director. Suresh demanded compensation for loss of office as well as his unpaid salary for the last 2 months. Will he be entitled for compensation for loss of office and unpaid salary? (3 Marks)
Answer:

The main purpose of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is to enable and empower secured creditors to take possession of their secured assets and to deal with them, without the intervention of Court.
Section 9 of SARFAESI Act, 2002, provides various measures that can be taken by a secured creditor for the purposes of recovery of non-performing assets, including change in management, takeover of business, taking over possession of secured assets etc.
Section 15 of SARFAESI Act, 2002, empowers a secured creditor to take-over the management of business of a borrower. Where the management of business of a borrower is taken over by a secured creditor, it can appoint as many persons as it thinks fit to be the directors.
The secured creditor shall publish a notice in a newspaper in English language as well as in the vernacular language of the place where the principal office of the borrower is situated.
On publication of such notice, all persons who were directors of the borrower company are deemed to have vacated their office.
As per section 16, no director or manager or any person in charge of management of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act. However, they are entitled to any outstanding dues receivable from such company.
In the given case, a bank took over the management of a company in terms of SARFAESI Act, 2002 and appointed 5 directors. Mr. Suresh, an executive director, was removed in the process. Suresh demanded compensation for loss of office as well as his unpaid salary for the last 2 months.
Based on the provisions of section 16 of the SARFAESI Act, 2002, Mr. Suresh shall not be entitled for any compensation for loss of office. However, he can claim his unpaid salary for the last 2 months.

Question 5(b)
How could the rights of dissenting shareholders to a scheme of merger be resolved? (3 Marks)
Answer:
→ The basic principle of shareholders’ democracy says that the rule of majority shall prevail. However, it is also vital to ensure that the power of the majority does not result in oppression of the minority and/or mismanagement of the company.

→ Every shareholder has the freedom to voice his opinion in the meeting or through an affidavit submitted to the Tribunal. Dissenting shareholders represent those members who do not agree with the resolution, and hence they vote against the resolution. Such dissenting members are given opportunity to express their opinions during the decision-making process.

→ As per section 230(4) of the Companies Act, 2013 it is provided that in a scheme of arrangement any person or persons holding at least 10% of the shareholding or 5% of the total outstanding debt can put objection to the proposed scheme.

→ There are various modes of resolving the rights of dissenting shareholders. Following are ways of protecting the rights of dissenting shareholders
1. Dual majority: As per section 230(6) of the Companies Act, 2013, a scheme of merger must be passed via dual majority, ie., simple majority in number of members, representing three-fourths (3/4th) in value of shares held. Due to dual majority, the minority shareholders are protected from oppression.

2. Appeal to the Tribunal: The dissenting shareholders have a right to appeal to the National Company Law Tribunal for setting aside the scheme of merger. Where the dissenting shareholders can prove mala fide intention of the majority, the NCLT shall reject the scheme.

3. Power to modify the scheme: As per section 231(2), the Tribunal has the power to modify the scheme of merger to protect the dissenting shareholders.

4. Exit route: The Tribunal has the power to award an exit route to the dissenting shareholders. The promoters of the merging company shall be directed to purchase the shares of such dissenting shareholders at a fair price (as computed by registered valuers).

5. Tribunal Hearing: After the scheme is approved in the members’ meeting, the NCLT shall order a separate hearing on the petition, prior to sanctioning the scheme. The dissenting shareholders have the right to voice their concerns at such NCLT hearing.

6. Published in newspapers: The notice of the members’ meeting is published in newspapers and websites for maximum coverage. All members shall have due knowledge of the scheme of merger and they shall participate in the voting and exercise their rights.

7. Independent Chairman conducts and supervises the meeting, to ensure impartial treatment.

Question 5(c)
What are the powers and obligations of a Liquidator regarding ‘uncalled capital’ or ‘unpaid capital contribution’? (3 Marks)
Answer:
→ The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation for corporate persons as well as partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.

→ In case of insolvency of corporate persons, IBC consists of two independent stages:

Insolvency Resolution Process: the creditors assess the viability of corporate debtor’s business and the options for its rescue and revival, and
Liquidation Process: where the insolvency resolution process fails or financial creditors decide to wind-up and distribute the assets of the debtor.

→ The Liquidation process involves sale of all assets and properties of the corporate debtor and payment of all liabilities, as per the waterfall mechanism.

