Corporate Law

Course by Prof. Anand Shrivas

 What is Corporate Law

 What is corporate law about? Any responses? Why do you need corporate
law to govern companies ?
 It follows that a principal function of corporate law is to provide business
enterprises with a legal form that possesses these five core attributes.
 Core of Corporate Law.
 Function of Corporate Law

 Transact Easily
 Prevent Frauds
 Lower Cost of governance
 Facilitates Coordination
 conflicts between managers and shareholders,
 conflicts among shareholders,
 and conflicts between shareholders and the corporation’s
 other constituencies, including creditors and employees.
 All three of these generic conflicts may usefully be characterized as what
economists call ‘agency problems.’
 The main role of corporate law is to minimize agency problems.
 Features of Company

 Uniform Features across world-

 Separate Personality
 Limited Liability- creditor protection far more important in company law
than in partnership law? WHY?
 Transferability of Shares- Creates agency problem WHY?
 Delegated Management-
 Investment Ownership-
 Separate Personality

 Nexus of Contracts v. Nexus for Contracts

 Why separate personality- what will happen ?
 Number of contracts
 Separate Patrimony- demarcation of pool of assets from one class of
owners to others
 Company’s right to ownership means- use, sell and give as mortgage.
 Company’s assets are unavailable for personal creditors of owners.
 Core function of separate personality is to shield itself from creditors of
owners/shareholders.
Deduction

 Starting from the premise that the company is itself a person, in the eyes of
the law, it is straightforward to deduce that it should be capable of
entering into contracts and owning its own property; capable of
delegating authority to agents; and capable of suing and being sued in its
own name.
Contribution of corporate law and
effective working of corporate law
 Entity Shielding
 Authority
 Procedure
 Entity Shielding

 Absolute Priority Rule- waterfall mechanism

 Liquidation Protection-
 Shareholders can not redeem or withdraw their shares
 Nor can personal creditors foreclose shareholders share of the company.
 Protects the going concern value of the firm.
 Not available in partnership firms? why
 creditors can foreclose partners contribution in the firm?
 Strong v. Weak Form of Entity Shielding.
 Procedure

 Authority for delegated management

 Procedure to sue and be sued in its own name
 Authority

 Company law provide that a board of directors, as opposed to individual

owners, has power to bind the company in contract whereas in partnership
it is the owners that bind the company. In partnership third parties rely on
mere appearance.
 Why Answered

 Entity shielding doctrine is needed to create common expectations,

among a firm and its various present and potential creditors, concerning
the effect that a contract between a firm and one of its creditors will have
on the security available to the firm’s other creditors. Rules governing the
allocation of authority are needed to establish common expectations as to
who has authority to transfer rights relating to corporate assets prior to
entering into a contract for their transfer. And procedures for lawsuits need
to be specified by the state, whose third-party authority is invoked by those
procedures. This need for special rules of law distinguishes these three types
of rules from the other basic elements of the corporate form discussed here,
which could in theory be crafted by contract even if the law did not
provide for a standard form of enterprise organization that embodies them.
 Limited Liability

 Universal norm except rare jurisdictions.

 Owner shielding
 Owner v. entity shielding ??
 Limited liability protects the assets of the company owners from the claims of the
company creditors.
 Asset Partitioning
 Overall cost of due diligence is reduced due to partitioning
 Isolation of different lines of business- subsidiaries etc. Again saves cost of the creditor.
 Risk is shared by shareholders and creditors.
 Simplification of bankruptcy procedure individual and company
 Downside shifting of risk- allows creditors to become monitors of the managers than
shareholders.
 Limited liability only in contract and not in tort.
 Transferability of Shares

 Transferability permits the firm to conduct business uninterruptedly as the

identity of its owners changes, thus avoiding the complications of member
withdrawal that are common among, for example, partnerships,
cooperatives, and mutuals.
 Liquidity
 Diversified investment portfolio
 Flexibility in raising capital
 free tradability can also make it difficult to maintain negotiated
arrangements for sharing control and participating in management.
 Transferability of Shares

 Transferability of shares, is closely connected both with the liquidation

protection that is a feature of strong form legal personality, and with limited
liability. Absent either of these rules, the creditworthiness of the firm as a
whole could change, perhaps fundamentally, as the identity of its
shareholders changed.
Session 1-What structure to choose for
your business.
 Partnership
 Limited Liability Partnerships
 Trust
 Company- Private and Public
 Delegated Management with the
Board Structure
 the general partnership form grants power to a majority of partners to
manage the firm in the ordinary course of business; more fundamental
decisions require unanimity.
 Both aspects of this allocation are unworkable for business corporations
with numerous and constantly changing owners.
 corporate law typically vests principal authority over corporate affairs in a
board of directors or similar committee organ that is periodically elected,
exclusively or primarily, by the firm’s shareholders.
 More specifically, business corporations are distinguished by a governance
structure in which all but the most fundamental decisions are delegated to
a board of directors that has four basic features.
 Four Basic Feature of Board

 First, separate from the operational managers of the corporation.

 Single tier v. two tier boards (England v. Germany)
 Separation between Control and Management
 Monitoring and ratification of decision by the board while initiation and
execution by Management.
 Second, the board of a corporation is elected—at least in substantial part—by
the firm’s shareholders. Board is responsible to owners.
 In trust sponsor nominates the trustees as opposed to beneficial owners.
 Third, even though board is elected, still it is separate from shareholders. Helps in
protection of minority.
 Fourth, Trust can become absolute but not companies since there is no single
person directing in company.
 Investor Ownership

 the right to control the company, and the right to receive the company’s
net earnings.
 Importance of Percentage
 Restriction on Transfer of Shares.
 Private Company

 ―private company‖ means a company which by its articles,—

 (i) restricts the right to transfer its shares;
 (ii) limits the number of its members to two hundred:
 Employees being members not included in two hundred.
 (iii) prohibits any invitation to the public to subscribe for any securities of the
company;
 Public Company

 ―public company‖ means a company which—

 (a) is not a private company;
 Provided that a company which is a subsidiary of a company, not being a
private company, shall be deemed to be public company.

 Listed and Unlisted Companies

 Private Placement v. Public Offers

 Company may make private placement through issue of a private

placement offer letter.
 the offer of securities or invitation to subscribe securities, shall be made to
such number of persons not exceeding fifty or such higher number as may
be prescribed,
 Not included in 200-
 excluding qualified institutional buyers
 employees of the company being offered securities under a scheme of
employees stock option as per provisions of clause.
 Limited Liability Partnerships

 an LLP and a partnership firm is that independent or unauthorized actions

of one partner do not make the other partners liable. All partners are
agents of the LLP and the actions of one partner do not bind the others.
 The partners of the LLP can manage their business. However, only the
designated partners are responsible for legal compliances.
 Gives Flexibility in Management
 Offers flexibility without imposing detailed legal and procedural
requirements.
 Trust

 Flexibility
 in appointment of trustee
 Choice of beneficiary
 Asset distribution
 Dissolution
 PE, VC and HF, and MF
 Trust is pass through structure.
 Trust Taxation

 Determination of residence of trust in India is a tricky issue. In general, if neither the trustee
 nor the protector, or the person who has the ability to control the management of
 the assets of the trust fund and determine their distribution, is not located in India
 at any time during the financial year, and the trust is not subject to Indian laws, then
 the trust should not be considered a resident in India. For the purpose of ascertaining
 the residency of the trust, the residence of the beneficiaries also has some bearing. In
 order for an offshore trust not to be subject to tax in India based on the source rule,
 none of its assets or source of income should be in India
 Trust Use and Misuse

 In the context of insolvency, the Sindh High Court had held that a trust is
unlawful and marred by Section 4 of the Trusts Act if the trust has been
created at the time of insolvency of the settlor and such settlement would
be against the official assignee.
 The Supreme Court in the case of Chogmal Bhandari v Dy Commercial Tax
Officer had the occasion of examining an interesting question which was if
a trust has been created by a debtor for the benefit of his creditors and if
the debtor has provided an order of preference to pay the creditors will
that render the trust unlawful under Section 4 of the Trusts Act.
 The Supreme Court held that such order of preference to pay the creditors
does not by itself create grounds for the inference that the intent of the
debtor is to defraud the creditors and the debtor is well within its right to lay
out such preference. Hence, such a trust will be valid.
What is the Goal of Modern Corporate
Law
 Answers Please.
 What are the Sources of Corporate
Law
 Special and partial corporate forms.
 Other bodies of corporate law
 Tax, Securities, Disclosure requirements in US and Takeovers
 German and French Code
 Lifting of Corporate Veil

• Salomon v A Salomon and Co Ltd [1897] AC 22

• State of U.P v. Renusagar

• Balwant Rai Saluja v. Air India (2014) SC

• Prest v. Petrodel (2012)

• Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd., (1961) 2 AC307

• Dinshaw Maneckjee Petit, re, AIR 1927 Bom 371

• CIT v Associated Clothiers Ltd., AIR 1963 Cal 629

 Grounds

 Evasion of Tax
 Enemy contracts
 Fraud or Improper conduct
 Avoidance of welfare legislation
 Used as sham
 Breach Contracts

 List is not exhaustive.

