CORPORATE RESTRUCTURING AND INSOLVENCY Time allowed : 3 hours Maximum marks : 100 NOTE : All references to sections relate to the Companies Act, 2013 unless stated otherwise. PARTA (Answer Question No.1 which is compulsory and any three of the rest from this part) Question 1 (@) Enumerate the corporate restructuring tools and explain the difference between ‘demerger’ and ‘slump sale’. (8 marks) (®) State whether the following statements are true or false citing relevant provisions of the law/case law : @ The transferee company in a scheme of merger or amalgamation need not necessarily be a company within the meaning of the Companies Act, 1956. (@ The scheme must be approved by a resolution passed with special majority as stipulated under the provisions of the Companies Act, 1956 and a copy Of the resolution needs to be filed with the Registrar of Companies. ii) Ina scheme of amalgamation, if transferor and transferee companies are under the jurisdiction of different High Courts, separate approvals are required for the scheme. (W) The Court, if the scheme is approved by the requisite majority, must pass orders for sanctioning the scheme. (2 marks each) (©) What are the various kinds of ‘corporate restructuring’ ? (5 marks) (Q) Briefly discuss the concept of franchising’ (4 marks) Answer 1(a) ‘Some of the tools of corporate restructuring are: — Amalgamation — Merger — Demerger — Slump sale — Takeover —_ Joint venture — Strategic Alliance etc As per Section 2(19AA) of Income TaxAct, 1961 “demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 by a demerged company of its one or more undertakings to any resulting company in such a manner as prescribed in this section. 2627 PP-CRI-December 2014 As per Section 2(42C) of Income-tax Act, 1961, “slump sale" means the transfer of ‘on of more undertakings as a result of the sale for a lump sum consideration without "elves being assigned to the individual assets and liabilities in such sales. Both Demerger/siump sale result in hiving of a division or undertaking, but the following ere the differences. (In slump sale values are not being assigned to individual assets and liabilities and the sale of undertaking is for a lump sum consideration called slump price. In demerger, valuation of individual assets and liabilities are mandatory. (ii) Incase of demerger, the shareholders of demerged company has to be issued the shares of resulting company and in case of slump sale the issue of shares does not take place. (ii) _Demerger results in reorganization of capital where as slump sale does not result in reorganization of capital. (v)_In case of demerger, the resulting company has to continue the business of transferred undertaking of demerged company, where as in slump sale it is not so Answer 1(b)(i) False As per Section 394(4) of Companies Act 1956 transferee Company does not include any company other than a company within the meaning of this Act. Answer 1(b)(ii) False Sub-section (2) of Section 391 of the Companies Act 1956 provides that when the court directs the convening, holding and conducting of a meeting of creditors or members or a class of them, a particular majority of the creditors or members or a class of them should agree to the scheme of compromise or arrangement. As per the sub-section, the majority required is the majority in number representing three-fourths in value of the creditors or members or a class of them, as the case may be, present and voting in the meeting so convened either in person, or by proxy.. The order made by the court under Sub-section (2) should be filed with the Registrar of Companies. Answer 1(b)(iii) True if transferor and transferee companies are under the jurisdiction of different High Courts, separate approvals are necessary. Answer 1(b)(iv) False The court even if the scheme is approved by the requisite majority should ensure that the scheme must be fair and equitable one. Then only it should sanction the scheme.PP-CRI-December 2014 28 Answer 1(c) ‘The meaning of the term ‘Corporate Restructuring’ is quite wide and varied. Depending upon the requirements of a company, it is possible to restructure its business, financial and organizational transactions in different forms. Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the ‘organization or to sharpen the focus on achieving them. The essentials of Corporate Restructuring are efficient and competitive business operations by increasing the market share, brand Power and synergies. Simply stating, the expression ‘Corporate Restructuring’ implies restructuring or reorganizing a company or its business (or one of its businesses) or its financial structure, in such a way as to make it operate more effectively. Various types of corporate restructuring strategies include Merger, Demerger, Reverse Mergers, Disinvestment, Takeovers, Joint venture, Strategic alliance, Slump Sale, Franchising, Strategic alliance etc. Answer 1(d) Franchising aims primarily at distributing goods and services that have a high reputation in the market and involves servicing the customers and end