Turnaround Strategies for Companies under IBC Scenarios
CS Dr. Ahalada Rao Vummenthala,
Insolvency Professional, Company Secretary in Practice
Harshwita Inuganti
1st year LL.M (Insolvency and Bankruptcy Laws),
NALSAR University of Law and IICA
Background
As stated by Heraclitus “The only constant in life is change”, with the dynamic and unpredictable happenings in the market and economy, companies and their kingpins can never be too cautious regarding their situation. Distress can come from any angle and may come despite best efforts from the company; however, the company must also be strong enough to rise, like a phoenix from the ashes, from the struggle by creating and taking all the opportunities available. The Insolvency and Bankruptcy Code, 2016 (IBC) is one such aid for the revival of the company and provides many reliefs in order to support its revival. Apart from its large economic impact, it has bought about many changes which have transformed the sphere of business and corporate law.
The article aims to be a concise guide for the turnaround strategies which can be used by a company under the scanner of IBC and also by normal companies looking for advancement by avoiding IBC and catch hold of companies under IBC to make synergies through mergers and amalgamations and other strategies available. It consists of several tools which cover a multitude of angles, which can suit companies which are in different phases.
Objectives of the Article
The objectives of the article include:
- to identify the turnaround strategies and models involved in it,
- to compile the turnaround strategies in various IBC stages,
- to find out the legal remedies and precautions available to the companies
Steps or Stages of Turnaround Strategies
The steps include:-
- Situational analysis
The reason for the company’s decline has to be identified through various actions such as a SWOT (Strength, Weakness, Opportunity and Threat) analysis being conducted. The analysis of the company’s financial statements, market trends and industry outlook can also play a major role in revealing the causes.
- Development of turnaround Strategy
In order to develop a turnaround strategy, there is a need to define the company’s mission, vision and objectives which will also help identify the key areas of improvement. This can lead to the development of a comprehensive turnaround plan.
- Implementation of turnaround plan
To ensure effective implementation of the plan it becomes necessary to communicate the strategy to stakeholders involved such as employees, customers and investors. It is also important to establish timelines and milestones for implementation and assign responsibilities and tasks to team members.
- Monitoring and evaluation
The evaluation of the effectiveness of the strategy can be done through tracking of progress and adjusting the plan as needed to ensure long term sustainability and establishing KPIs (Key Performance Indicators).
- Sustaining the turnaround
In this step for sustenance, the strategy has to embedded into the company’s culture and the progress has to be continuously monitored and evaluated. The success has to be celebrated and the contributions of the employees must be recognized and awarded.
Causes of Distress
In order to develop a turnaround strategy which will suit the scenario, the first and crucial step becomes to determine the root cause. The common causes of distress include: –
- Unsustainable debt
Unsustainable debt requires the borrower to make large adjustments to the expenditure. The debt would also be growing beyond the servicing capability of the borrower causing distress and later require restructuring.
- Operational Inefficiencies
The operations of the company must be properly managed, failing which it can lead to severe implications, some of the examples can include inefficient processes, energy wastage, over or understaffing and others.
- Market Decline
It causes a decrease in demand for products or services offered by the company affecting its revenue and also causes the inventory or stock to pile up which can result in their obsolescence.
- Economic Downturn
It leads to factors such as increased operation costs, difficulty to access finance, change in consumer and investor actions and any other conditions which negatively affect the company.
- Over Expansion
While it definitely would dilute the management’s focussing capabilities, dealing with multiple product and market lines without adequate personnel would lead to operational and marketing challenges and increased risk among others.
- Lack of Innovation and Upgradation
This is a crucial factor which can severely impact a company’s future. For instance- Kodak is a company which was at its prime during its initial years however could not sustain the same as there was no upgradation and adoption of the changes occurring.
The causes of distress may be combined or may be individual in their effect on the company and it is vital for the turnaround strategy to address the causes in a proper manner, without which the purpose shall be defeated.
The objects of the Code include time bound resolution process, balancing interests of all stakeholders, promoting entrepreneurship and availability of credit. It also consolidates the laws regarding insolvency resolution and reorganisation. The Code has evolved after a long history of debt recovery laws and others and has also made a shift to creditor in control approach. The Code, provides that once a debt has been defaulted action can be initiated by a financial or operational creditor under section 7 or 9 respectively. It also provides the opportunity for the corporate debtor to initiate action by itself under section 10.