→ Where the assets of the corporate debtors are insufficient to pay all liabilities, the liquidator may collect funds by making calls to the shareholders. The Liquidator has the power to realize any amount due from any contributory to the corporate debtor.

→ The liquidator is empowered to call and realize the uncalled capital of the corporate debtor and to collect the arrears, if any, due on calls made prior to the liquidation.

→ The liquidator shall send a notice to the contributory to make the payments within 15 days from the receipt of the notice.

→ No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required.

Question 5(d)
Are there any grounds to appeal against the approval of Resolution Plan by the Adjudicating Authority in terms of Insolvency and Bankruptcy Code, 2016? (3 Marks)
Answer:
→ A resolution plan means a plan proposed by a resolution applicant for insolvency resolution of the corporate debtor as a going concern.

→ A Resolution Professional shall submit each resolution plan to the Committee of Creditors who shall approve the resolution plan by not less than 66% majority.

→ Once the resolution plan is approved by the Committee of Creditors, it is presented to the Adjudicating Authority (NCLT) for its approval. As per section 31, the Adjudicating Authority (NCLT) shall review the resolution plan sanctioned by the Committee of Creditors.

→ Section 32 of the IBC, 2016 deals with appeals against an order approving a resolution plan.

→ An appeal may be filed on the following grounds:
(a) the approved resolution plan is in contravention of the provisions of any applicable law,
(b) there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period,
(c) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board,
(d) the insolvency resolution process costs have not been provided for repayment in priority to all other debts, or
(e) the resolution plan does not comply with any other criteria specified by the Board.

Question 5(e)
“The procedure for application to initiate Insolvency Resolution Process against a Corporate Debtor by operational creditor differs with application by financial creditors.” Explain briefly. (3 Marks)
Answer:
→ As per section 6 of Insolvency and Bankruptcy Code, 2016, where any corporate debtor commits a default, the following person are entitled to initiate a corporate insolvency resolution process:
(a) a financial creditor (section 7),
(b) an operational creditor (section 8) or
(c) the corporate debtor itself (section 10).

→ A Financial Creditor means any person to whom, a financial debt is owed. Financial Debt means a debt (with interest), related to money borrowed, bonds, notes, deposit, debentures, hire-purchase, lease, indemnity, guarantee, letter of credit etc.

→ An Operational Creditor means a person to whom an operational debt is owed. Operational Debt means a claim in respect of the provision of goods or services and salary or wages, including payable to the Central Government, any State Government or any local authority.

→ Basically, the procedure for application to initiate Corporate Insolvency Resolution Process against a corporate debtor by operational creditor differs with application by financial creditors.

→ Following are the reasons for the difference in the procedure

the amount involved in operational debts are much less as compared to the financial debts.
in case of operational creditors, the possibility of disputed debts is higher in comparison to financial creditors such as banks and financial institutions.

→ Hence, the procedure for insolvency resolution by operational creditor differs from the procedure applicable to financial creditors.

Attempt all parts of either Q. No. 6 or Q. No. 6A

Question 6(a)
United Nations Commission on International Trade (UNCITRAL) demonstrated as Guiding Role in respect of Insolvency Laws in Member Nations – Comment. (5 Marks)
Answer:

‘Cross-Border Insolvency’ or ‘International Insolvency’ is a term used when the lender and borrower belong to different countries, and the borrower becomes insolvent.
Cross-border insolvency is a situation where assets, properties and liabilities, of an insolvent debtor are located in two or more countries.
Expansion in global trade has resulted in rising cases of cross-border insolvencies.
However, the national insolvency laws of many countries are not effective to deal with cases of cross-border insolvencies. Generally, local laws do not provide tangible solutions in such cases.
Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
The Model Law is designed to assist countries to update their local insolvency laws with modem, harmonized and fair framework.
The synchronization of local laws with the UNCITRAL Model law will lead to better handling of cross-border insolvency cases.
The UNCITRAL Model law is intended to inform and assist insolvency law reform among member nations, providing a reference tool for national authorities and legislative bodies while preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
The Model Law is designed to assist member nations to prepare their insolvency laws with a modern legal framework to more effectively focus on cross-border insolvency proceedings. It focuses on authorizing and encouraging cooperation and coordination between member nations.
In 2004, UNCITRAL released the Legislative Guide on Insolvency Law. The purpose of the Legislative Guide is to assist the establishment of an effective and efficient legal framework to address the financial difficulty of debtors.
The Guide is supposed to be used as a reference by national legislative bodies, while preparing new laws and regulations.
The Legislative Guide discusses the importance of other tools for addressing cross-border insolvency, such as voluntarily negotiations between a debtor and its key creditors etc.
Thus, the United Nations Commission on International Trade (UNCITRAL) demonstrates a ‘Guiding Role’ in respect of Insolvency Laws in Member Nations.

