HAMDARD INSTITUTE OF LEGAL STUDIES AND RESEARCH,

SCHOOL OF LAW, JAMIA HAMDARD

Role of Insolvency and Bankruptcy Code in Distressed

Mergers and Acquisitions

SUBMITTED TO-
DR. A.K. MISHRA
PROF. OF PRACTICE

SUBMITTED BY-
Name- HAYA FATIMA
Sec- A
Roll No.- 2020-342-038
Exam Roll No.- 20342038
th
10 Semester, B.A.LL.B. (Hons.)

INSOLVENCY AND BANKRUPTCY CODE

PROJECT SUBMISSION FOR INTERNAL ASSESSMENT

 ACKNOWLEDGEMENT

Firstly, I would like to express gratitude to my professor Mr. A.K. Mishra sir, who provided me
with the opportunity to do this project and also helped me in completing the project. The project
helped me broaden my knowledge regarding the topic; I came to know about so many new things.
I am thankful to him.

Secondly, I would like to thank my parents, who helped me a lot in finalizing this project within
the prescribed time frame.

And lastly, I would like to thank my friends who helped me a lot in gathering different information,
collecting data from varied resources.
 Abstract:

The Insolvency and Bankruptcy Code (IBC), 2016, has significantly reshaped the management of
distressed assets in India by providing a structured and time-bound framework for the corporate
resolution of distressed companies. As outlined in the preamble of the Code, the primary aim is to
preserve the value of assets while safeguarding the interests of creditors. This has led to an uptick
in merger and acquisition (M&A) transactions, particularly distressed M&As, which assist
financially troubled companies in recovering and overcoming financial distress.

The enactment of the IBC introduced a paradigm shift by prioritizing the continuation of a
distressed company as a going concern. To achieve this, the Code actively encourages debtors to
resolve their financial difficulties through M&As during the Corporate Insolvency Resolution
Process (CIRP). This, in turn, has created various opportunities for investors and given hope to
creditors seeking recovery. However, there are challenges, such as delays in the resolution process,
prolonged litigation, and ambiguity in the laws that hinder the full potential of distressed M&As.
Thus, it is essential to study the role of the IBC and the challenges it presents in distressed M&A
transactions.

Introduction
The rise of distressed assets became a critical issue for India’s economy, highlighting the need for
new regulations to address these challenges. The enactment of the Insolvency and Bankruptcy
Code, 2016 (IBC) marked a significant reform in the country's approach to dealing with companies
facing insolvency and bankruptcy. The IBC provides efficient mechanisms for resolving distressed
companies through a unified legal framework, aiming for time-bound resolutions, preserving asset
value, and prioritizing creditor interests.

Before the IBC, distressed assets often remained trapped in long, disorganized processes that led
to value depletion. The earlier laws primarily focused on liquidating companies to free them from
their debts. In contrast, the IBC emphasizes reviving companies and keeping them as going
concerns, with liquidation being a last resort. This shift encouraged the use of distressed M&As,
which have become an essential tool in resolving financial distress.

When a company defaults on its debt, it becomes a corporate debtor, initiating the Corporate
Insolvency Resolution Process (CIRP). During this process, the Adjudicating Authority (AA)
declares a moratorium, during which resolution applicants can submit plans to resolve the
corporate debtor’s financial issues and maximize asset value. This includes mechanisms for
facilitating mergers, acquisitions, or demergers. Distressed M&As have become a vital strategy
for reviving failing businesses and ensuring maximum asset recovery for creditors, offering
quicker transactions while preserving asset value. As a result, distressed M&As have gained
prominence, with 12% of M&A deals in India within two years of the IBC’s enactment worth
$14.3 billion.

Understanding the role of the IBC in distressed M&As is crucial because these transactions differ
from traditional M&As, as they occur within the context of financial distress. The IBC ensures
that these M&As are carried out in a time-bound manner, with due diligence, while maximizing
asset value. This creates both opportunities and challenges. Despite the IBC’s intended efficiency,
practical issues such as delays, asset devaluation, and involvement of various organizations make
distressed M&As complex. Therefore, this study will analyze the IBC’s impact on distressed
M&As, examining both the opportunities and challenges that arise.