Lifting of corporate veil

 Section 12 – Misdescription of Name

 Section 34 & 35 – Misstatements in Prospectus
 Section 39 – Failure to return application money
 Section 76A – Punishment for contravention of section 73/76
 Section 219 – For facilitating the task of an inspector appointed under
section 210/212
 Section 339 – Fraudulent Conduct
 Capital Maintenance Rules

 Object- the conflict that exists between creditors and shareholders regarding
how to allocate a company’s capital.
 This conflict is obvious once the company is insolvent and, consequently, the
company has insufficient money to meet all of its financial obligations.
 It is important to protect creditors even when company is solvent.
 Conflict- between shareholders and between creditors too.
 Shareholders Abuse?
 Asset Diversion- Dividend payments and share buy backs.
 Risk Shifting- Riskier projects and underinvestment.
 Claim Dilution.
 Creditors Abuse?
 US- only contractual restrictions primarily.
 Creditor Protection

 Minimum capital rules

 maintain an equity cushion to protect the creditors in the event of
insolvency, and one of the key factors in this approach has been the
prevention of capital return to the shareholders.
 Formation that is made available about a company via its annual report
and accounts, and publicly traded companies are, in addition, under
significant continuing disclosure obligations,
 Asset diversion is the easiest of all for creditors to monitor and control.
 Contractual restrictions and fixed security
 a matter for the directors, and regulated primarily through the duties
imposed on them.
 Capital Maintenance Rules

 Decisions have to be made in the interest of the company

 Negative pledge clauses
Shares at discount not allowed

 a company shall not issue shares at a discount.

 Under scheme of RBI to restructure a debt
 Refund money with interest
 Fine of Rs. 5 Lacs.
Further Issue

 Existing shareholders
 Employees
 Directly to outsider through special resolution ( Preferential allotment)
 Conversion of debentures is not included here.
 Government can convert debentures (even if contract doesn’t provide for
the same) specially in public interest.
 Reduction of Share capital
ONLY NCLT
 Cant be done when deposits are not paid back.
 Audi Altrum Partem from Creditors and regulators
 NCLT to be satisfied creditors interest is taken care of
 Buy Back has a separate route
 Fraud- Concealing name of creditor or misrepresent the debt amount.
 Authority of Buy Back

 Free reserves
 Securities premium account
 Funds obtained through further issue of shares.
 Only when the article provides for it.
 10 or less equity buy back can happen through just board
 10 to 25 % through Special Resolution passed for the buy back
 Outstanding debt is 1=2 ratio both secured and unsecured
 Only one buy back in six months is allowed
 Buy back to be completed in a year after resolution
 Punishment- 3 lacs company and officer in default.
 Method of buy Back

 Existing shareholders
 Open market
 Purchasing back employee securities through ESOPS
 Solvency from MD and 1 director- will be solvent at least for one year.
 Destroy the security

 No Buyback through associates

 Through subsidiary company

 Through investment company
 No payment of deposits
 No Loan to buy its own shares

 Exceptions-
 Banking company
 Loan to employees through trust
 Direct loan 6 months salary not more than that
 Report of voting rights exercised
 Company liable for 25 lac rs and officer imprisonment of 3 years and 3 lac
fine.
 Rights of debenture holders

 If assets insufficient the Debenture trustee can file a case in NCLT to safeguard
interest. NCLT will direct not to incur further liabilities
 If default in payment- case at NCLT and direction by the NCLT to pay the same.
 Debenture trustee cant act smart- liability can not be contractually nullified.
 Degree of care and diligence
 Invitation to public or 500 members or more to appoint debenture trustee
 DRR from profits
 No debenture with voting rights
 Convertible debentures only when Special Resolution is passed.
 Default- 3 years imprisonment or 2 lacs minimum.
 Dividend Payments

 Out of the profits of the company that year

 Or previous FY
 Free reserves contribution not mandatory
 Losses and depreciation of that year or previous year to be set of first
against the profits.
 If no profits it can be declared from accumulated profits in free reserves
 Interim dividends from profits of the company

no payment of dividends if defaults in deposits

SEBI (Prohibition of Insider Trading
Regulations) 2015

By Prof. Anand Shrivas

Is it true with insider trading cases.
“If it walks like a duck and
quacks like a duck, its
probably a duck.” -James
Whitcomb Riley (Poet)
 Case to decide
 The board meeting of M/s Syndicate Services Ltd. (hereinafter referred as
“SSL”) was scheduled to be held on June 30, 2017, in which meeting, the
revenue growth over a period of 1 year was discussed. It was expected that the
growth will 2 times higher than previous two years. However, the growth
report was tentative. The agenda for the board meeting was finalized between
June 19 to 21, 2017 and the agenda was discussed internally between Mr.
Pankaj Bobde, chairman and managing Director and Mr. Kewal, whole time
director of the company. Similarly, the agenda for the board meeting to be held
on July 25, 2017, inter alia, including the aforesaid forecast and issuance of
bonus shares was discussed internally during the period between July 15, 2017
to 20 July 2017, and the agenda paper was circulated on July 17, 2017. Mrs.
Yami, who is the accused in the matter, happens to be the wife of the promoter
of SSL, Mr. Uday Bobde, who is passively holding 10% in the SSL and also the
brother of Mr. Pankaj Bobde, the chairman and managing director of SSL. She
had bought and sold the scrip of the SSL when the information on forecast and
the bonus issue. Her transactions were noted by SEBI as the Board conducted
investigations into the rise in price and volume in the scrip of the company
during the period 8th June, 2017 to 20th July, 2017.
 Insider

Insiders

Connected Possession
Persons of UPSI
 Connected Persons

Deemed
Current or Past Connected
Persons
Connected Persons
 Past Connections- SRSR Holdings v.
SEBI
 SAT stated it was open for SEBI earlier in the absence of the
time limit to interpreted time period as till UPSI is generally
available.
 However now since the period is provided in explanation
SEBI can not prosecute a connected person who left the
organization 6 months before the date of the Act. The Law
Presumes the information is generally available.

 But with 2015 regulations someone who left the organization

six months ago can still be possession insider till the
information becomes UPSI.
 Types of Association
 Frequent Communication- Frequent communications near the
trading points time. Specially through calls records or messages can be
established. SEBI in KLG Capital Ltd and SAT in VK Kaul v. SEBI (2014
and 2012)
 Cover people who do not hold any position but may access UPSI.
 Social or personal connections- Facebook case and invest Matrimony
application case- tip passed through matrimony by an investment banker
to the mother of prospective bride.
 Contractual Relations- shareholders, debt holders, management and
third parties etc.
 Nature of contract may determine UPSI- Security guard under contract.
Length of relationship matters sometimes.
 Connected persons
 Fiduciary Relationship:
 Directors, lawyers and investment advisors have to disclose
conflict of interest as when they arise.
 Therefore separate code of conduct through 2018 amendment for
fiduciaries.
 Director, Officer and Employee:
 JE Talaulicar re- Independent and nominee directors are also
connected persons.
 Professional Relationships
 Subjective answers- Sudhir Reddy v. SEBI- like auditor in merger
may not have UPSI. Similarly, lawyer might not have UPSI on
financials if the case is a consumer case.
 Possession Insiders
 Insiders who temporarily posses information such as consultants
and advisers.
 Accidental Insiders
 Printer checked takeover documents. He is no way related to
company but still he is an possession insider.
 NK Sodhi committee report said the real test to be considered to
find if direct evidence exist of possession of upsi. If not even if
someone is reasonably expected to access UPSI would be
considered insider.
 NK Sodhi Committee said even Judges and public servants should
be included. Public Servant as creating policies or legislations
might also be included by SEBI in possession insiders.
 Someone planning to invest. VK Kaul v. SEBI may also be
included. A and B example if B doesn’t even know of the planning.
Actual or Expected UPSI
 Association resulted in access to UPSI or reasonably
expected to have UPSI.
 Example- executive HR and low level employee may not
have access to UPSI.
 Connected person v. Possession
Insiders
 Connected Persons- SEBI will establish that they fall in
connected persons. Then it is on the connected person to
prove that they do not possess or access UPSI.

 Possession Insiders-
 SEBI will provide information that proves person had
possessed or had access to UPSI.
Deemed Connected persons
 (a). an immediate relative of connected persons specified in clause
(i); or (US. Wife overheard M&A. Father acted on daughters due
diligence) Zylog systems in india. Wife showed financial
independence. But ZSL policy she was dependent.
 (b). a holding company or associate company or subsidiary
company; or (common directors) (control BOD) (control
management) through one or more intermediaries. Significant
influence (business decisions under agreement or 20%)
 (c). an intermediary as specified in section 12 of the Act or an
employee or director thereof; or
 Stock brokers, sub-brokers, merchant bankers, depository,
depository participants, underwriters, portfolio managers,
investment advisors, STA, registrar to an issue and investment
advisors
 Deemed connected persons
 d). an investment company, trustee company, asset
management company or an employee or director thereof; or
(asset to be investment).