users. Franchisors support, train and to an extent control franchisees in selling goods and rendering services The most popular form of franchising is the product distribution franchise. Franchising may be defined as a contract, either expressed or implied, written or oral, between two persons or artes by which franchisee is granted the right to engage in the business of offering, Selling, distributing goods and services prescribed in substantial part by franchisor. In other words, franchising is a business relationship in which the franchisor (the ownet of {he business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor's goods or service, and to use the business name for a fixed period of time. Operation of franchise's business is Substantially associated with franchisor's trade mark, service mark or logo or advertisement or commercial symbol. Franchisee pays directly or indirectly the fees to the Franchisor. The franchising may cover the entire system or a specified territory or a specified retail Outlet. Usually Franchisors have standard agreements for all their franchisees because uniformity.and conformity is considered very important Question 2 (a) The Board of directors of Small Ltd. , Little Ltd. and Mini Ltd. passed a scheme of amalgamation with Giant Ltd. and their ‘Position of paid-up share capital and investments is as under Particulars Giant Ltd. Small Lid. _ Little Ltd. Mini Ltd, Transferee Co. _‘Transferor —Transferor _—_‘Transferor Co.- 1 Co.- Co.- it Issued shares : Capital @ %10 each 1,50,000 1,00,000 90,000 60,000 Fully paid-up @#10 each —_‘1,30,000 90,000 80,000 40,000 Partly paid-up @% each 20,000 10,000 10,000 20,000 Investments Shares of Small Ltd. 10,000 ‘Shares of Little Ltd. 10,00029 PP-CRI-December 2014 » 5 of Mini Lid. 5,000 a (Of Giant Lid. 10,000 Shares of Little Ltd. 5,000 "Shares of Mini Ltd. 5,000 | Steves of Giant Ltd. 5,000 Shares of Mini Ltd. 5,000 _ Shares of Smaill Ltd. 5,000 Shares of Little Ltd. 2,000 : scheme of amalgamation specifically provides that : All transferor companies shall be dissolved without winding-up. ‘The partly paid-up shares will be forfeited by the respective companies and po new shares of Giant Ltd. will be offered to the shareholders of partly paid- ‘up equity shares of the transferor companies. ‘The shareholders of the transferor companies holding fully paid-up equity ‘Sheres of 2710 each will get new shares of Giant Ltd. of 10 each. Ip view of above scheme of amalgamation and arrangement — ‘Calculate the quantum of new shares of Giant Ltd. to be given to each of the fansferor companies’ shareholders. one adjustments, what is the quantum of paid-up equity shares of Giant (10 marks) eae. notice of meetings by advertisement. (5 marks) ‘Amount in Rs. 8 Small Ltd Little Ltd Mini Ltd 1,00,000 90,000 60,000 (10,000) (10,000) (20,000) 90,000 80,000 40,000. By Giant Ltd. _ 10,000 10,000 5,000 By Small Ltd. a 5,000 5,000 By Little Ltd. - - 5,000 By Mini Ltd. 5,000 2,000 - Tete cross holding to be cancelled (15,000) (17,000) (15,000) ES to be exchanged with | 7500 shares of 6300 shares of 2500 shares of Rs 10Each Rs 10 each Rs 10 eachPP-CRI-December 2014 30 () Total new shares of Giant Ltd. To be issued to the shareholders of transferor (dissolved company) = 7500+6300+2500 = 16, 300 (ii) Quantum of paid-up capital of Giant Limited after all adjustments Fully paid up capital Rs 1,30,000 Less: Share capital held by small limited Rs. 10000 Less : Share capital held by Little Limited Rs. 5000 Rq1,15,000 Add : Fresh capital issued 16,300x10 Rs 1,63,000 Quaritum of fully paid up capital Rs.2,78,000 Partly paid up capital of transfree company already existing Rs. 20,000 Note: The partly paid up capital of transfree company is shown as the question talks about forfeiture of partly paid up shares of transferor companies only Answer 2(b) Notice of meetings by advertisement Generally, the Court directs that the notice of meeting of the creditors and members. or any class of them be given through newspapers advertisements also. Where the court The notice must particularly disclose any material interest of the directors, managing director or manager whether as shareholders or creditors or otherwise and the effect on their interests on the compromise or arrangement, if, and in so far as, itis different from the effect on the like interests of other persons. Such information must also be included in the form of a statement in the notice convening the meeting, where such notice is given by a newspaper advertisement, or, if this is not practicable, such advertised notice Must give notification of the place at and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement. If debenture holders are affected, the statement must give like information as far as it affects the trustees for the debenture holders. Statements which have to be ‘supplied to creditors and members as a result of press notification must be supplied by the company to those entitled, free of charge. The Chairman appointed by the High Court has to file an affidavit atleast 7 days before the meeting