Understanding the Legal Process in Corporate Restructuring by Adv. Abhinav Trehan, Founder of Adhivakta Law Chamber

Corporate restructuring is a complex and often necessary process that enables companies to reorganize their operations, finances, or structure to improve efficiency, reduce liabilities, and maintain long-term competitiveness. It can involve various strategies such as mergers, acquisitions, demergers, asset sales, or financial reorganization. In the corporate world, restructuring is not only a business decision but also a legal one, requiring careful navigation through various legal frameworks.

Key Steps in the Corporate Restructuring Process

1. Assessment and Decision-Making:

   • The first step involves a comprehensive analysis of the company's financial health, business model, and operational structure. This includes understanding the scope of existing debts, obligations, and other liabilities.

   • The company’s board of directors typically initiates the process, often with advice from financial experts and legal advisors.

2. Strategic Planning:

   • Once the need for restructuring is recognized, a strategic plan is drafted. This can involve selling off non-core assets, reducing workforce, consolidating operations, or reorganizing corporate ownership. A critical legal step in this phase is determining the best structure for the restructuring based on the company’s specific goals.

3. Legal Framework and Compliance:

   • Corporate restructuring in India must comply with several key laws, including the Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016 (IBC), and other regulatory frameworks depending on the nature of the restructuring. For example, if the company is undergoing insolvency proceedings, the Insolvency and Bankruptcy Code (IBC) mandates a specific process to follow.

   • Under the Companies Act, 2013, Section 230 to Section 240 govern schemes of compromise and arrangement, which provide a legal framework for the restructuring process. Approval must be obtained from shareholders and creditors, and in some cases, the National Company Law Tribunal (NCLT) is involved to approve the restructuring plan.

4. Creditors' Rights and Approval:

   • A critical aspect of corporate restructuring is the negotiation with creditors. Often, creditors will need to agree to modified repayment terms, debt reduction, or a restructuring of their claims. This is particularly important in debt-for-equity swaps or when a company seeks to extend the repayment period.

   • Under the IBC, creditors play an essential role in approving the resolution plan in insolvency proceedings. Creditors may vote on whether to accept or reject a plan based on the proportion of their debt.

5. Regulatory Approvals and Court Approvals:

   • Depending on the nature of the restructuring, regulatory approvals may be required from authorities such as the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), and others. For example, if the restructuring involves cross-border mergers or acquisitions, approvals from foreign regulators may be necessary.

   • If a scheme of arrangement or compromise involves substantial changes to the company’s structure, it will require approval from the NCLT.

6. Implementation and Post-Restructuring Compliance:

   • After obtaining all necessary approvals, the company can begin implementing the restructuring plan. This could involve changes in ownership, adjustments in capital structure, or shifts in management.

   • Post-restructuring, the company must continue to comply with statutory requirements and corporate governance norms. This includes updating shareholders and creditors on the completion of the restructuring and filing appropriate documents with the Ministry of Corporate Affairs (MCA).

Legal Challenges in Corporate Restructuring

Corporate restructuring can be fraught with legal challenges. Common issues include:

• Litigation Risks: Creditors or shareholders may challenge the restructuring plan in court if they feel their interests are not adequately protected. Companies must ensure compliance with all procedural aspects to minimize the risk of litigation.

• Regulatory Scrutiny: If the restructuring involves mergers or acquisitions, regulatory bodies like SEBI or the Competition Commission of India (CCI) may scrutinize the transaction for compliance with antitrust laws.

• Cross-Border Jurisdictions: In cases of cross-border restructuring, different countries’ laws may come into play, requiring compliance with international regulations.

Sources

1. Companies Act, 2013 

2. Insolvency and Bankruptcy Code, 2016