 Trustee company Axis Bank Mutual Fund Fraud. Prior

approval

 (e). an official of a stock exchange or of clearing house or

corporation; or
 F) Employees of PFI- LIC, IDFC,
 E) Bankers etc. Information on financial deals.
 Axis AMC SCAM
 Joshi allegedly shared confidential information
about the asset manager’s trades with brokers in
Gujarat in return for kickbacks.
 Violated SEBI’s Code of Conduct.
 UPSI
 unpublished price sensitive information" means any information,
relating to a company or its securities, directly or indirectly, that is not
generally available which upon becoming generally available, is likely to
materially affect the price of the securities and shall, ordinarily including
but not restricted to, information relating to the following: –
 Financial results
 Dividends
 Merger acquisition etc
 Capital structure
 Change in kmp (narayan murthy and removal of cyrus mistry)
 Material events in listing agreement- omitted (patent expiry
business closure, promoter fraud or default)
 Misc- may be included by SEBI. Event outside ordinary course of
business.
 Communication of UPSI Section 3
 1) No insider shall communicate, provide, or allow access to
any unpublished price sensitive information, relating to a
company or securities listed or proposed to be listed, to any
person including other insiders except where such
communication is in furtherance of legitimate purposes,
performance of duties or discharge of legal obligations.
 (2) No person shall procure from or cause the
communication by any insider of unpublished price sensitive
information, relating to a company or securities listed or
proposed to be listed, except in furtherance of legitimate
purposes, performance of duties or discharge of legal
obligations.
 Examples
 Legitimate purpose- UPSI sharing so that joint venture is
successful with brother in law. Brother in law bought the shares.
This transaction was in the interest of the company. Rakesh
Agarwal v. SEBI
 Demonstrate legitimacy by entering NDA. Legal advisor or
merchant banker or auditor. Important to create a trail of
information.

 Duties- Expert opinion for duties

 Legal obligation- Inspection, investigation etc.

 Due Diligence Exceptions (Insufficient
info)
 i) entail an obligation to make an open offer under the
takeover regulations where the board of directors of the [listed]
company is of informed opinion that 10[sharing of such
information] is in the best interests of the company;
 Ii) not attract the obligation to make an open offer under the
takeover regulations but where the board of directors of the
[listed] company is of informed opinion [that sharing of such
information] is in the best interests of the company and the
information that constitute unpublished price sensitive
information is disseminated to be made generally available at
least two trading days prior to the proposed transaction
being effected in such form as the board of directors may
determine [to be adequate and fair to cover all relevant and
material facts].
Section 4 prohibition of trading
 1) No insider shall trade in securities that are listed or
proposed to be listed on a stock exchange when in possession
of unpublished price sensitive information:

 When a person who has traded in securities has been in

possession of unpublished price sensitive information, his
trades would be presumed to have been motivated by the
knowledge and awareness of such information in his
possession.]
 Inclusive Exceptions
 i) the transaction is an off-market inter-se transfer between
[insiders] who were in possession of the same unpublished price
sensitive information without being in breach of regulation 3 and
both parties had made a conscious and informed trade decision.
 Provided that such unpublished price sensitive information was
not obtained under sub-regulation (3) of regulation 3 of these
regulations.
 Provided further that such off-market trades shall be reported by
the insiders to the company within two working days. Every
company shall notify the particulars of such trades to the stock
exchange on which the securities are listed within two trading
days from receipt of the disclosure or from becoming aware of
such information.]
 Inclusive Exceptions
 (ii) the transaction was carried out through the block deal
window mechanism between persons who were in possession
of the unpublished price sensitive information without being
in breach of regulation 3 and both parties had made a
conscious and informed trade decision; Provided that such
unpublished price sensitive information was not obtained by
either person under sub-regulation (3) of regulation 3 of
these regulations.
Inclusive Exceptions
 (iii) the transaction in question was carried out pursuant to a
statutory or regulatory obligation to carry out a bona fide
transaction.
 (iv) the transaction in question was undertaken pursuant to
the exercise of stock options in respect of which the exercise
price was pre-determined in compliance with applicable
regulations.]
 Chinese Wall
 In the case of non-individual insiders: – (a) the individuals who
were in possession of such unpublished price sensitive information
were different from the individuals taking trading decisions and
such decision-making individuals were not in possession of such
unpublished price sensitive information when they took the
decision to trade;

 and (b) appropriate and adequate arrangements were in place to

ensure that these regulations are not violated and no unpublished
price sensitive information was communicated by the individuals
possessing the information to the individuals taking trading
decisions and there is no evidence of such arrangements having
been breached
 Trading Plan
 vi) the trades were pursuant to a trading plan set up in
accordance with regulation 5.
Other Exceptions NK Sodhi Committee
Report
 Opposite Trades

 Innocent recipient- example research report

 Invocation of pledge on default- If it is bona fide transaction

 Types of information
 Essentials- Specific and precise, and reliable.
 Rakesh Agarwal- FI would acquire 51 % (Specific information was
not public but general proposal for this joint venture was public
information.
 Market rumours would not amount to inside information but an
insider taking advantage of rumour knowing the truth will be
liable.
 However, Specific articles on confidential information relating to
public event may constitute inside information. Such as rakesh
Agarwal.
 Many would then circulate vague information and trade on
specific information with them.
 Inferences, deductions and
suppositions
 AUSTRALIA ASIC v. Citigroup
 Instructions from city banks investment banking team to the
trading team- (not to buy shares of a particular listed
company for which they were advising on material matter.
 Inferences were drawn from this suggestion .
 Forecasts, merger discussions and internal thought process
on matter may constitute UPSI.
 Deductions from the already public information would fall
outside the regulations- no liability-
 Research analysts are under a duty to make reports from
public information.
 Wall Crossing by the Investor
 UK- David Einhorn re. – issuance of shares indication was
received by the investor and it was specific to make inference
of the price of issue. But Einhorn said the transaction was not
certainty when he traded.
 DSQ Holdings Ltd re- Promoter of DSQ Holdings- defended
that there were no precise details of issue and ratio and price.
All was decided later however he was common director in
listed company as well. In US merger negotiations are also
material even if merger fails.
 SEBI- no need of specific and precise information. The
chairman focused on relationship with the company which
put him in possession of relevant information.
 Director Trading opposite
 Merger and Share exchange ration
 Before merger is announced he sold the shares instead of
buying. When SER was announced the share prices fell.
 Such kind of transactions should be considered violation.
UPSI- should be specific or precise
 Dividend- expectations can take the shares up or down
 SER in merger up or down
 Market sentiments can cause different reactions too
 Change from date of trade to date of publication
 Such events should be left from liability. (some author
suggests)
 But such cases in india would be very difficult to be proved.
 Short Swing Profits
 Partially applied in india through 2008 amendment- prohibit
all directors and employees to buy or sell of the company
then do the opposite transaction later within 6 months.
 Hindustan Lever Case
 Brook Bond target. HLL bought from UTI. Core team of
both Brook and HLL had common directors. Both subsidiary
of parent Unilever grp. Merger discussion- 17 jan 1996 had
granted approval. 6 march 1996 HLL decided to acquire 8
lac shares from PFI. Acquisition from UTI by HLL at 10%
premium to market price on march 25 1996 and merger
became public 19 April 1996.
 SEBI- said same management Unilever in principle approval
to merger is upsi. UTI has lost merger advantage value
because of this. HLL said merger was already public and it
should not be authenticated.
 SAT made the party innocent.
 Mandatory Codes
 Code of Fair disclosure for UPSI.
 Code of conduct for listed companies.
 Code of conduct for intermediaries.
 Landmark Judgments
 Rakesh Agarwal v. SEBI
 Pharma company in deep trouble. JV with FI.
 FI wanted 51% of company.
 In order to meet this condition insiders bought the shares to
meet 51% requirement.
 When trades were made modalities of deal was worked out.
 Modalities were worked in respect of decision already made.
 Modalities were just formalities.
 Information may be at fluid state still relevant.
 Negotiation half way is enough to establish.
 Landmark Judgments
 Satyam-
 Satyam ltd bought myta infra and myta prop.
 Disclosure to officer by raju about deal
 steps taken to execute d deal
 Deal was upsi
 Trading window for insider should be closed
 compliance officer penalised.
Landmark judgments
 Reliance Petroinvestment Ld
 IPCL- announced merger to amalgamate with RIL.
 In board meeting 10 march 2007.
 RPL subsidiary committed insider trading by acquiring shares
in feb before the meeting
 SEBI could not provide proper data for upsi existence. The
case failed.
Samir Arora
 Fund manager sold holdings in listed entity on information
that there adverse SER.
 SAT said mere conjunctures not liable.
Shelter infra projects ltd
 Promoter selling and trigerred takeover code while Bod
approved the SSA on 30 July 2009 but share price when fixed
not known. Acquisition announced 7 august 2009. Between
May and August director and his wife traded in shares of the
company.
KK Maheshwari
 Patent license case. Prior information traded on it.
 Thank you
“If it walks like a duck
and quacks like a duck,
its probably a duck.” -
James Whitcomb Riley
(Poet)
 Today’s Story

RAGS TO RICHES
&
BILLIONS TO BUST
Indian Insolvency Law By Prof. Anand Shrivas
 Why Does Businesses Fail??