confirming that the direction relating to issue of notices and the advertisement has been duly complied with Question 3 (@) “The key to valuation is finding a common ground between all the companies for the purpose of a fair evaluation.” Comment with reference to factors influencing valuation (7 marks) (b) The Companies Act, 2013 does not ‘specify various types of merger but in business31 PP-CRI-December 2014 parlance there are many types of merger. As a Company Secretary of a cash rich company, explain to the Board, the definition of (i) cash merger; and (ii) de facto merger and difference between the two before taking its strategic decision of expanding business through merger. (©) What are the contents of public announcement under the SEB/ (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ? (4 marks) Answer 3(a) Determining the value of a business is a complicated and intricate process Valuing a business requires the determination of its future earnings potential, the risks inherent in those future earnings, Strictly speaking, a company’s fair market value is the price at which the business would change hands between a willing buyer and willing seller when nether are under any compulsion to buy or sell, and both parties have knowledge of relevant facts. ‘The process of arriving at this value should include a detailed, comprehensive analysis sehich tekes into account a range of factors including the past, present, and most _ ==eer=ntly the future earnings and prospects of the company, an analysis of its mix of (Sh ySc=! end intangible assets, and the general economic and industry conditions. ‘The other salient factors include: — The stock exchange price of the shares of the two companies before the commencement of negotiations or the announcement of the bid — Dividends paid on the shares. — Relative growth prospects of the two companies. — Incase of equity shares, the relative gearing of the shares of the two companies. — ("gearing" means ratio of the amount of issued preference share capital anddebenture stock to the amount of issued ordinary share capital.) — Net assets of the two companies. = \oting strength in the merged(amalgamated) enterprise of the shareholders of the two companies. — Past history of the prices of shares of the two companies. Also the following key principles should be kept in mind; There is no method of valuation which is absolutely correct. Hence a combination of all or some may be adopted If possible, the seller should evaluate his company before contacting potential buyers. In fact, it would be wiser for companies to evaluate their business on regular basis to kep themselves aware of its standing in the corresponding industry. Go for a third party valuation if desirable to avoid over-valuation of the company which is a common tendency on the seller's part. Merger and amalgamation deals can take a number of months to complete duringPP-CRI-December 2014 32 which time valuations can fluctuate substantially. Hence provision must be made to protect against such swings. Answer 3(b) Cash Merger refers to a merger in which certain shareholders are required to accept cash for their equity shares. Or in simple words Merger where an acquiring firm buys the target firm's stock with cash, instead of the more common practice of exchanging it with own stock. Cash mergers take place where the target firm's stockholders don't want to be associated with the firm resulting from the merger. Defacto merger is a transaction that has the economic effect of a statutory merger but is cast in the form of an acquisition of assets. Or in simple words Transaction that is not declared as a merger but effects acquisition of one firm's assets and/or voting stock By another firm. Answer 3(c) As per Regulation 15 of SEBI(SAST) Regulations 2011 the public announcement shall contain such information as may be specified including the following, - a) Name and identity of the acquirer and persons acting in concert with him b) Name and identity of the sellers, if any; ¢) Nature of the proposed acquisition such as purchase of shares or allotment of shares, or any other means of acquisition of shares or voting rights in. or control over the target company; d) The consideration for the proposed acquisition that attracted the obligation to make an ipen offer for acquiring shares, and the price per share, ifany. e) The offer price, and mode of payment of consideration; and f) Offer size, and conditions as to minimum level of acceptances, if any The detailed public statement pursuant to the public announcement shall contain such information as may be specified in order to enable shareholders to make an informed decision with reference to the open offer. The public announcement of the open offer, the detailed public statement, and any other statement, advertisement, circular, brochure, publicity material or letter of offer issued in relation to the acquisition of shares under these regulations shall not omit any relevant information, or contain any misleading information Question 4 (a) Drawa flow chart for the