The study aims to explore the role of the Insolvency and Bankruptcy Code (IBC) in facilitating
distressed Mergers and Acquisitions (M&A). The IBC, enacted in 2016, was primarily designed
to resolve distressed assets of companies unable to meet their financial obligations. Distressed
M&As, which involve the sale or merger of financially troubled companies, often occur as part of
the Corporate Insolvency Resolution Process (CIRP) under the IBC. The distressed assets, such as
non-performing assets (NPAs) or restructured assets, are sold at discounted prices to more
financially stable entities. This study delves into how the IBC provides a legal framework for such
transactions and its effectiveness in resolving distressed companies while maximizing recovery
for creditors.

Relevance of the Study:

The IBC has transformed the management of distressed companies in India. Since its enactment,
distressed M&As have flourished, providing distressed companies with the opportunity to merge
with healthier corporations, thus managing their financial distress. For potential buyers, it has
created opportunities to acquire assets at lower prices, especially in distressed sectors like steel.
Notable transactions include the acquisition of Essar Steel by ArcelorMittal and Bhushan Steel by
Tata Steel, both of which had significant economic impacts.

This study is relevant because it seeks to understand the relationship between the IBC and M&As,
particularly how distressed M&As serve as a crucial tool during the Corporate Insolvency
Resolution Process. By evaluating the effectiveness of the IBC in handling distressed M&As, this
research will provide insights into how the Code can be leveraged to ensure effective outcomes
for distressed companies and their creditors.

Justification of the Study:

As distressed assets continue to rise, M&As have become a vital strategy for addressing financial
distress. The IBC provides a robust framework for managing these distressed assets, creating a
shift in how they are handled. However, despite the potential benefits, challenges such as delays,
haircuts, and the devaluation of assets still hinder distressed M&As. Furthermore, it is crucial to
ensure that distressed M&As are conducted in a way that preserves creditors' rights and does not
result in anti-competitive behavior.

This study is vital to assess how effectively the IBC facilitates distressed M&As, balancing the
rights of creditors while fostering healthy competition in the market. It will also address the
challenges that impede distressed M&As and suggest ways to enhance the effectiveness of the IBC
framework.

Statement of the Problem:

Research into the role of IBC in distressed M&As is essential due to the increasing number of
distressed M&A deals in India. Although the IBC provides a structured framework for resolving
distressed assets, challenges such as delays, ambiguity in laws, and creditor rights issues persist.
High-profile cases like Essar Steel and Jet Airways highlight how these challenges can affect
distressed M&As. Additionally, ensuring that these M&As do not lead to anti-competitive
outcomes is a key concern.

This study will examine how effectively the IBC is managing distressed assets, maintaining a
balance between creditor rights and market competition, and addressing legal barriers to successful
M&A transactions.

Distressed Assets and M&As

Distressed assets refer to those under financial stress, including NPAs and restructured assets,
typically valued below market prices due to financial instability or operational challenges. Such
assets are often involved in insolvency processes and are associated with high risks. M&A
transactions related to distressed assets are usually executed to address the financial distress of the
company, rather than for strategic reasons as seen in general M&As.

In a regular M&A, companies engage in mergers or acquisitions for growth, market expansion, or
other strategic goals. In contrast, distressed M&As primarily aim to resolve financial distress and
prevent bankruptcy, often by selling assets at significantly discounted prices. These transactions
typically occur under forced circumstances, making distressed M&As distinct from regular M&As
in terms of objectives and challenges.

The Role of IBC in Facilitating Distressed M&As

The IBC provides a robust framework for resolving distressed assets, encouraging distressed
M&As as part of the resolution process. One of the key provisions of the IBC, under Regulation
37, allows corporate debtors to merge or be acquired during the resolution process. This provision
aims to help financially distressed companies recover instead of being liquidated. Before the
enactment of IBC, investors were reluctant to invest in distressed assets due to the high risks
involved. However, the IBC has provided a legal structure that offers distressed companies an
opportunity for revival.