 Reasons Please?
 Internality and Externality.
 Who Gets Affected

 Answers Please?
 INSOLVENCY
 JET Airways

 Past Promoter was Naresh Goyal

 State Bank of India
 Jalan Karlock Plan
 Reasons for its failure Rajnish Kumar

 2000 cr by SBI consortium. 1/4th of total liabilities of JET. In exchange shares

of JP Miles.
 The problem lay in the equity structure of JP Miles: it was managed by a
separate company (not Jet Airways) and this company was majorly owned
by Etihad Airways (51.1 per cent), with Jet being a minority shareholder at
49.9 per cent. India’s FDI rules cap foreign investment in an Indian airline to
49 per cent if the investment is being done by a foreign airline.
 Further debt was needed however sbi was reluctant since shares of JP Miles
weren’t listed.
 Jet Airways

 2018 Resolution Framework

 Equity deficit to debt was around 3000 cr. SBI realised no cusion.
 No trust among Goyal and Etihad (UAE).
 No additional securities were available for Debt.
 Etihad bought 24% in Jet Air after pledging shares of JET Air with foreign
bank.
 Increase in bilateral flying rights on assurance of Goyals influence on Indian
policy which was never confirmed.
 Naresh Goyal being adamant of keeping control- tatas and Qatar
 Altercation betn Arijit Basu, CMD SBI and Tony CEO of Etihad.
 JET Resolution Plan

 The consortium proposes to invest ₹600 crore in the first two years to repay
creditors and acquire an 89.79% stake in the carrier.
 The resolution plan also proposes selling existing non-core assets such as
real estates and luxury cars by the end of the first year and said it will repay
to financial creditors, ₹131 crore, ₹193 crore, ₹259 crore at the end of the
third, fourth and fifth years, from the airline's cash flows, respectively.
 The company intends to repay creditors a total of ₹1,183 crore over five
years, which includes collections from asset sale proceeds and cash flows.
 Naresh Goyal- Cheat or Victim of
Business Failure
 Serious Fraud Investigation Office, ED, Mumbai Police, ITD and CBI
 Transactions of maintenance and lease agreements
 Fraud by not using loan for sanctioned purpose
 Tax Evasion
 Money Laundering
 Essar Steel Downfall

 One among old Steel company

 Ruia Family (Sashi Ruia, Prashant Ruia and Ravi Ruia)
 Essar Group is a multinational conglomerate and a leading player in the sectors of steel, oil and gas, power,
communications, shipping, ports and logistics, projects and minerals.
 Association with Vodafone, Rosenet and Trafigura
 Ruias involvement in 2G spectrum case-acquitted
 It is the second largest steel maker/JSW Steel With operations in more than 20 countries across five continents, the group
employs 75,000 people, with revenues of US$17 billion
 The Essar Group had been involved in pellet making, iron making, and other steel-related manufacturing activities and was
performing fairly well until 2002
 2008-huge debt 2800 cr debt on balance sheet
 Expand operations- borrowed more from SBI, ICICI and Syndicate Bank
 Expansion- Hazira plan no environmental clearance/no availability of natural gas
 Financial crisis- prices of steel went down-could not cope up
 2015-Debt-43k cr to FC and 11k cr to OC
 RBI list of 12 defaulters-essar was one among them
 Essar Steel-Now and future

 ArcelorMittal Nippon steel India

 It's president Aditya Mittal has claimed that he believes that "the growth story of
the company is intact”
 the demand has only increased by 4% and that it will increase more.
 The capacity of the plant has climbed by 40% from its acquisition, which is also
impressive.
 Every great story has a bump at the beginning
 Essar Steel

 Essar Steel was one of India's largest steel manufacturers. Its overdue debt
of about INR 55,000 crore was the largest among the companies being
resolved under the IBC. Pursuant to the IBC process, a joint venture
between ArcelorMittal and Nippon Steel acquired Essar Steel in December
2019.
 Arcellor Mittal, Nippon v. Numetal (Rewant Ruia)
 Curing ineligibility of Arcellor and nippon- RPT debts overdue
 Case lasted for more than two years
 Banks- Standard Chartered and SBI
 Essar Resolution Plan

 Under ArcelorMittal's resolution plan, the manner of distribution of funds among

the secured financial creditors was left to the discretion of the CoC. The resolution
plan of ArcelorMittal provided for an upfront payment of INR 42,000 crore and an
equity infusion of INR 8,000 crore. Unsecured financial creditors were to be paid
about 4% of their admitted claims. Operational creditors having claims of less than
INR 1 crore, workmen and employees were to be paid their dues in full. Operational
creditors with claims of INR 1 crore and above were not to be paid any amounts.
 The plan also provided that upon payment to the financial creditors, all security
documents (excluding corporate or personal guarantees provided by the erstwhile
promoter group in relation to Essar Steel's loans) would be deemed to be assigned
to ArcelorMittal and those documents that were not capable of being assigned
were to be terminated. Further, upon approval of the resolution plan by the NCLT,
all guarantees invoked prior to the effective date of the plan and claims of any
guarantor on account of subrogation under such guarantee would be deemed to
be extinguished. However, the rights of the financial creditors to enforce the
corporate or personal guarantees against the erstwhile promoter group were to
remain enforceable.
 Challenge of Resolution Plan

 The NCLT by its order4 dated March 8, 2019 conditionally approved

ArcelorMittal's resolution plan. The NCLT "suggested", inter-alia, that to avoid
discrimination, the CoC reconsider the manner of distribution of funds
proposed to be paid under ArcelorMittal's resolution plan to facilitate
higher recovery for the operational creditors (having claims over INR 1
crore) and Standard Chartered (a financial creditor).

 The approval of ArcelorMittal's resolution plan was challenged by various

parties, including Standard Chartered, several operational creditors, the
suspended board of directors and former promoters of Essar Steel.
 Order upon challenge

 By an order6 dated July 4, 2019 ("NCLAT Order"), the NCLAT, inter-alia,: (i) approved
ArcelorMittal's resolution plan,
 (ii) modified the distribution of amounts so that all creditors (secured, unsecured
and operational) were treated at par7 (resulting in approximately 60.7% recovery for
all the creditors),
 (iii) increased the admitted claims of operational creditors to almost four times the
original amount,
 (iv) granted operational creditors, whose claims had not been admitted by the NCLT
or the NCLAT, the liberty to institute or continue appropriate proceedings against
Essar Steel after the conclusion of its insolvency resolution process, and
 (v) held that the guarantees issued in respect of Essar Steel's debt come to an end
upon clearance of the underlying debt.8
 IBC Amendment that changed the
course
 (i) the minimum payment to operational creditors under a resolution plan should be the
higher of the two amounts; the amount that would be payable to them in the event of
liquidation and the amount payable to such creditors if the resolution amount was
distributed in accordance with Section 53 of the IBC,9
 (ii) any dissenting financial creditors should be paid a minimum of the amount that would
be payable to them in the event of liquidation, and
 (iii) the committee of creditors may approve a resolution plan after considering the
manner of distribution of funds under the plan, taking into account the respective priority
of creditors under Section 53(1) of the IBC (including the priority and value of security of a
secured creditor). An explanation to Section 30(2)(b) of the IBC was also introduced,
which expressly clarified that a distribution in accordance with such section would be
considered "fair and equitable".
 Further, the IBC Amendment Act also required all corporate insolvency resolution
processes to be "mandatorily" completed within a period of 330 days from the insolvency
commencement date. For the resolution processes that were already underway (including
those subject to litigation) a grace period of 90 days from commencement of this IBC
Amendment Act was granted.
 SC- FC on Driver Seat. WHY????

 The Corporate Insolvency Resolution Process ("CIRP") under the IBC is based
on a flexible model where market participants (as resolution applicants) can
propose solutions for revival of the corporate debtor. The Supreme Court
made it clear that the CoC is in the driver's seat for directing the insolvency
resolution process. The underlying assumption was that the financial creditors
are fully informed about the viability of the corporate debtor and feasibility of
any proposed resolution plan. This assumption is based on the fact that
financial creditors being in the business of money-lending, having undertaken
a detailed study and exercising due diligence while granting the loan to the
corporate debtor, are well placed to make such assessment.
SC- NCLT ensure below factors taken
into accoubnt.
 i) the corporate debtor should continue as a going concern during the resolution
process,
 (ii) value of assets of the corporate debtor should be maximized, and
 (iii) interests of all stakeholders should be balanced. In the event that the
Adjudicating Authority, on a review of the facts of the case,
 concludes that the aforesaid factors have not been considered, it may send the
resolution plan back to the CoC (but not alter the resolution plan of its own accord).
 But since all information is not public how OC or other stakeholder will challenge
resolution plan of COC.
 committee of creditors does not owe any fiduciary duty to any group of
creditors but is required to take a business decision with the requisite majority,
which binds all stakeholders including any dissenting creditor.
 Equitable Treatment of All Creditors

 Equality doesn’t mean equal recovery for all

 Even in same class difference can be done based on value of security
 If security interest of creditors not considered all creditors will vote for
insolvency.
 Insolvency reform committee mulling to give voting rights to operational
creditors.
 Fresh Start- no promoter paid guarantees to be enforced against new
promoters.
 all "undecided" claims of the corporate debtor would stand extinguished
once a resolution plan was accepted. Therefore, no creditor may pursue
any claims against the corporate debtor after the completion of the CIRP.
 Bhushan Steel-Singal Brothers

 Brij bushan- door hinges-railway track fastners-started in 1970

 Acquisition and renaming of Jawahar metal industries to Bhushan Steel-
Got listed in 1993
 Family Fight in 2000-1/3rd of the company was owned by brij
 Sanjay expelled brij from BPSL
 Brij and Neeraj were on one side with BSL
 Race for expansion in Orissa in Coal and Iron Ore
 BSL Debt-48k cr and BPSL- 38k cr.
 Clients-Maruti-Suzuki, tata and Mahindra
 Bhushan Steel- Fall Reasons