steps involved in merger. (3 marks) (b) Explain the procedure for investigation of ‘combination’ under the Competition Act, 2002. (5 marks) (c) Explain ‘net present value’ (NPV) and ‘discount rates’. (5 marks)33 PP-CRI-December 2014 Answer 4(a) Process of Merger and Amalgamation Check Memorandum whether Ifno Amend the itauthorises Merger [1 4 ObjectClause Convene a preliminary Board Meeting Prepare Valuation Report and Swap Ratio Preparation of scheme of Amalgamation aban Convene Board meeting to approve the scheme, valuation report, swap ratio —— Application under Clause 24 of Listing Agreement filing the proposed scheme of Amalgamation L Application to the court seeking direction to call general meeting/creditors meeting Convene meeting as directed by the court Reporting results of the meeting to the concerned High Court Petition to the Court for confirmation of the Scheme ‘Obtaining Court order sanctioning the scheme Filing copy of Court order with Registrar of Companies alee Transfer of assets and liabilities and allotment of shares to the shareholders of Transferor company Listing of shares at the stock exchange ‘The procedure commencing with an application for seeking directions of the Court for convening, holding and condition meetings of creditors or class of creditor, members or class of creditors, members or class of members, as the case may be, to the stage ofPP-CRI-December 2014 34 the court's order sanctioning the scheme of compromise or arrangement is contained in Section 391 to 395 of the Companies Act 1956 and rules 67 to 87 of the companies (Court) Rules, 1959. The Rules also prescribe forms for various purposes relating to compromise or arrangement. "Answer 4(b) Section 29.(1) states that where the Commission is of the prima facie opinion thata combination is likely to cause, or has caused an appreciable adverse effect on competition within the relevant market in India, it shall issue a notice to show cause to the parties to combination calling upon them to respond within thirty days of the receipt of the notice, as to why investigation in respect of such combination should not be conducted. Sub-section 1(A) states that after receipt of the response of the parties to the combination under subsection (1), the Commission may call for a report from the Director General and such report shall be submitted by the Director General within such time as the Commission may direct. Sub-section (2) states that the Commission, if it is prima facie of the opinion that the combination has, ors likely to have, an appreciable adverse effect on competition, it shall, within seven working days from the date of receipt of the response of the parties to the combination, or the receipt of the report from Director General called under sub section (1A), whichever is later direct the parties to the said combination to publish details of the combination within ten working days of such direction, in such manner, as it thinks appropriate, for bringing the combination to the knowiedaeor information of the public and persons affected or likely to be affected by such combination. Sub-section (3) states that the Commission may invite any person or member of the public, affected or likely to be affected by the said combination, to file his written objections. if any, before the Commission within fifteen working days from the date on which the dataile of the combination Here publitined unde]; sub-section (2). Sulb-section ft that the Commission may, within fifteen working days from the expiry ofthe in sub-section (3), call for such additional or other information as it may deem parties to the said combination Sub-section (5) states that the additional or other information called for Sy the Commission shall be furnished by the parties referred to in sub-section (4) within Steen days from the expiry of the period specified in sub-section (4). Sub-section (6) states that after receipt of all information and within a period of forty-five working days fom the expiry of the period specified in sub-section (5), the Commission shail proceed to deal with the case in accordance with the provisions contained in section 34 (© orders of the commission on certain combination). Answer 4(c) Net Present Value (NPV) The net present value ( NPV) approach is a theoretically more rigorous approach to the valuation of corporate assets. The NPV method is based on the assumption that the value of any asset is the sum of the future cash benefits of ownership converted to a single present value. Consequently it concentrates on the capacity of business or asset to generate cash, rather than on accounting profits. An acquisition involves an immediate outflow of funds in different points of time cannot be compared directly, since to do so35 PP-CRI-December 2014 would be to ignore a fundamental concept generally referred to as the " time value of money ". The time value of money is taken into account by converting all cash flows relating to an acquisition to a common reference point in time (usually the present). This is achieved by applying simple