Notable examples, such as the Tata Steel acquisition of Bhushan Steel through IBC, showcase the
potential of distressed M&As. In this case, Tata Steel acquired 72.65% of Bhushan Steel’s shares
after the company defaulted on debt payments. The transaction resulted in a recovery of INR
35,152.28 crores, albeit with a 37% haircut. Such examples highlight the effectiveness of IBC in
facilitating distressed M&As.

Why Facilitating Distressed M&As under IBC is Essential

IBC was enacted to resolve NPAs and creditor claims arising from defaulted corporate debtors.
Liquidating distressed companies often results in further depreciation of asset values, making it
detrimental to creditors and other stakeholders. By promoting M&As, the IBC ensures that
distressed assets are transferred to financially stable entities that can restore and enhance their
value, benefiting creditors and preventing further asset devaluation. The goal is to maximize the
value of distressed assets and improve recovery rates for creditors.

Role of IBC in Distressed M&As

The IBC plays a pivotal role in facilitating distressed M&As by providing a structured framework
for transactions. Through the CIRP, distressed companies are sold to financially robust entities,
allowing for continuity of operations, preservation of asset value, and protection of creditors’
interests. The resolution plan under IBC ensures that distressed assets are acquired efficiently and
legally. Furthermore, the IBC provides a strict timeline for completing M&A transactions, which
helps maximize asset value.

A crucial aspect of the IBC’s role in distressed M&As is the "clean slate" approach for the acquirer.
Once a resolution plan is approved, the acquirer is relieved of the liabilities associated with the
distressed company, making the investment less risky. Additionally, the IBC’s moratorium period
protects the assets from being sold at depreciated values during the resolution process.

Challenges Faced in Distressed M&As Due to IBC

Despite its benefits, the IBC framework faces several challenges. One of the primary issues is the
time-bound nature of the resolution process, with the statutory limit of 330 days often exceeded in
practice. Prolonged delays, caused by litigation, asset valuation disputes, and an overburdened
National Company Law Tribunal (NCLT), significantly impact the success of distressed M&As.
The uncertainty caused by delays undermines investor confidence.

Furthermore, the limited time available for due diligence in distressed M&As poses a challenge
for acquirers, as they may not be able to thoroughly assess all potential issues. The absence of
warranties and indemnities in distressed M&As increases the risk for buyers. Additionally, the
ambiguity in judicial interpretations of IBC provisions, due to its relatively recent enactment, has
led to prolonged litigation, which further complicates distressed M&A transactions.

Impact of Distressed M&As on Market Competition

While distressed M&As can help resolve financial distress, they also raise concerns about potential
anti-competitive effects. The acquisition of a distressed competitor by a financially stable company
could reduce competition in the market, leading to monopolistic control. However, in cases of
insolvency, the need to preserve the failing firm often outweighs concerns about market
competition.

The Competition Commission of India (CCI) must review proposed distressed M&As to ensure
they do not harm market competition. This process can be time-consuming, further exacerbating
delays in distressed M&A transactions. One suggestion is to extend green-channeling to CIRP,
allowing automatic approval if the transaction meets the CCI’s requirements.
 Detailed Study on Enhancing the Effectiveness of IBC in Facilitating
Distressed M&As

The Insolvency and Bankruptcy Code (IBC) has significantly contributed to resolving distressed
assets and improving the ease of distressed mergers and acquisitions (M&As) in India. However,
there remain key areas where improvements can be made to ensure that distressed M&A
transactions are executed efficiently and effectively, benefiting both creditors and acquirers. This
section outlines several suggestions for enhancing the IBC framework, aimed at improving the
speed, clarity, and attractiveness of distressed M&As.

1. Increasing NCLT Resources

The National Company Law Tribunal (NCLT) plays a central role in the insolvency resolution
process under the IBC. However, it is overburdened with cases and often faces significant delays
in processing cases. As of now, the statutory timeline under the IBC for resolving insolvency cases
is set at 330 days. Yet, real-world data shows that the average time taken to approve a resolution
plan exceeds two years, causing prolonged delays. These delays diminish the potential value of
distressed assets and increase uncertainty for investors.