 Falling steel prices due to recession

 High Debt
 High expansion plans
 Got easy loans without much problem as they were close to bankers
 Week balance sheet and further loans
 Blast in BSL-2003 company shut for 5 months-killed 3 labourers
 Neeraj arrested for bribing mr. Jain of syndicate banks
 Both brothers are keeping low profile
 Deallocation of coal block- bought expensive coal
 Delay in project
 No allocation of mine iron ore- bought expensive ore
 Insolvency Proceedings- Process

 Application: On July 13, 2017, application was filed by State Bank of India (Applicant) before the NCLT against Bhushan
Steel Limited in terms of Section 7 of the Insolvency and Bankruptcy Code, 2016 read with its Rules and Regulations.
 Admission: The NCLT admitted the application of State Bank of India and appointed Mr. Vijaykumar V. Iyer as the Interim
Resolution Professional (IRP) vide its order dated July 26, 2017 (Insolvency Commencement Date, ICD).
 Moratorium was imposed.
 Appointment of IRP
 Function as going concern during IRP
 IRP inviting claims and forming COC
 Confirmation of RP the Resolution Professional (RP) by the Committee of Creditors (CoC) pursuant to the voting at the first
CoC meeting held on August 24, 2017.
 Preparation of Resolution Plan
 Invitation to Resolution Applicant
 Approval of Plan by COC and confirmation by NCLT
 CIRP finished on time and implemented on time
Bhushan Steel acquisition by Tata Steel

 Debt of 59000 crore to SBI and others

 After Resolution Tata Steel own 75% in Bhushan Steel
 No promoter has stake over Bhushan Steel now
 Tata’s gave 35100 crores to FC in return got 75% stake
 10% shares were given to FC
Bhushan Steel Success for IBC

 Due to CIRP process, valuable and productive assets could be saved and various
stakeholders including employees continued to be gained fully employed. It also leads to
profitable utilisation of assets and generating positive EBITDA. As a next step, it is getting
merged with Tata Steel Ltd giving big opportunities to all the stakeholders to become part
of one of the largest steel producer and get returns.
 This can be considered as a classic case under IBC which fulfills aspirations of all the
stakeholders and achieved the objectives as envisaged under the law. Let us hope that all
assets heavy corporate debtor under stressed (eg. steel, cement, metal companies) get
revived similarly and in the process productive assets and infrastructure are not required
to be dismantled and sold in open for recovery.
 Other important case

 Jaypee Group
 Monnet Ispat
 Amteck Auto
 ABG Shipyard
 Videocon
 Jaypee

 When you travel on the Noida-Greater Noida Expressway and then to the
Yamuna Expressway to Agra, you see the sheer scale of the ambitions of the
Gaur family. For kilometres on end, towers, most of them incomplete, keep
you company.
 After IBC action against two group companies - holding firm Jaiprakash
Associates, or JAL, and infrastructure arm Jaypee Infratech, is over, the Gaur
empire would have shrunk to a few inconsequential pieces. They have already
sold some profitable cement plants to Aditya Birla's UltraTech in a distress sale.
The hydro power assets, too, have been sold. Manoj Gaur, the son of the
founder, Jaiprakash Gaur, tried to cut a deal with lenders in May with a
Rs10,000 crore offer for Jaypee Infratech. The proposal included paying a part
of the Rs9,800 crore debt, giving lenders equity and completing unfinished
housing projects. It did not go through.
 Jaypee

 Jaiprakash Gaur had started out as a builder of infrastructure projects. JAL,

floated in 1979, made a name for itself through high-profile dam projects. Gaur
also built several cement plants. Execution skills and closeness to the powers
that be in Lucknow ensured that they got many big projects. After the 90s
liberalisation, the Gaurs used India's big infrastructure plans to build
businesses and amass land, some bought outright and others as part of
infrastructure development deals.
 The Gaurs led a simple life. However, their aspirations soared with last
decade's boom and they grabbed financially risky projects - including roads,
power/cement plants, real estate and hotels, besides the Rs2,000.
 Monet Ispat Insolvency

 Sandip Jajodia-son in law of OP Jindal and brother in law of Naveen Jindal

 B-com university of delhi-business family. Started with ferro alloys business via 80 lac loan
 Coal based sponge iron plant in chattisgarh
 Coal mines attached to the plant were cancelled
 Chinese dumping of steel
 Financial creditor- SBI, BOB, IDBI, Axis, BOI and ICICI-Total debt 11000 cr.
 JSW to provide 125 cr loan for working capital
 JSW and promoters acquired 88% voting capital in Monet
 Approx 2500 cr paid to the financial creditors
 80% haircut for financial creditors
 Not many were interested to buy monet ispat only one bidder.
 Around 400 crore provided as optional convertible preference shares
 Monet Ispat-Future

 Repayment of Loan given to subsidiaries and associates to the tune of

approx. 1000 cr.
 The first priority of JSW Steel would be to restart the existing plants that
had ceased to be operational, and the second priority would be to finish
building the remaining half of the planned capacity.
 Interesting- Liquidation value of the company is around 2300 cr close to
CIRP infusion of funds.
 Liquidation v. CIRP

 the realisation for financial creditors till end March 2022 stood at Rs 2.25
trillion, much higher than liquidation value of Rs 1.31 trillion. The cumulative
admitted claims of financial creditors till end March 2022 were Rs 6.84 trillion.
 The bid amount of companies during the resolution process is less than the
liquidation value so lenders opt for the latte
 the lack of inherent value of the stressed assets itself may be one of the
reasons behind the absence of bidders.
 Essar & Bhushan many bidders interested. Why???
 Fact that liquidation value is more than enterprise value couldn’t be a
ground to liquidate a corporate debtor: NCLT
 Long and bumpy road for Amtech
Auto
 Arvind Dham
 Established in 1985, Amtek specializes in forging, aluminium casting and
machining for applications in the engine, transmission driveline and chassis
segments.
 Original Equipment Manufacturer (OEMs) in India namely, Maruti
 Suzuki India (MSIL), Honda Motorcycle and Scooters (HMSI), Tata Motors,
Ford Motors, J.C. Bamford Excavators (JCB), Ashok Leyland, Eicher etc. and
the world's top Tier 1 customers namely, Sriram Pistons, Hitech Gears,
Unimotion, Valeo etc
 Aggressive mis-timed ambitions of inorganic growth resulted in poor
utilization of funds and capital expenditures with long gestation period
returns were incurred.
 Challenges

 Piling up of debt and decline in sales specially after 2014 till insolvency
 Trust deficit due to frequent defaults
 All operating in Silos taking control became difficult
 Massive operations
 Employee not paid for long
 Payment delays to stakeholders due to cash cruch in working capital
 Trust deficit with client and no supplier wanting to supply
 Long collection cycle for sales
 Quality complaints due to no maintenance
 Predatory pricing another reason.
 Largest COC to be maintained
Long and bumpy road for Amtech
Auto
 domestic operations spread across 15 states
 plants, panning through Haryana, Himachal Pradesh, Maharashtra,
Madhya Pradesh and Tamil Nadu, the Corporate Debtor (CD) under its
direct and indirect holding
 Amtek had businesses in different countries
 Japan, Germany and Thailand
 Limited control over these companies
 Each factories had different methods of governing
 Long and bumpy road for Amtek Auto

 New promoter- Deccan value investors llp

 Longest standing case on insolvency
 US based hedge fund DVI
 DVI v. Liberty house
 Liberty house violated bid norms
 Fresh issue of EOI
 DVI ineligible in second round
 Liquidation was ordered
 But stakeholders didn’t give up- wanted to keep Amtek as going concern
 DVI again sought for withdrawal but court denied the permission
Code of conduct for COC and RA

 CoC, in particular, does undertake a sort of public function, yet works in a

role that is largely unregulated under the IBC. A code of conduct would go
a long way in ensuring that the mandate of the IBC is complied with and
insolvency processes such as Amtek’s do not recur in the future.
 IBC does not make it binding on a successful resolution applicant to see
the resolution process through.
 SC saved the process- plan is binding between the CoC and the resolution
applicant and cannot be modified or withdrawn after approval.
 E&Y Report- Carried preferential transactions to defraud its creditors.
 Fraud-Arvind dham and bank employees specially IDBI Bank
 ABG Shipyard

 The Gujarat-based ABG Shipyard - once a key player in shipbuilding and ship repair - is
the flagship company of the ABG Group. Its shipyards - located in Gujarat's Dahej and
Surat - have built over 165 vessels in the last 16 years.
 Rishi Agarwal, Muthuswamy and Ashwini Kumar
 Fraud to the tune of 23000 crore
 Outstanding aprox 20000 cr loan
 Loans were misused for allegedly transfer money to overseas company
 Pandemic hit
 FC-SBI-ICICI, IDBI, PNB
 It had managed to remained profitable till fiscal 2012-13 when it reported
revenues of Rs 2,149 crore and profits of Rs 107 crore. However, the financials
started deteriorating after 2013-14 as falling sales revenues and higher cost
including interest pushed the company in the red.
 Videocon