mathematical technique known as “discounting ". The time value of money is related to the existence of interest rates (and not inflation, although the latter can affect the level of interest rates). Positive NPV of a project effectively represents the increase in the value of a company (and, therefore, of the shareholders’ investment) which results from accepting an investment opportunity rather than returning the money to shareholders by way of dividends. The advice given by the NPV method is directly linked to the most widely accepted objective of financial management (the maximisation of shareholder wealth) and explains its theoretical superiority over other investment appraisal methods. Discount Rates Capital markets not only offer a wide variety of different investment opportunities, but each one offers a different rate of return. Shares generally offer a higher rate of return than bank deposits or government stocks, while shares in some industry sectors offer higher returns than others. The main determinant of the return on an investmentis its associated risk. Risk can be defined as variability or uncertainly of outcome. The more difficult it is to predict the future benefits of owing an asset, the riskier it is and therefore the higher the prospective return the asset must offer if investor are to be persuaded to part with their funds. Consequently, the appropriate discount rate to use when evaluating an investment or acquisition is the rate of return offered by the capital markets for similar investments of equivalent risk Question 5 (2) Sometimes a company running a good business is trapped into an awkward situation and finds itself in a very uneasy position. Such situations are like — Original capital is lost; — Value of debtors becomes irrecoverable; — Finished stock becomes redundant: — Heavy trading loss; — Heavy capital expenses and acquired assets of reduced value or doubtful value. Conversely, a company sometimes has more resources than it can profitably deploy/employ. To balance the situation, there is one way out to rectify the financial position of acompany. (i) Name the method which can be employed. (2 marks) (i) Discuss briefly how it can be implemented. (3 marks) (b) Strong Ltd. (acquirer/transteree co.) intends to takeover the management of Weak Ltd. (transferor co./target co.). Both the companies are not listed with any recognised stock exchange.PP-CRIi-December 2014 36 The Board of both the companies after studying various options of takeover, had decided to make a scheme of takeover under the Companies Act, 1956. Asa preliminary exercise, the acquirerftransferee company amended its objects clause to take controlling shares of another company and the scheme with recommendation of the Board of Weak Ltd. was circulated to the shareholders of Weak Ltd., with all material information and approved (with 9/10 in value) by the shareholders. However, the Registrar of Companies (ROC) refused to register the scheme on the ground that the objects clause of the transferor company do not have such provision. Do you agree with the contention of the ROC ? (5 marks) (c) State the factors determining vulnerability of companies to takeover bids. (5 marks) Answer 5(a) € i) In this situation “reduction of share capital” is the best method to optimize the capital structure (ii) The mode of reduction, as laid down in Section 100 of the Companies Act 1956 is as follows: ‘A company limited by shares or a company limited by guarantee and having 2 share capital may, if authorised by its articles, by special resolution, and subject to its confirmation by the Court on petition, reduce its share capital in any way and in particular: by reducing or extinguishing the liability of members in respect of uncalled or unpaid capital e.g., where the shares are of Rs. 100 each with Rs. 75 paid-up, reduce them to Rs. 75 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of Rs. 25 per share; by paying off or returning paid-up capital not wanted for the purposes of the company, e.g., where the shares are fully paid-up, reduce them to Rs. 75 each and pay back, Rs. 25 per share; by paying off the paid-up capital on the conditions that it may be called up again so that the liability is not extinguished; by following a combination of any of the preceding methods; by writing off or canceling the capital which has been lost or is under represented by the available assets e.g. a share of Rs. 100 fully paid-up is represented by Rs. 75 worth of assets. In such a situation reality can be re-introduced by writing off Rs. 25 per share. This is the most common method of reduction of capital The assets side of the balance sheet may include useless assets which are cancelled. On the other side i.e. on the liability side share capital is reduced. Answer 5(b) No, the contention of ROC is not valid There are two different opinions expressed by various courts on a simple query that whether the court can sanction an amalgamation when the Memorandum of Association37 PP-CRI-December 2014 of the company does not contain powers to