Companies Act 2013: An Act for All Seasons

Most of the focus of legal literature on COVID-19 was on the economic impact of the pandemic on every sector of business in the Country. There seem to be more questions than any answers or solutions. Due to the pandemic, most questions revolve around as to what would happen to the commercial interest of stakeholders? Creditors, as a class, define the growth and sustainability of every industry. Equally important, are its promoters, shareholders, investors and the management. What would companies do to turn around their fortunes and how would they sustain this pandemic? Would companies ever be able to reverse the economic impact of the Pandemic? All of these questions need an answer or a solution. These are issues that companies invariably may have to face irrespective of the sector or industry. Given the present scenario, it is of utmost importance to discuss the possible legal solutions which may be attempted by each of the stakeholders on account of such a volatile economic environment.

Debtors / Creditors: Debt Restructuring under Section 230 of the Companies Act, 2013:

Most commonly being a provision utilized to implement an amalgamation or demerger exercise, it would more than ever be used by companies to present a scheme of arrangement or compromise with its creditors. In essence, a debtor on account on default, would make an offer to the creditor for repayment mixed with scheduled payment or hair cuts on portions of principal and interest. This would be a pure debt restructuring exercise under the aegis of section 230-232 of the Companies Act, 2013 which would enable a company or a creditor or a shareholder to approach the Tribunal to restructure its liabilities based on a scheme with a payment schedule / structure to settle its dues. It would be a measure adopted to rearrange financial positions, factoring in available cash flows and forecasted inflow which would be the basis of the offer made to the creditors. The offer made to the creditors on achieving the threshold laid down under the Act may be being on the balance creditors. This would be a negotiated process, in which the creditors have a central role to play as they would vote on their interests. Though the Companies Act 1956 provided provisions for stay on “legal proceedings” which is unavailable under the present Act, it would be a viable attempt asking for any company to pray for a moratorium on legal proceedings when such a scheme is being considered by the Tribunal. Parallel proceedings would defeat the purpose of the offer; hence, a moratorium would be most vital. This process would be a non-adversarial and would enable the company to overcome the economic imbalance and enable it to protect the interest of creditors, paying for the company to successfully protect its business during such crunch / unviable markets.

Company: Internal Restructuring, Consolidation and Hiving Off under Section 230 to 232 of the Companies Act, 2013

The impact of the Pandemic on the books of each and every company would be evident as heavy losses on account of negligible income and unrelenting over heads / expenses would be recorded. In an attempt to clean up the balance sheets and streamline the Profit & Loss account so that future profits are not impacted on account of this financial year, companies may attempt an arrangement to wipe off its losses by either adjusting existing reserves, its capital or premium. The advantage of such a scheme under the provisions of section 230 of the Act would permit the Company to arrive at a certain date to absorb this mode of restructuring; such date is commonly referred to as the “Appointed Date”. This mode of internal financial restructuring would enable the Company to represent its true financial position paving way to attract significant investments and lending opportunities. Apart from the above, companies may also propose and adopt vanilla restructuring options by way of an amalgamation for purposes of consolidation, carrying forwards of losses and depreciation. This would also be a method for administrative convenience, reduction of costs or exercising control over all businesses under one roof. Companies may also look at identifying and cutting business segments or assets and consequently hiving- off the same through a scheme of demerger or slump sale or slump exchange to potential buyers at values which may be bargains. Private arrangements through execution of contracts may also be a viable option considering the urgency of parties. All the options under this bullet may also be driven based on the cash flows available to potential buyers which would be the yard stick to restructure a transaction.

Members: Reduction of Share Capital or Buy-Back of Shares:

Investors or shareholders who seek their return on investment or having decided to exit the business may adopt the route of reduction of capital or buy back of shares. The reduction of capital route would be a Tribunal process wherein a selective reduction of an identified shareholder may be undertaken. The repatriation of such investments may be emergent as investors / shareholders would be needing such cash flows/funds in their original markets to restabilize their business operations globally. Investors may not pull out their entire investment but appropriate amounts which would be utilized and used to plough in markets where needed most. Buy-Back of shares have a certain threshold under the Act but would certainly be an alternative available to investors. These options would be most viable than inter-se shareholder sale as the monies required to be paid off would not be from the pockets of the shareholders but of the company. It’s but obvious that tax considerations would also be weighed before an affirmative action is taken. Apart from these options, shareholders may also opt for variation of rights depending on the commercial understanding arrived at with the Company. In event a company is unable to redeem preference shares or pay dividends, applications may be made to the Tribunal for further issue of shares equivalent to the redemption or unpaid dividend amounts.

Conclusion:

The options available are definitely subject to a case to a case basis depending on the financial position of the Company, its investors/ shareholders, the interest of the creditors. The impact of the pandemic on economics is insurmountable and devastative. The realistic economic dilution is yet to be assessed locally and globally. The measures under the Act are even more relevant in light of the Insolvency Ordinance dated 5^th June 2020 which has suspended certain provisions of the Insolvency & Bankruptcy Code 2016. Hence, the Act would be a changed paradigm, now being looked at as a measure of rehabilitation and revival of industries. The corporate restructuring measures available for robust actions in favorable economic conditions are now options available in dire economic circumstances, making truly, the Companies Act, the Act for all seasons.