 Venugopal Dhoot and Pradeepkumar dhoot

 64k cr loan including FC and OC
 Bid from twin start 2800 cr.
 95% haircut
 Dissenting creditor bank of Maharashtra,SIDBI and IFCI
 Wireless telephone license was cancelled in 2012
 Videocon Industries was founded in 1979 by Venugopal Dhoot with its
headquarters in Mumbai. It initially started dealing in consumer electronics and
home appliances such as mobile phones, colour TVs, air conditioners. After
becoming a popular brand in these sectors, they became a conglomerate and
diversified their business in Oil and Gas, Telecom, and DTH Service
 Videocon Rise and Fall

 Diversification led to aggressive borrowing since there was huge capital

requirement in electronics
 Increased competition
 Too late for selling business such as DTH, telecom and gas field
 Acquisition of foreign companies CBI investigating
 Cancelled 2G license.
 Probably will go into liquidation
 Chanda kochhar scam
 IBC Objects

 An Act to consolidate and amend the laws relating to reorganisation and

insolvency resolution of corporate persons, partnership firms and individuals
 in a time bound manner
 for maximisation of value of assets of such persons,
 to promote entrepreneurship,
 availability of credit
 and balance the interests of all the stakeholders
 including alteration in the order of priority of payment of Government dues and
 to establish an Insolvency and Bankruptcy Board of India,
 and for matters connected therewith or incidental thereto
 Debtor possession v. creditor in control
 Object

 Binani Cements
 Swiss Ribbons case
 Applicable

 Individual
 Firms
 LLP
 Companies
 Statutory organizations having corporate form
 Personal Guarantors
 Claim defined

 “claim” means – (a) a right to payment, whether or not such right is

reduced to judgment, fixed, disputed, undisputed, legal, equitable,
secured, or unsecured;
 (b) right to remedy for breach of contract under any law for the time being
in force, if such breach gives rise to a right to payment, whether or not such
right is reduced to judgment, fixed, matured, unmatured, disputed,
undisputed, secured or unsecured;
 Creditor and Default

 “creditor” means any person to whom a debt is owed

 and includes a financial creditor,
 an operational creditor,
 a secured creditor,
 an unsecured creditor
 and a decree-holder;
 “default” means non-payment of debt when whole or any part or instalment of
the amount of debt has become due and payable and is not [paid] by the
debtor or the corporate debtor, as the case may be;
 Minimum amount of default is Rs. 1 crore.
 Pandemic Defaults are exempted- March 2020 to March 2021.
 Financial Debt

 “financial debt” means a debt alongwith interest, if any, which is disbursed

against the consideration for the time value of money and includes–
 (a) money borrowed against the payment of interest;
 (b) any amount raised by acceptance under any acceptance credit
facility or its dematerialised equivalent;
 (c) any amount raised pursuant to any note purchase facility or the issue of
bonds, notes, debentures, loan stock or any similar instrument;
 Financial Debt

 (d) the amount of any liability in respect of any lease or hire purchase
contract which is deemed as a finance or capital lease under the Indian
Accounting Standards or such other accounting standards as may be
prescribed;
 (e) receivables sold or discounted other than any receivables sold on non-
recourse basis;
 (f) any amount raised under any other transaction, including any forward
sale or purchase agreement, having the commercial effect of a borrowing;
 Financial Debt

 Real Estate Project.

 (g) any derivative transaction entered into in connection with protection
against or benefit from fluctuation in any rate or price and for calculating
the value of any derivative transaction, only the market value of such
transaction shall be taken into account;
 (h) any counter-indemnity obligation in respect of a guarantee, indemnity,
bond, documentary letter of credit or any other instrument issued by a
bank or financial institution;
 (i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h) of this
clause;
Property given as mortgage not
financial debt
 Jaypee Infratech Insolvency
 a CD has given its property in mortgage to secure the debts of a third
party, it may lead to a mortgage debt and, therefore, it may fall within the
definition of ‘debt’ under Section 3(10) of the IBC. However, it would remain
a debt alone and cannot partake the character of a ‘financial debt’ within
the meaning of Section 5(8) of the IBC.
 Enforcement against guarantor by an Financial Creditor is financial debt.
 Home Buyers

 “assured returns/ committed returns” agreements with them, whereby, on

payment of a substantial portion of the total sale consideration upfront at
the time of execution of the agreement, the developer undertook to pay a
certain amount to the allottees on a monthly basis from the date of
execution of the agreement till the date of handing over possession. The
NCLAT held that the amounts raised by developers under assured return
schemes had the “commercial effect of a borrowing” and, as such, these
allottees were held to be FCs within the meaning of section 5(7) of the IBC
 Pioneer Urban Land Infrastructure Ltd.
 Operational Debt

 “operational debt” means a claim

 in respect of the provision of goods or services
 including employment
 or a debt in respect of the [payment] of dues
 arising under any law for the time being in force and
 payable to the Central Government, any State Government or any local
authority;
 Difference in OC and FC

 In Swiss Ribbons Private Limited and Another Vs. Union of India and Others [(2019) 4 SCC
17],
 the Supreme Court held that a review of the definition of
 “financial creditor” and “financial debt” makes it clear that a financial debt is a debt
together with any interest that is disbursed against the consideration for the time value of
money.
 On the other hand, an “operational debt” would include a claim for the provision of goods
or services, including employment, or a debt in respect of payment of dues arising under
any law, and payable to the government or any local authority.
 OC are unsecured and FC are secured.
 Long term and short term.
 Dispute resolution with OC is private such as arbitration
 FCs are, from the very beginning, involved with assessing the viability of the CD.
 Restructuring and reorganisation is common in FC
 Who can start insolvency

 FC
 OC
 Corporate Debtor (CD)
Initiation of Corporate Insolvency
Process by Financial Creditor
 Any financial creditor or jointly can be filed
 Debentures- 100 creditors in same class or not less than 10% of creditors in
same class whichever is less
 Real Estate Project-100 allottees or 10% of allottees In the same project.
 Application-record of default+IRP name.
 NCLT will see default and no disciplinary proceedings pending against the
IRP and give order.
 Insolvency Resolution by Operational
Creditor
 Demand Notice on receiving the CD must bring
 Bring Existence of dispute
 Pay the amount
 The application can be filed with proper evidence such as invoice.
 The OC may propose IRP
 NCLT will appoint the same
 Dispute

 Smart lawyers providing smart route

 Creation of dispute even when there was no dispute earlier.
 Mobilox Innovation pvt ltd case.
 Only pre-existing disputes
 Arbitration award- is actually dispute. Vijay Niramal Company Ltd.
 Veer Gujar Aluminium- Limitation period.
 Self Filing by CD

 The corporate applicant shall, along with the application, furnish- (a) the
information relating to its books of account and such other documents for
such period as may be specified;
 (b) the information relating to the resolution professional proposed to be
appointed as an interim resolution professional; and
 (c) the special resolution passed by shareholders of the corporate debtor or
the resolution passed by at least three-fourth of the total number of
partners of the corporate debtor, as the case may be, approving filing of
the application.]
Following Barred from Entry

 (a) a corporate debtor undergoing a corporate insolvency resolution

process [or a pre-packaged insolvency resolution process]; or
 [(aa) a financial creditor or an operational creditor of a corporate debtor
undergoing a pre-packaged insolvency resolution process; or];
 (b) a corporate debtor having completed corporate insolvency resolution
process twelve months preceding the date of making of the application; or
 [(ba) a corporate debtor in respect of whom a resolution plan has been
approved
Barred from filing

 (c) a corporate debtor or a financial creditor who has violated any of the
terms of resolution plan which was approved twelve months before the
date of making of an application under this Chapter; or
 (d) a corporate debtor in respect of whom a liquidation order has been
made.
 Pre-Package Insolvency to get
Preference over other applications
 A. Disposal of applications under section 54C and under section 7 or section 9
or section 10. (1) Where an application filed under section 54C is pending, the
Adjudicating Authority shall pass an order to admit or reject such application,
before considering any application filed under section 7 or section 9 or section
10 during the pendency of such application under section 54C, in respect of the
same corporate debtor.
 (2) Where an application under section 54C is filed within fourteen days of filing
of any application under section 7 or section 9 or section 10, which is pending,
in respect of the same corporate debtor, then, notwithstanding anything
contained in sections 7, 9 and 10, the Adjudicating Authority shall first dispose of
the application under section 54C.
 Barring (3) Where an application under section 54C is filed after fourteen days
of the filing of any application under section 7 or section 9 or section 10, in
respect of the same corporate debtor, the Adjudicating Authority shall first
dispose of the application under section 7, section 9 or section 10.
 Time Line

 Golden rule- 180

 Voting by COC 66% of creditors should agree = another 90 days
 In any case maximum by 330 days
 The Tussle

 Promoter Group V. Resolution Applicant

 The NCLT may allow the withdrawal of application admitted under section
7 or section 9 or section 10, on an application made by the applicant with
the approval of ninety per cent. voting share of the committee of creditors,
in such manner as may be specified.]
 Moratorium

 No suit
 No transfer
 No charge
 No enforcement
 No recover of property
 Supply essentials
 Public Announcement