amalgamate. It has been held by certain courts that there is no necessity to have special power in the objects clause of the memorandum of association of a company for its amalgamation with another company as to amalgamate with another company, is a power of the company and not an object of the company. The Karnataka High Court in Hindhivac (P) Ltd. In re (CP No. 15 and 16 of 2005), (206) 62 CC 58, the High Court had sanctioned the scheme of amalgamation taking note of the fact that the shareholders of both the companies had unanimously approved the scheme. The Court held that Section 17 is an aid to company seeking amalgamation, reconstruction etc. Therefore, there would be no impediment on the scheme of amalgamation even if there is no provision in the objects clause of Memorandum of Association as to amalgamate with another company. In Marybong & Kyel Tea Estates Ltd., Re (1977) 47 Com Cases 802, a previous decision in Hari Krishan Lohia v. Hoolungoree Tea Company, (1970) 40 Com Cases 458: AIR 1969 Cal 312 (DB) was followed and it was asserted that where there is a statutory provision dealing with the amalgamation of companies, no special power in the objects clause of memorandum of association of a company is necessary for its amalgamating with another company. It is submitted that to amalgamate with another company is a power of the company and not an object of the company. Amalgamation may be effected by order of the court under Sections 391 and 394 Answer 5(c) Factors Determining Vulnerability of Companies to Takeover Bids The enquiry into such strategies is best initiated by an analysis of factors, which determine the “vulnerability” of companies to takeover bids. It is possible to identify such characteristics that make a company a desirable candidate for a takeover from the acquirer's point of view. Thus, the factors which make a company vuinerable are: . 1. Low stock price with relation to the replacement cost of assets or their potential earning power; A highly liquid balance sheet with large amounts of excess cash, a valuable securities portfolio, and significantly unused debt capacity; 2. Good cash flow in relation to current stock prices; 3. Subsidiaries and properties which could be sold off without significantly impairing cash flow; and 4. Relatively small stockholdings under the control of an incumbent management. A combination of these factors can simultaneously make a company an attractive proposition or investment opportunity and facilitate its financing. The company’s assets may act as collateral for an acquirer's borrowings, and the target's cash flows from operations and divestitures can be used to repay the loans. PART B (Answer ANY TWO questions from this part.) Question 6 (a) ‘Non-performing assets constitute a real economic cost to the nation’ — because they reflect the application of scarce capital and credit funds to unproductive uses.PP-CRI-December 2014 38 In view of above, explain how securitisation has gained importance citing the ineffectiveness of present recovery laws and considerable delay in judiciary. (5 marks) (2) Which entities are designated as ‘operating agency’ under section 3(1)(i) of the Sick Industrial Companies (Special Provisions) Amendment Act. 1993 ? What is the main function of an operating agency ? (5 marks) (©) Explain the procedure for appeal to the Appellate Tribunal underthe Recovery of Debts Due to Banks and Financial Institutions Act, 1993. (5 marks) Answer 6(a) When a borrower, who is under a liability to pay to secured creditor, makes any default in repayment of secured debt or any instalment thereof, the account of borrower 's classified as non-performing asset (NPA). NPAs constitute a real economic cost to the nation because they reflect the application of scarce capital and credit funds to unproductive uses. The money locked up in NPAs are not available for productive use and to the extent that banks seek to make provisions for NPAs or write themo® itis a charge on their profits. High level of NPAs impact adversely on the financial strength of panks who in the present era of globalization, are required to conform te stungent International Standards. The public at large is also adversely affected because bank's main source of funds are deposits placed by public continued growth in NPA portfolio threatens the repayment Capacity of the banks and erode the confidence reposed by them in the banks. The banks had to take recourse to the long legal route against the defaulting Boxowers beginning from filling of claims in the courts. A lot of time was usually spent i getting decrees and execution thereof before the banks could make some recovenes in the meantime the promoters could seek the protection of BIFR and could also deute the securities available to banks. The Debt Recovery Tribunals (DRTs) set up by the Govt also did not prove to be of much help as these get gradually overburdened by the huge volume Of cases referred to them. Alll along, the banks were feeling greatly handicapped in the absence of any powers for seizure of assets charged