What are the benefits of acquisition at the time of insolvency

The pandemic has brought several changes in the insolvency management. The acquisition of the companies at the time of insolvency is not only beneficial for the economy, but for the stakeholders as well.

The implementation of the Insolvency and Bankruptcy Code, 2016 (IBC) brought a change in the economic scenario of the country, as also the perspective of both the parties - creditor and debtor. There are also concerns that require to be addressed such as delays in the admission of cases, lack of bidders and disparity in valuation.

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The insolvency process is not just a recovery legislation for lenders unlike SARFAESI Act or the Recovery of Debts Act, but an effective resolution mechanism for corporate debtors.

According to the Insolvency and Bankruptcy Board of India (IBBI), companies which are viable should be rescued and an effective resolution plan must be put in place that benefits all stakeholders.

What is the change brought into the IBC after pandemic?

The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 introduced Section 32A, which aims to safeguard the interests of the acquirer under the CIRP and deals with assets of the corporate debtor pursuant to any offence or proceedings against the corporate debtor committed prior to the acquisition, and subsequently accords immunity to a corporate debtor and its assets from any prosecution, action, attachment, seizure, retention or confiscation upon approval of a resolution plan if the resolution plan results in the change in the management or control of the corporate debtor.

Is buying a company during insolvency beneficial?

The investment in acquiring insolvent companies is being widely adopted because restructuring and a going concern lies at the centre of the statutory framework. The stakeholders, especially customers and employees, are informed in due time about and become involved in the procedure, so that any possible damage to the company's image can be significantly reduced. The advantage is that even if there is a higher rate of satisfying creditor claims, the maintenance of as many jobs as possible and the going concern are the primary aims of the insolvency practitioner. This perspective is important at the time of economic slowdown.

Acquisitions of insolvent companies involve a range of special aspects which have to be centrally managed by the buyer. Besides special provisions of insolvency law, reconciling different interests of banks, employees, labour unions, customers, vendors, landlords/lessors adds to the complexity of the transaction process.

Moreover, buying a company out of insolvency involves greater time pressure (3-4 months) than normal M&A transactions (9-12 months). Usually, 'restructuring by transfer' [i.e. where the buyer pays for all or some of the assets of the company] is carried out in form of an asset deal. As a result, the assets required for the company's operation are transferred to the buyer's company created to continue the activities of a former company in liquidation ("NewCo"). In addition, those assets can be bought as a rule at a knock-down price and without the buyer being liable for any liabilities of the insolvent company such as liabilities to banks or retirement benefit obligations.