Corporate Reconstruction or Restructuring

CORPORATE RECONSTRUCTION OR RESTRUCTURING

Author: Divya Vishal

INTRODUCTION

Corporate reconstruction or restructuring is an activity taken by the corporate body to alter its capital structure or its tasks essentially. By and large, corporate rebuilding happens when a corporate body is encountering critical issues and is in monetary related risk.

The procedure of corporate rebuilding is viewed as critical to remove the entire monetary emergency and upgrade the organization’s work. The administration of concerned corporate body confronting the budgetary crunches recruits a monetary and legal advisor for warning and help with the deals and the trade bargains. As a rule, the concerned body may see debt financing, reduction of operational work, any bit of the company to the investors interested in it.

Also, the requirement for a corporate reconstruction or restructuring emerges because of the adjustment in the ownership aspect of the company. Such change in the ownership structure of the organization maybe because of the takeover, merger, unfavorable monetary conditions, antagonistic changes in business, for example, buyouts, absence of combination between the divisions, over-utilized workforce, and so on.

CLASSIFICATION OF CORPORATE RESTRUCTURING

• Monetary Restructuring: This kind of rebuilding may happen because of a serious fall in the general deals due to the unfavorable financial conditions. Here, the corporate body may adjust its value design, debt overhauling plan, the equity holdings, and cross-brief pattern. This is done to continue the market and the productivity of the entity.
• Authoritative Restructuring: The Organizational Restructuring suggests an adjustment in the hierarchical structure of an organization, for example, lessening its degree of the chain of importance or hierarchy, upgrading the job positions, scaling down the representatives, and changing the detailing connections. This sort of rebuilding is never really down the expense and to take care of the outstanding debt to proceed with the business activities in some way.

FEATURES OF CORPORATE RECONSTRUCTION

• To improvise the Balance Sheet of the organization (by discarding the unbeneficial division from its center business)
• Decreasing of Staff (by shutting down or auctioning off the unfruitful section of the staff)
• Alterations in corporate administration or management section.
• Discarding the underutilized resources, for example, rights of brands/patent.
• Re-appropriating its tasks, for example, specialized help and finance the executives to a progressively effective third party entity.
• Moving of tasks, for example, moving of manufacturing activities to bring down cost areas.
• Redesigning capacities, for example, advertising, deals, and appropriation.
• Renegotiating work agreements to lessen overhead.
• Rescheduling or renegotiating of obligation to limit the payment of interests.
• Directing an advertising effort everywhere to reposition the corporate entity with its purchasers thereby improving business to consumer relationships.

TYPES OF COPORATE REBUILDING APPROACH

• Merger:

This is where at least two corporate bodies are combined either by method of ingestion or amalgamation or by shaping a new company. The merger of at least two business substances is commonly done by the trade of protections between the target organization and the acquiring body.

• Demerger:

Under this corporate rebuilding system, the organization is divided into different companies to get the advantage of cooperative benefit emerging out of it.

• Acquisition/Takeover:

Under this system, the acquiring company assumes by and large responsibility for the objective company. It is called the Acquisition

• Joint Venture (JV):

Under this system, an entity is shaped by at least two organizations to attempt together with a monetary act. The body made is known as the Joint Venture. Both the parties consent to contribute to the extent as consented to frame new corporate bodies and furthermore share the costs, incomes and control of the organization.

• Slump Sale:

Under this technique, an entity allocates its undertaking for a lump sum amount. Under this, a corporate body is sold for a thought independent of the individual estimations of the assets or liabilities of the body.

The two important approaches among the above mentioned approaches are- Mergers and Demergers. The concept of mergers and amalgamation was earlier mentioned in Section(s) 391-394 under Companies Act, 1956. Later the concept of mergers, amalgamation including demergers was recognized under Companies Act, 2013. Section 232 of the Act includes mergers and amalgamation including demerger. Some other laws dealing with it are Competition Act, 2002; Sebi Takeover Code; Income Tax Act, etc.

A merger includes the common choice of two organizations to join and become one legitimate entity. From the view of business associations, there are various types of mergers that are characterized by the following categories:

(1) Horizontal merger-Two organizations that are in direct rivalry and offer similar product offerings and markets which means it brings about the combination of firms that are immediate opponents in the market.