to them. Allthese issues gave the passage for evolution of the Securitisation and Reconstniction of Financial Assets and Enforcement of Security Interest Act, 2002 SARFAESI Act, 2002. SARFAESI Act, 2002, is a unique piece of legislation which has far reaching consequences. This Act is having the overriding power over the other legisiation and it Shall go in addition to and not in derogation of certain legislation The main purpose of the Securitisation Act is to enable and empower the secured creditors to take possession of their securities and to deal with them without the intervention of the court and also alternatively to authorise any securitisation or reconstruction company to acquire financial assets of any bank or financial institution. Answer 6(b) Under SICA (Section 3(1)(i) “Operating agency" means any public financial institution, State level institution, scheduled bank or any other person as may be specified by general or special order as its agency by the Board for Industrial and Financial Reconstruction (BIFR)39 PP-CRI-December 2014 Role of Operating Agency includes the following — Conductoof inquiry on reference received — Preparation of a scheme of rehabilitation — Apply to Tribunal for review of its order — Recommend to the Tribunal, on the various steps to be taken to implement the scheme and remove the difficulties therein — Implementation of rehabilitation scheme, ordered by Tribunal — Appointment as liquidator in case of winding up of industrial company Preparation of detailed inventory and lists of any industrial company ordered by Tribunal Answer 6(c) Section 20 of the Act provides that any person aggrieved by an order made, or deemed to have been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties. Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and it shall be in such form and accompanied by such fee as may be prescribed. Provided that the ‘Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. The Appeliate Tribunal shall send @ Copy of every order, made by it to the parties to the appeal and to the concerned Tribunal. The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal. Deposit of amount of debt due, on filing appeal: Where an appeal is preferred by any person from whom the amount of debt is due to a Bank or a Financia! Institution or a consortium of Banks or Financial Institutions, such appeal shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five percent of the amount of debt so due from him as determined by the Tribunal. Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited. Question 7 (2). When can a contributory file a winding-up petition ? (§ marks) “\_(®) ‘Cross examination of witness is not necessary for Debt Recovery Tribunal (DRT)". Comment. (6 marks) (c) State the concept and objectives to set the Lok Adalat under the Legal Service _ Authorities Act, 1987. Is it successful in meeting its objective ? (5 marks) ™ mPP-CRI-December 2014 40 Answer 7(a) A contributory is entitled to present a winding up petition in case where: (a) the number of members of the company is reduced below the statutory minimum of 7, in the case of a public company and below 2 in the case of private company; or (b) the shares in respect of which he is a contributory or some of them: (i) were originally allotted to him; or (ii) have been held by him and registered in his name for at least six months during the 18 months before the commencement of the winding up: or (iii), have devolved upon him through the death of a former holder. Answer 7(b) Yes, the statement is correct. All evidences are taken by way of an affidavit Cross examination is allowed only on request by the defense and that too if the Trbunal feels that such a cross examination is in the interest of justice. Frivolous cross examination may be denied. In March, 2002, Supreme Court ruled that it was not necessary for Debt recovery Tribunals to always cross examine a witness. Evidence could be taken by a™idavits also on the pattern of High Courts and Supreme Courts where the cases can Se decided merely on the basis of documents and affidavits filed before them, ordinarily The court ‘observed that it is common knowledge that hardly any transaction with the Dank would be oral and without proper documentation. In such an event, the need for orel examination of awitness would rarely arise. The Tribunal may at any time for sufficient reason, order that any particular fact be proved by affidavit, on such conditions, as the tunel thinks reasonable. The Tribunal may at any time, for sufficient reason, order that the affidavit of any witness may be read at the hearing, on such conditions, as the tunel thinks reasonable : Answer 7(c) The concept of Lok Adalat is of recent origin and is set up under the Legal Service Authorities Act, 1987 (39 of 1987). Where the borrower and the banker are not able to arrive at a compromise, Lok Adalat can prove to be successful in bringing the borrower to terms by using some kind of social pressure. Lok Adalats are being organized at different places under the auspices of local judiciary