Suggested Improvements:

To ensure the timely resolution of distressed M&As, the government should allocate more
resources to the NCLT. These resources could include:

• Increased Personnel and Infrastructure: Hiring additional judicial members and

administrative staff to handle a higher volume of cases and improve case management.
• Technological Support: Introducing AI and digital tools to expedite case management
and enhance decision-making efficiency. Automated case tracking and documentation
systems can help speed up processes.
• Specialized Tribunals: Establishing dedicated divisions within the NCLT focused solely
on distressed M&As could enhance expertise and reduce the time taken for decision-
making.

Benefits:

• Reduces delays in the resolution process.

• Ensures quicker asset sales and M&A transactions.
• Improves the reliability of timelines for distressed M&As, boosting investor confidence.

2. Developing Standardized Valuation Frameworks

The valuation of distressed assets is a critical aspect of distressed M&A transactions. However,
asset valuations in insolvency proceedings are often inconsistent, leading to discrepancies in the
value of distressed assets. The lack of a standardized framework for assessing the value of
distressed assets can create uncertainty for investors and creditors, potentially leading to disputes
and protracted litigation.

Suggested Improvements:

• Standardized Guidelines: The introduction of a set of national standards for valuing

distressed assets would ensure consistency and accuracy in assessments. This could be
done by establishing a valuation body under the IBC or collaborating with professional
valuation organizations.
• Use of Technology: Incorporating advanced data analytics, machine learning, and AI tools
to assess distressed assets could make the valuation process more accurate and transparent.
These technologies can take into account a wide range of market variables that impact asset
value.
• Independent Valuation Process: The IBC could require independent valuation reports to
be submitted by certified valuers to avoid potential conflicts of interest, ensuring fairness
in the process.

Benefits:

• Ensures accurate and transparent asset valuations.

• Reduces litigation related to asset prices.
• Enhances investor confidence by providing clear and reliable information about asset
values.

3. Cross-Border Insolvency Framework

As more international investors look to acquire distressed assets in India, the lack of a
comprehensive cross-border insolvency framework presents a significant barrier. Currently, the
IBC only partially addresses cross-border insolvencies, making it difficult for foreign investors to
navigate the complexities of international law. The absence of a structured process for handling
cross-border insolvency cases creates uncertainty and risks for foreign buyers.

Suggested Improvements:

• Global Best Practices: India should adopt an internationally recognized framework for
cross-border insolvency, such as the UNCITRAL Model Law on Cross-Border Insolvency.
This framework would streamline the resolution process for distressed companies with
foreign assets or creditors.
• Bilateral and Multilateral Agreements: India could enter into agreements with key
jurisdictions to facilitate the recognition and enforcement of foreign insolvency
proceedings. This would make cross-border M&As smoother by allowing foreign investors
to engage more easily with distressed assets in India.
• Clear Jurisdictional Rules: Establish clear rules regarding which courts or tribunals will
have jurisdiction over cross-border insolvency cases to avoid confusion and delays.
Benefits:

• Attracts international investors by reducing the complexity of cross-border insolvency

issues.
• Facilitates smoother distressed M&As involving foreign companies.
• Ensures global compliance and consistency in resolving cross-border insolvency cases.

4. Encouraging Investor Participation

The high risks associated with distressed M&As often discourage investors from participating in
these transactions. Additionally, investors face significant challenges in assessing the true value of
distressed assets, given the complex legal and financial landscape of insolvency resolution. As a
result, the pool of potential investors is often limited, which can hinder competition and reduce the
final sale price of distressed assets.

Suggested Improvements:

• Tax Incentives: The government should offer tax breaks or subsidies to investors who
participate in distressed M&As under the IBC. These incentives could include lower capital
gains taxes on investments in distressed assets or tax deductions for companies that acquire
distressed entities.
• Government-backed Guarantees: The creation of government-backed guarantee funds
to protect investors from potential losses arising from distressed asset acquisitions could
encourage more participation. This would be especially helpful for smaller investors or
those hesitant to enter the high-risk distressed asset market.
• Investor Education and Outreach: Launch programs to educate investors about the
opportunities and risks associated with distressed M&As. Increased awareness can attract
more investors into the market, improving liquidity and competition.