Question 6(b)
Ganga Infrastructure Ltd. is an Indian Company with its Registered office at New Delhi. Michle Inc is an incorporated company in New York. Ganga Infrastructure Ltd. proposes to merge the business of Michle Inc with its business in India – Brief your opinion with reference to merger and amalgamation with a foreign entity under the Companies Act, 2013? (5 Marks)
Answer:

A cross border merger refers to any merger, amalgamation or arrangement between an Indian Company and Foreign Company in accordance with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 notified under the Companies Act, 2013.
A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.
An Inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. An outbound merger is one where an Indian company merges with a foreign company resulting in a Foreign Company being formed.
In the given case, Ganga Infrastructure Ltd. is an Indian company and Michle Inc. is a foreign company. Ganga Infrastructure Ltd. plans to merge the business of Michle Inc. with its business in India. Hence, this is a scenario of Inbound merger.
Section 234 of the Companies Act, 2013, deals with merger between a Foreign Company and an Indian Company. Following are the provisions under the Companies Act, 2013
- The terms and conditions of the cross-border merger may include payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be.
- A Foreign Company may merge with an Indian Company after obtaining approval of RBI and after complying with the provisions of Sections 230 to 232 of the Companies Act, 2013.
- Mergers which comply with FEMA (Cross Border Merger) Regulations, 2018 are deemed to be automatically approved by the RBI and do not require a separate approval.
- Transferee Company shall ensure that valuation is conducted by registered valuers who are members of a recognized professional body in the jurisdiction of the Transferee Company.
- Valuation shall be as per internationally accepted principles on accounting and valuation. A declaration to this effect shall be submitted to RBI for obtaining its approval.
- Cross Border Merger is permitted with companies belong to certain countries:
whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding,
whose central bank is a member of Bank for International Settlements (BIS), and
a country which is identified by Financial Action Task Force (FATF), with respect to Anti-Money Laundering or Financing Terrorism activities.

Question 6(c)
“Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is a legislation for fast recovery of debt by the secured creditors but there are certain exceptions” – briefly elucidate with at least 5 circumstances, where the legislation cannot be applied. (5 Marks)
Answer:

The main purpose of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is to enable and empower secured creditors to take possession of their secured assets and to deal with them, without the intervention of Court.
Section 9 of SARFAESI Act, 2002, provides various measures that can be taken by a secured creditor for the purposes of fast recovery of non-performing assets, including change in management, takeover of business, taking over possession of secured assets etc.
However, as per section 31 of the SARFAESI Act, 2002, following are the cases where the Act does not apply
- a hen on goods, money or security given under Indian Contract Act, 1872 or Sale of Goods Act, 1930;
- a pledge of movables as per the Indian Contract Act, 1872;
- any conditional sale, hire-purchase or lease where no security interest has been created;
- any rights of unpaid seller under the Sale of Goods Act, 1930;
- any security interest for securing repayment of any financial asset not exceeding X 1,00,000;
- any security interest created in agricultural land;
- creation of any security in any aircraft as per the Aircraft Act, 1934;
- creation of any security interest in any vessel as per the Merchant Shipping Act, 1958;
- any case in which the amount due is less than 20% of the principal amount and interest thereon.

Alternative Q. No. 6A

Question 6A(i)
Elucidate briefly the process of Notification to Foreign Creditors as per United Nations Commission on International Trade (UNCITRAL) Model Law. (5 Marks)
Answer:

‘Cross-Border Insolvency’ or ‘International Insolvency’ is a term used when the lender and borrower belong to different countries, and the borrower becomes insolvent.
Cross-border insolvency is a situation where assets, properties and liabilities, of an insolvent debtor are located in two or more countries.
The United Nations Commission on International Trade Law (UNCITRAL) Model law on cross-border insolvency is designed to assist member nations to update their local insolvency laws with modern, harmonized and fair framework.
The Model Law is designed to assist member nations to prepare their insolvency laws with a modern legal framework to more effectively focus on cross-border insolvency proceedings.
As per Article 14 of the Model Law, under laws of the enacting country relating to insolvency, a notification is to be given to creditors, such notification shall also be given to the known creditors that do not have addresses in the country.
The Court may order that appropriate steps be taken with a view to notifying any creditor whose address is not yet known.
The main purpose of notifying foreign creditors is to inform them of the commencement of the insolvency proceeding and of the time-limit to file their claims.
Such notification shall be made to the foreign creditors individually, unless the court considers that some other form of notification would be more appropriate.
When a notification of commencement of a proceeding is to be given to foreign creditors, the notification shall:
(a) Indicate a reasonable time period for filing claims and specify the place for their filing;
(b) Indicate whether secured creditors need to file their secured claims; and
(c) Contain any other information required to be included in such a notification to creditors pursuant to the law of this country and the orders of the court.

Question 6A(ii) As an Interim Resolution Professional (IRP) how could you constitute the Committee of Creditors of a Corporate Debtor (CD) having only operational creditors or all financial creditors, who submitted their claims, are found to be related parties of the CD? (5 Marks)
Answer:

As per Section 21 of Insolvency and Bankruptcy Code (IBC), 2016, an Interim Resolution Professional is responsible for the constitution of the Committee of Creditors. He shall collate all claims received against a Corporate Debtor, determine the financial position of the Corporate Debtor and then constitute a Committee of Creditors.
Basically, the Committee of Creditors shall comprise of all financial creditors of the Corporate Debtor. Where a Financial Creditor is related party of the Corporate Debtor, he shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors.
As per Regulation 16 of IBC, 2016, there is a possibility that a Corporate Debtor has no financial creditors or where all financial creditors are related parties of the Corporate Debtor.
In such cases, the Committee of Creditors shall consist of only operational creditors.
Committee of Creditors, consisting of only operational creditors shall have following members:
(a) eighteen (18) largest operational creditors by value, however, if total number of operational creditors is less than eighteen, then all such creditors are included;
(b) one representative elected by all workmen; and
(c) one representative elected by all employees.
A member of the Committee of Creditors shall have voting rights in proportion of the debt due to such creditor, as compared to the total debt.
‘Total Debts’ includes
- the amount of debt due to the operational creditors;
- the amount of the aggregate debt due to workmen; and
- the amount of the aggregate debt due to employees.
A Committee of Creditors formed by Operational Creditors shall have the same rights, powers, duties and obligations as a committee comprising Financial Creditors.

Question 6A(iii)
Briefly comment on the rights of secured creditors in a Repayment Plan under section 105 of the Insolvency and Bankruptcy Code, 2016? (5 Marks)
Answer:

As per section 105 of the Insolvency and Bankruptcy Code, 2016, a repayment plan means a plan prepared by a debtor in consultation with the Resolution Professional.
The repayment plan contains the terms and details, as per which the debtor will repay his debts to his creditors.
The Repayment Plan may authorize the Resolution Professional to perform the following
(a) carry on the debtor’s business or trade on his behalf or in his name; or
(b) realise the assets of the debtor; or
(c) administer or dispose of any funds of the debtor.
The Resolution Professional shall prepare a report on the proposed repayment plan. Such report shall be submitted to the Adjudicating Authority (within 21 days) along with the repayment plan.
Section 110 of the Insolvency and Bankruptcy Code, 2016, provides the rights of secured creditors in a repayment plan.
A secured creditor may or may not give up on his right to enforce security during the period of implementation of the repayment plan.
A secured creditor who participates in the meetings of creditors and votes in relation to the repayment plan will be required to give up his right to enforce his security.
However, where the secured creditor does not want to give up his right to enforce his security, he may vote on the repayment plan in respect of his unsecured debt. Such an affidavit shall be given by the secured creditor, containing the estimated value of unsecured debt.
In case a secured creditor participates in the voting on the repayment plan by submitting an affidavit, the secured and unsecured parts shall be treated as separate debts.
Confirmation of the secured creditor shall be obtained if he does not participate in the voting on repayment plan, but the repayment plan affects his right to enforce security.

CS Professional Corporate Restructuring, Insolvency, Liquidation & Winding-Up Question Paper

CS Professional Corporate Restructuring, Insolvency, Liquidation & Winding-Up Question Paper

Corporate Restructuring Insolvency Liquidation & Winding-Up Notes