 Claims are invited

 IRP manager
 Last date
 False claim penalty
 IRP

 Proposed IRP by FC and CD are directly appointed if no proceedings are pending

 Proposed IRP by OC is appointed only on approval of the IBBI
 The term of the interim resolution professional shall continue till the date of appointment of the
resolution professional.
 IRP has the powers of board of directors
 IRP in-charge of management and operation of the business\
 All officers and managers of company reports to IRP
 Banks furnishes all details to IRP
 collect all information relating to the assets, finances and operations of the corporate debtor
 Collect information-Last two years business and operations of the company
 Take control and custody of assets
 Manage as going concern
 To Raise interim finance
 COC

 IRP shall after collation of all claims received against the corporate debtor and determination of
the financial position of the corporate debtor, constitute a committee of creditors.
 All FCs are part of COC
 Related party FC of CD has no voting or participation right in COC.
 Related party through conversion of debt to equity via RBI Scheme is included for voting and
participation
 Each party to consortium also has voting rights based on their proportion of debt.
 Debenture trustee to act for debenture holders
 Save as otherwise provided in this Code, all decisions of the committee of creditors
 shall be taken by a vote of not less than fifty-one per cent. of voting share of the financial
creditors
 COC to appoint RP by 66% of vote
 OC May attend meeting
 RP Powers

 Prepare information memorandum

 Invite resolution applicants
 Present all received plans
 File for Avoidance transactions
 RP to take approval before these
actions-66% approval
 Raise interim finance in excess beyond approved by COC
 Create security over the assets of the company
 Change the capital structure of the company
 Change ownership interest in the company
 Giving debit instructions to Banks beyond approved by COC
 undertake any related party transaction;
 amend any constitutional documents of the corporate debtor;
 delegate its authority to any other person;
 RP to take approval before these
actions-66% approval
 dispose of or permit the disposal of shares of any shareholder of the
corporate debtor or their nominees to third parties;
 Change the management
 transfer rights or financial debts or operational debts under material
contracts otherwise than in the ordinary course of business;
 make changes in the appointment or terms of contract of such personnel
as specified by the committee of creditors; or
 make changes in the appointment or terms of contract of statutory auditors
or internal auditors of the corporate debtor
 Information Memorandum

 All info. Subject undertaking confidentiality, insider trading and IPR

 the financial position of the corporate debtor,
 all information related to disputes by or against the corporate debtor
 and any other matter pertaining to the corporate debtor as may be
specified
 Ineligible RA

 Insolvent
 Wilful defaulter
 Non Performing Assets or NPA under the control of promoter
 Arcellor Mittal Case-eligible after payment
 Two years imprisonment under act specified in 12th schedule
 7 years imprisonment otherwise
 Prohibited by SEBI
 Disqualified to be a director in the company
 Promoter or control of management in company where All avoidance transactions have been
committed
 RA has executed [a guarantee] in favour of a creditor in respect of a corporate debtor against
which an application for insolvency resolution made by such creditor has been admitted under
this Code [and such guarantee has been invoked by the creditor and remains unpaid in full or
part];
RP to examine Plan in compliance with
Law
 Provides for following
 Insolvency cost
 Provides for payment of operational creditor not less than -
a) The amount in liquidation or
b) not less than if the Amount in revival plan were distributed according to waterfall
mechanism (which ever is higher)
 Provide for payment of dissenting financial creditors- not less than liquidation
amount
 Distribution shall be fair and equitable
 Management of affairs of corporate debtor
 Implementation and supervision of resolution plan
 COC PLAN APPROVAL

 The committee of creditors may approve a resolution plan by a vote of not

less than [sixty-six] per cent. of voting share of the financial creditors,
 after considering
 its feasibility and viability,
 [the manner of distribution proposed,
 which may take into account the order of priority amongst creditors
 including the priority and value of the security interest of a secured
creditor]
 and such other requirements as may be specified by the Board:
 APPROVAL AND SANCTION

 If the NCLT is satisfied that the resolution plan as approved by the

committee of creditors under sub-section (4) of section 30 meets the
requirements as referred to in sub-section (2) of section 30, it shall by order
approve the resolution plan which shall be binding on the corporate
debtor and its employees, members, creditors, [including the Central
Government, any State Government or any local authority to whom a debt
in respect of the payment of dues arising under any law for the time being
in force, such as authorities to whom statutory dues are owed,] guarantors
and other stakeholders involved in the resolution plan.
 No Action

 No criminal action against the new management

 No Action against the corporate debtor property under the approved
resolution plan
 Avoidance Transactions

 Fraudulent
 Preferential
 Under-Valued Transactions
 Extortionate Credit Transactions
 Preferential Transaction

 Transfer of property or interest in favour of creditor, surety in preference to

other creditors effect of which benefit beyond waterfall mechanism
 Transfer made in ordinary course of business not included in preference
transaction
 Security Interest creating new value is not included
 Preference is deemed to be given
 i) two years in case of related party from insolvency commencement
 Ii) one year in case of non related party from Insolvency commencement
 Undervalued Transaction

 A transaction shall be considered undervalued where the corporate

debtor–
 (a) makes a gift to a person;
 (b) enters into a transaction with a person which involves the transfer of one
or more assets by the corporate debtor for a consideration the value of
which is significantly less than the value of the consideration provided by
the corporate debtor,
 and such transaction has not taken place in the ordinary course of business
of the corporate debtor
 Relevant period- Two year for related party and 1 year for non related party
Effect of undervalued transaction

 (a) require any property transferred as part of the transaction, to be vested

in the corporate debtor;
 (b) release or discharge (in whole or in part) any security interest granted
by the corporate debtor;
 (c) require any person to pay such sums, in respect of benefits received by
such person, to the liquidator or the resolution professional as the case may
be, as the Adjudicating Authority may direct; or
 (d) require the payment of such consideration for the transaction as may
be determined by an independent expert.
 Fraudulent Transactions

 Deliberate undervaluing of transaction is fraudulent transaction

 Following grounds-
 (a) for keeping assets of the corporate debtor beyond the reach of any
person who is entitled to make a claim against the corporate debtor;
 (b) in order to adversely affect the interests of such a person in relation to
the claim.
 Extortionate Credit Transactions

 NCLT satisfied that the terms of a credit transaction required exorbitant

payments to be made by the corporate debtor, it shall,
 by an order –
 (a) restore the position as it existed prior to such transaction;
 (b) set aside the whole or part of the debt created on account of the
extortionate credit transaction;
 (c) modify the terms of the transaction;
 (d) require any person who is, or was, a party to the transaction to repay any
amount received by such person; or
 (e) require any security interest that was created as part of the extortionate
credit transaction to be relinquished in favour of the liquidator or the resolution
professional, as the case may be.
 Father of Corporate law

 Overriding effect in case of clash.

Debt Enforcement and
Debt Restructuring in India
By Prof. Anand Shrivas
 Different Routes of Debt Enforcement,
Restructuring and Corporate Resolution

 Insolvency Law, (Secondary market for companies)

 Securitization under SARFAESI Act (secondary market for loans)
 Security Enforcement under SARFAESI Act
 RBI Debt Restructuring Scheme under RBI Regulations
 Scheme under Section 230 to 236 of Companies Act, 2013
 Recovery of Debts Due to Banks and Financial Institutions Act
 Other Ways under Companies Act, 2013
 Liquidation under IBC.
Corporate Governance
By Anand Shrivas
 Meaning and principles of Corporate
Governance
 Systems and process through which corporates are governed.
 Poor corporate governance reduces a company's potential and can lead to
financial problems and fraud.
 Ensuring the basis of an effective corporate governance framework
 The rights and equitable treatment of shareholders and key ownership
functions
 Institutional investors, stock markets, and other intermediaries
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board
 Basis of Framework

 Promote transparent and efficient framework

 Rule of law
 Division of responsibilities among supervisory, regulatory and enforcement
bodies
 Rights and equitable treatment of
shareholders
 Minority shareholders (appointing or removing KMP) is it against minority
(Bharat Nidhi Ltd) Vineet Jain- Bennet Group. Undervalued buyback.
 Diversion of funds from the company ???
 What is the best way traditionally to deal with this ?