Benefits:

• Increases investor participation, leading to more competitive bidding for distressed assets.
• Helps reduce the risks associated with distressed acquisitions, boosting confidence.
• Improves recovery rates for creditors by ensuring better pricing of distressed assets.

5. Digital Platforms for Asset Sales

The process of selling distressed assets through the IBC is still largely manual and paper-based,
leading to inefficiencies and delays. The lack of a centralized digital platform for listing distressed
assets reduces transparency and makes it harder for potential investors to access information. This
lack of transparency can lead to lower bids for distressed assets and a less efficient process.
Suggested Improvements:

• Centralized Online Marketplace: A digital platform dedicated to the sale of distressed

assets could be created to streamline the process. This platform would allow creditors,
debtors, and potential investors to list, view, and bid on distressed assets in real-time.
• Real-Time Bidding and Auction Mechanisms: The platform could include auction
features that allow for real-time bidding, increasing the chances of securing higher prices
for distressed assets.
• Data Transparency: The platform should offer transparent access to all relevant data
regarding the distressed assets, such as financial statements, asset valuations, and legal
documentation. This would ensure that investors are fully informed when making
purchasing decisions.

Benefits:

• Streamlines the sale process for distressed assets.

• Enhances transparency and accessibility for investors.
• Increases competition and bidding for distressed assets, leading to better recovery rates.

Improving the effectiveness of the IBC in facilitating distressed M&As requires a multi-faceted
approach that addresses the challenges of delays, asset valuation, investor participation, cross-
border insolvency, and lack of transparency. By implementing the suggested measures—such as
increasing NCLT resources, developing standardized valuation frameworks, creating a cross-
border insolvency framework, encouraging investor participation, and introducing digital
platforms for asset sales—the distressed M&A process can be significantly improved. These
changes will not only enhance the speed and efficiency of distressed asset resolutions but also
increase the confidence of both domestic and international investors, fostering a healthier M&A
market and ensuring better outcomes for creditors and acquirers alike.

Conclusion

The IBC has played a crucial role in facilitating distressed M&As by offering a legal structure for
resolving distressed assets and maximizing recovery for creditors. Distressed M&As help maintain
market stability by enabling the continuation of operations and preserving asset value. While
challenges remain, such as delays in the resolution process and legal ambiguities, the IBC has the
potential to significantly improve the efficiency of distressed M&A transactions in the future. The
implementation of the suggested reforms can enhance the effectiveness of the IBC, making
distressed M&As a vital tool for dealing with financially troubled assets.

Bibliography

1. Arjun Khanna, The Relationship Between Mergers and Acquisitions and the Insolvency
and Bankruptcy Code (IBC) in India: A Critical Analysis (2023).
 This paper analyzes the relationship between M&A and IBC in India. It highlights how
IBC facilitates faster and more efficient M&A transactions for distressed assets, while also
addressing challenges such as delays in the Corporate Insolvency Resolution Process
(CIRP) that can deplete asset value.

2. P. Ram Mohan & Vishakha Raj, Merger Control for IRPs: Do Acquisitions of Distressed
Firms Warrant Competition Scrutiny (2020).

This study explores whether distressed M&As should undergo competition law scrutiny
due to concerns about potential anti-competitive outcomes, particularly in the context of
the IBC’s provisions.

3. Binoy J. Kattadiyil, Phoenix from Ashes: The Impact of IBC on The Distressed Mergers
and Acquisitions Market (2020).

The paper discusses how IBC has created a structured framework for handling distressed
M&As in India, offering quicker, time-bound resolutions. It also explores the challenges
associated with delays, asset devaluation, and anti-competitive practices.

4. Corporate Finance & Restructuring, India’s M&A and Distressed Opportunity

Landscape (2023).

This report highlights the rise of distressed M&A in India following the enactment of IBC,
emphasizing the opportunities for inorganic growth through such transactions, along with
the risks of asset quality and financial viability.

5. Saloni Khaitan, The Case of Asset Acquisition: Are IBC-Led M&A Activities the Way
Forward? (2023).

This paper examines the implications of IBC on asset acquisition strategies, focusing on
how IBC has transformed the landscape for M&As and ensuring effective asset
acquisitions despite challenges.