and voluntary organizations with the object of speedy disposal of disputes of different kinds. Bank's claims against its borrowers are also being taken-up by such Lok Adalats. The Indian Banks Association (IBA) has considered the matter relating to participation by banks before Lok Adalats by which cases of banks are settled speedily and also saving legal charges If either of the parties does not give consent for settlement of dispute through Lok Adalat, the Lok Adalat cannot settle the matter. The procedure followed by lok adalats is _ not like civil suits, which are tried by the ordinary civil court. Neither the Lok Adal _ records any evidence, nor are any arguments heard for deciding intricate legal iquesi#" j Beca PP-CRI-December 2014 The presiding members of Lok Adalat, are usually social workers. The members discuss the matter with both the parties without the help of their advocates and make efforts to bring the parties to an amicable settlement in the spirit of give and take. The members persuade the parties to settle the matter on the basis of a reasonable agreement. If a settlement is arrived at, terms thereof are recorded by the Presiding Officer of the Lok Adalat and signed by the parties. If there is no settlement, the matter is left unresolved Settlements arrived at Lok Adalats are not legally enforceable, as Lok Adalats do not have statutory status. Where settlement has been arrived at, in a matter regarding which no civil suit is pending, the settlement has to be filed before a competent court of civil jurisdiction in the form of a plaint for obtaining a decree in terms of the settlement. On the other hand, where settlement has been arrived at in respect of a matter for which a civil suit is already pending, the settlement has to be filed in the form of a compromise and the court passes necessary decree in the civil suit itself. Thus, settlements arrived at before Lok Adalats can be made legally enforceable only by obtaining appropriate court decree. Thus they are not very effective in achieving the objective as the parties are required to obtain decree in appropriate form from civil court. Question 8 (@) Explain notification to foreign creditors relating to insolvency under the UNICTRAL Model Law. (5 marks) (b) State the duties of a Company Secretary in respect of compulsory winding-up. (5 marks) (¢) “itis a cardinal principle of law that a company incorporated cannot be dissolved without going through winding-up.” In view of above statement, you are required to answer: () Do you fully agree with this statement ? (1 mark) (i) “Is there any exception to the rule ? State briefly. (2mark) (ii) What is the precondition for dissolution before sanction of the High Court ? (2 marks) Answer 8(a) Article 14 of the Model Law provides that whenever under laws of the enacting State relating to insolvency, a notification is to be given to creditors, such notification shall also be given to the known creditors that do not have addresses in the State. The court may order that appropriate steps be taken with a view to notifying any creditor whose address is not yet known. The main purpose of notifying foreign creditors is to inform them of the commencement of the insolvency proceeding and of the time-limit to file their claims. Such notification shall be made to the foreign creditors individually, unless the court considers that, under the circumstances, some other form of notification would be more appropriate. No letters rogatory or other, similar formality is required. When a notification of commencement of a proceeding is to be given to foreign creditors, the notification Shall (@) Indicate a reasonable time period for filing claims and specify the place for their filing; . (b) IFicate whether secured creditors need to file their secured claims; andPP-CRI-December 2014 42 (©) Contain any other information required to be included in such a notification to creditors pursuant to the law of this State and the orders of the sour: Answer 8b) The roles of the Company Secretary in regard to the compulsory winding up of a company are; He must assist the directors in preparing the petition for the compulsory winding up {o be submitted to the court, when the company itself is the Petitioner for compulsory winding up. He should file with the registrar of companies a certified copy of the winding up order Passed by the court within 30 days of the passing of the court order He must submit to Other information regarding the company which the official liquidator requires from time to time He should ensure that the words "the company is under liquidations are mentioned po every letter, document, etc. Issued by the company after the winding up order has been passed Answer 8(c) ()_ No, the statement is not totally correct (i) Yes there is one exception. Itis in the case of amalgamation and arrangements where the transferor company can be dissolved without following the detailed Process of winding up. (iii) The report of Official Liquidator (OL) is required for the submission to High Court for making dissolution.