 Foreign shareholders
 Tata Mistry Case

 Removal from position of directorship is not sufficient to make out a case of

oppression and mismanagement, and the NCLT can dismiss such complaints.
However, relief under Section 242 can be granted if the removal is carried out in
accordance with law but "forms part of a larger design to oppress or prejudice the
interest of some members."
 Winding up of a company upon finding of oppression/mismanagement can only
take place when there is a justifiable lack of confidence in the conduct and
management of the company's affairs. A mere lack of confidence between majority
and minority shareholders will not be sufficient.
 Sections 241 and 242 do not give the Tribunal powers of reinstatement.
 Court while deciding a case under Section 241 can only look at past conduct or
conduct which is going on. An apprehension of future misconduct arising out of the
Articles of the company cannot be looked into by the Tribunal under a Section 241
complaint.
Rights of Shareholder
 Institutional Investors

 provide sound incentives throughout the investment chain and provide for
stock markets to function in a way that contributes to good corporate
governance.
• All shareholders of the same series of a class should be treated equally
• Insider trading and abusive self-dealing should be prohibited
• Members of the board and key executives should be required to disclose to
the board whether they, directly, indirectly or on behalf of third parties,
have a material interest in any transaction or matter directly affecting the
corporation.
 Disclosure and Transparency

 The corporate governance framework should recognize the rights of

stakeholders established by law or through mutual agreements and encourage
active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
 The corporate governance framework should ensure that timely and
accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership, and
governance of the company.
 Corporate Governance Mechanism in
India
 Any decision beyond company powers is ultra vires the company. All such
contracts are void. Directors are directly liable.
 False disclosure in prospectus are punished with civil and criminal liability.
 Reduction of capital to be fair
 Related party transactions to be genuine
 Dividends payments are distributed as per the provisions
 Payments of deposit and debenture holders on time
 Compliance with corporate social responsibility
 Declaration of beneficial interest to the company in transparent manner
 Mechanism

 Board diversification
 Auditor
 Royalty payments
 Independent Directors
 ESOP
 Class action suits
 Oppression and Mismanagement
 M&A
 Sub-committees- Audit committee, stakeholders committee
 CSR committee and Nomination and remuneration committee
 Directors duty
 Fraud
 Auditor

 Rotation every 10 years with special resolution every five years

 No removal unless special resolution
 No related party to be auditor
 Prior auditors cant form another audit firm to operate
 Liability under class action
 Reasons for resignation
 Power of nclt to change auditors
 Action under fraud section
 Auditor eligibility

 (a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008
 (b) an officer or employee of the company;
 (c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;
 (d) a person who, or his relative or partner—
 (i) is holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company:
 Provided that the relative may hold security or interest in the company of face value not
exceeding one thousand rupees or such sum as may be prescribed;
 (ii) is indebted to the company, or its subsidiary, or its holding or associate company or a
subsidiary of such holding company, in excess of such amount as may be prescribed; or
 (iii) has given a guarantee or provided any security in connection with the indebtedness of
any third person to the company, or its subsidiary, or its holding or associate company or
a subsidiary of such holding company, for such amount as may be prescribed;
 Auditor eligibility

 (e) a person or a firm who, whether directly or indirectly, has business relationship
with the company, or its subsidiary, or its holding or associate company or
subsidiary of such holding company or associate company of such nature as may
be prescribed;
 (f) a person whose relative is a director or is in the employment of the company as
a director or key managerial personnel;
 1(g)a person who is in full time employment elsewhere or a person or a partner of a
firm holding appointment as its auditor, if such persons or partner is at the date of
such appointment or reappointment holding appointment as auditor of more than
twenty companies;
 (h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
 (i)2[a person who, directly or indirectly, renders any service referred to in section
144 to the company or its holding company or its subsidiary company.
Case study

 Future-Amazon
 Volkeswagon
 Apple
 Barings bank
 ICICI
 Nike
 punish

 Fraud
 Civil
 Remuneration
 Fine 5 lacs
 Class action
 Board to be diversified

 2 directors in private company

 3 directors in public company
 6 directors in first 1000 listed company as per market capitalization
 Independent women director
 Independent directors 1/3rd of the board
 1 resident director
 Appointment through the simple shareholder majority.
 Related Party Transactions
Abuse
 Pricing- The deal /transaction which may or may not taken place on Arm’s
Length Transaction which can be possible be case of conflicts of interest
thereby impacting the minority shareholders wealth;
 Transparency - Failing of Material Disclosures to be made in terms of pre-
exiting relationship or interest in companies,
 Wrong Doing - Practices that are/can potentially pose undue favor to
shareholder’s interest.
 RPT Regulations

 Companies Act
 LODR
 Uday Kotak Committee
 And other relevant norms
 Jubilant

 In FY 19, the holding company of Jubilant FoodWorks Ltd.—the operator of Domino’s Pizza
chain in India—
 backtracked on charging a royalty from subsidiaries for using its brand name within hours as
it sparked concerns about rewarding promoters at the expense of shareholders. The company
lost market cap in excess of 1000 Crores, when the holding company made a proposal to
charge corporate brand royalty of 0.25 percent of consolidated revenues of the company.
 Bhartias are promoters- charge to company for using jubilant
 Similarly with Colagate and HUL- they pay royalty to their promoters
 Colgate being charged for adding salt and pepper in the paste.
 Jubilant doesn’t add any value to the brand in fact dominos does and for they are paying
royalty.
 This was when zee promoters defaulted on loans and DHFL was involved in shady transactions
 JSW steel took 125cr. 30% of their profits as royalty nobody bothered.
 Akzo Noble

 Akzo Nobel - In FY-12, the company proposed to increase Royalty to its

Amsterdam-based parent from 1% to 3%. After the proposal was brought for
Shareholder approval, some Institutional Shareholders objected to the same
vehemently. Eventually company had to partially roll back the proposed
royalty from 3% to 2%.

 Similarly Tatas, Muthoot and Shriram also do charge for the brand name.
 Other payments Raymond paid promoters for refurbishing promoters building
it was more than annual profits.
 Maruti

 Shareholders criticized royalty payments by Maruti Suzuki India Ltd to its

parent Suzuki Motor Corp after Royalty value increased by around 7 times in
15 years. Shareholders demanded explanation on the basis of charging high
royalty
 Royalty payments 2700 cr.
 Companies claim it is at arms length price and ordinary course of business
hence no approval.
 Previous Law on the Royalty Payments

 The law doesn’t require shareholder approval for such royalty if it’s less than
10% of revenues (material related party rules) – but they should.
 Since it is a material related party transaction.
 Uday Kotak
 where royalty payout levels are high and exceed 5% of consolidated
revenues, the terms of conditions of such royalty must require
shareholder approval
 and should be regarded as material related party transactions. The
Listing Regulations currently prescribe a materiality limit at ten percent
of annual consolidated turnover of the Company. Therefore, the
Committee prescribed a stricter limit for brand usage and royalty i.e. 5%
instead of the existing limit which is 5% of consolidated turnover.
 New Law

 Royalty payments or payments for brand to 2% in one FY

 In excess of that should be considered material and would require special
resolution in such case.

 The other side of Law

 The continuing success of companies is highly dependent on technology driven

innovations for which technology transfer from the parent is critical. There could
arise a situation where the minority shareholders could disapprove the royalty
which would be a serious impediment in the flow of technology & would hurt a
company’s competitiveness. All stakeholders, including the minority shareholders
would also lose in such cases.
 Solution- Nestle india- 5 year plan approval for royalty payments majority of
minority principles. It is still difficult to achieve.
 Problem

 In general, every company’s action should be assessed in terms of impact, not just in
terms of assumed intent. if there is bad intent, royalty isn’t exactly the simplest way
to extract money from a listed company. In Jubilant’s case, they seem to have mended
fences somewhat. The market has a short memory and it will forget.
 PTL Enterprise

 PTL Enterprise - The management proposed to sell its entire stake in two
hospitals to Promoter Owned entities at very low valuations.
 The proposal faced strong confrontation from shareholders due to its low
valuation. This was the time when Related Party Transactions (RPT) did not
require minority shareholders’ approval. Large shareholders objected to the
deal got a stay against the proposal and finally the sale was stopped. The
company had to shelve the plan, and in fact never raised it again.
 Siemens India

 In FY14, Siemens India agreed to sell its Metal Technologies Business to a

whole owned subsidiary of Siemens AG (Parent Co) on a slump sale basis
without a proper valuation report .
 The valuation incidentally was lower than the value at which Siemens India
purchased the shares from Siemens AG. Minority Shareholders rejected the
resolution as the valuation was below the acquisition price.
 Siemens had to reconstitute a committee for evaluating the value and
thereafter the value was revised 20% upwards
 Vedanta

 Vedanta – In FY 19, Shares of the company fell as much as 20% on the

concerns of corporate governance issue after it was reported that a subsidiary
of the company invested $200 million in buying a stake in entity called Anglo
American. This stake was from Volcan Investments, a family trust of promoter
Anil Agarwal – a related party.
 Loans and Guarantees

 Not to be beyond 60% of paid up capital free reserves and SPA

 If it exceeds shareholders should pass a special resolution.
 Eveready

 In FY20, the auditors of the company resigned on issues relating inter-

corporate deposits and corporate guarantees to promoter group companies.
The shares of the company had already fallen by more than 50% in an year
due to issues relating to Guarantees and Loans advanced to Debt ridden
promoter group companies.
 Tata Motors

 In FY15, though Motors was making losses , it sought to pay high salaries to
KMP beyond the permissible limit. Shareholders voted against the resolution
and company, marking the first instance when shareholders successfully
stalled payment of excessive compensation to top executives in a company as
large as the Tata group firm. Eventually the company had to come back to
shareholders with greater disclosures and explanations of why the salary was
justified.
 Balaji

 Balaji Telefilms Shobha and ekta Kapoor salary payments.

 Apollo Tyres

 In FY19, small shareholders defeated a special resolution which had proposed

raising the remuneration of Chairman Onkar Singh Kanwar and MD Neeraj
Kanwar. Small shareholders were upset at such steep increases in the
remuneration at a time when the company wasn’t doing well and company
had to agree to cap promoter compensation at 7.5% of profit before tax (PBT)
and also that the remuneration of chairman Onkar Singh Kanwar and MD
Neeraj Kanwar would be lowered by around 30%
 Suggestions

 Audit committee to provide reasons

 Identification by promoters (it’s a joke basically)
 Sales justification with RP
 Promoters paid for the brand may be questioned
 Companies with R&D should they pay for brands
 Proxy role
 Fairness opinion from independent valuer
 Diversified shareholding can help or back fire.