(2) Vertical merger-A client and company or a provider and company for example merger of firms that have genuine or potential purchaser dealer relationship.

(3) Conglomerate merger-Generally a merger between organizations that don’t have any regular business zones or no basic relationship of any sort. A combined firm may sell related items or offer promoting and conveyance channels or procedures of production.

Justice DY Chandrachud in the case of Ion Exchange (India) Ltd. In re, has very nicely displayed the thinking of judiciary with respect to this subject as, “Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront a business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of changing times and to meet the demands of increasing competition. The law as evolved in the area of mergers and amalgamation has recognized the importance of the Court not sitting as an appellate authority over the commercial wisdom of those who seek to restructure the business.”[1]

The court in the case S. Shanmugavel Nadar v. State of Tamil Nadu laid down following principles with respect to the merger of an order of an inferior authority on that of superior authority.

1. Application of doctrine of merger cannot be rendered applicable by drawing a distinction between an application for revision and an appeal.
2.  Doctrine of merger doesn’t apply where appeal is dismissed.[2]

The Gujarat High court held that “it would be permissible for the Court to accord sanction to a scheme of merger under section 394 of Companies Act, 1956, even if the scheme contemplates a consequential alteration in the object clause of memorandum of association of the transferor company.”[3] Another point of law was discussed in National Organic Chemical Industries Limited v. Miheer H. Mafatlal. It was observed that “No statutory need for company Judge to decide question relating to allotment of certain shares to the appellant while considering the merger scheme.”[4] The main method of reasoning behind mergers and acquisitions is that the two companies are more important, beneficial than a single company and that the value of the investor or shareholders is likewise far beyond that of the entirety of the two companies. Despite negative studies and resistance from economists, M&A’s continue to be an important tool behind the growth of a company.[5]

Demergers on the other hand are the ones under which a company is broken into multiple companies. The new companies, the transferees, need not be the subsidiaries of the parent companies undergone such split or division.[6] The demerger of the Reliance on Reliance Industries Ltd. and the Anil Ambani group is the greatest demerger recently seen in India.

The case of HCL Ltd., In re and HCL Hewlett-Packard Ltd., the Central Government had raised the objection in approving of the scheme for an arrangement for demerger the company’s division with a new company that the “appointed date” under the scheme for transfer of division was falling prior to incorporation of a new company. The court overruled the objection by distinguishing the “appointed date” from “effective date”. The appointed date is relevant for fixation of the share valuation/ share exchange rate which the company would offer to the existing shareholders after bifurcation and spinning of the divisions.[7]

The Rajasthan High court in the case of In re, Uma Enterprises (P.) Ltd. held that “The Income Tax Act 1961 has specific provisions governing such demergers and provides an exemption from payment of income tax on the transfer of business undertakings if certain conditions are satisfied. One of the conditions for a tax-exempt demerger is that the business should satisfy the test of an undertaking and the same has to be transferred as a going concern.”[8] In a similar manner, even the laws of stamp duty include exemptions from stamp duty payment in case of mergers or demergers.

Therefore, a company experiencing an economic downturn needs to comprehend the procedure of corporate reconstruction or restructuring completely.

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[1] Ion Exchange (India) Ltd. In re, (2001) 105 Comp Cases 115 (Bom)

[2] S. Shanmugavel Nadar v. State of Tamil Nadu, (2003) 263 ITR 658

[3] Asian Investments Ltd., and others; In.re.,39 and Gujarat organic Ltd., (1992) 73 Comp. Case 517 (Mad)

[4] National Organic Chemical Industries Limited v. Miheer H. Mafatlal, (2004) 121 Comp. Case. 5119.

[5] Schweiger David M., 2003: M&A Integration: A Framework for Executives and Managers, ICFAI Journal of Applied Finance Vol.9, No.2, pp. 71-79.

[6] C. Verma, ‘Corporate Mergers Amalgamations and Takeovers: Concept, Practice and Procedure’, 5th ed. 2008, at p.264

[7] HCL Ltd., In re and HCL Hewlett-Packard Ltd., (1994) 80 Comp Cas 228 (Del)

[8] In re, Uma Enterprises (P.) Ltd., LSI-954-HC-2016-(RAJ).