Table: NPAs of SCBs recovered through various channels
Source: https://ibbi.gov.in/uploads/resources/1abc8cd7653dbc0024ed9da385e8b710.pdf
The article will be covering the following concepts:
Introduction
The turnaround strategies will be applicable to all companies, viz healthy companies, normal companies, strong companies, even weak companies, that is a company under the NPA (Non Performing Asset) stage or a company which is about to be admitted by Hon’ble NCLT under the Insolvency and Bankruptcy Code. The turnaround strategies can be for all companies, depending on the stages. These are the three stages as under: –
- Pre- IBC Stage
This section will be including the phases in the pre- IBC stage, the actions to be taken for strengthening the company and prevent entrance into IBC and turnaround strategies in the stage along with the legal remedies.
- During IBC Stage
This part will consist of the process during IBC, the role players involved, the turnaround strategies in the stage and the legal remedies of the same,
- Post IBC Stage
It will include the events which will take place in the stage, the reliefs to be alert for, the precautions to be taken, strategies for acquisition of companies under IBC and turnaround in the stage and legal remedies.
Meaning and Final Objects
A turnaround strategy is a process of restructuring and transforming the company from loss to profitability. Its final objects include- i. revival of business and financial health, ii. nurturing and improvement of profitability and iii. ensuring long term sustainability and competitive advantage.
Pre-IBC stage
This stage is meant for all companies including companies under distress and healthy companies. The normal and healthy companies can use such strategies to become stronger. The distressed companies can use them to resolve the situations without initiation of proceedings under the Code.
In the pre- IBC stage, the twilight phase is present which is the zone of recognizing distress. The zone commences when directors of a company know or ought to have known that there is no reasonable prospect of avoiding insolvency. It represents a transitional phase where the company is financially distressed but has not yet entered formal insolvency proceedings. This concept is not explicitly defined in the IBC but is recognized as significant in insolvency jurisprudence.
Actions to Strengthen Company
Voluntary registrations is one of the major actions to be taken by a company to taken to ensure the company is utilizing the benefits available through such registrations. The registrations provide advantages to company before and during IBC.
- MSME Registration
It provides priority sector lending, collateral free loans, subsidiaries and incentives, tax benefits and also has an MSME mediation cell. In IBC, an MSME has added advantages of exemption from certain disqualifications for submission of resolution plan under section 29A, and others under section 240A.
- Registration with Information Utility
Registration with NeSL enhances credibility, provides data authenticity and transparency, improved risk management, facilitates easier loan sanctions and faster dispute resolution. It plays a larger role under IBC where it allows for substantial proof for submission of claims and for filing an application, efficient and transparent debt record management, streamlining insolvency resolution, legal sanctity and a digital paperless mechanism while giving real time information and support for corporate debtors.
- NSIC Registration
The registration certificate is an evidentiary document before NCLT and NCLAT. It also allows for access to government tenders, procurement and marketing support, financial assistance and credit and technology support. Whereas under IBC, it leads to prioritization in payment of dues, simplifies resolution for MSMEs, access to distressed asset market, government support and credibility, protection against coercive actions, favourable policy initiatives.
- IPR Registration
It is already known to have advantages such as legal protection against infringement, monetary benefits by revenue generation, market exclusivity and global brand recognition and goodwill and tax benefits. It also encourages innovation and supports economic growth and provides assets for collateral. Under IBC, it helps the distressed company by aiding in brand and intangible assets valuation, strengthening the balance sheet, maximization of value of assets on sale or acquisition.
- SIDBI Registration
Apart from being an evidentiary document before NCLT and NCLAT, it also leads to financial and working capital assistance, lower interest rates, customized loan schemes and technology upgradation. It offers support for MSME revival, promotion of alternate dispute resolution, compliance and regulatory benefits, contribution to credit ecosystem and facilitation of data and record maintenance under IBC.
- Affiliations and Registration
Registration with the Industrial Apex body provides a certificate of origin or recognition, benefits of advocacy, access to industry insights, networking opportunities, capacity building and training programs, government, liaison and support, representation before the government, awareness of sectoral laws and funding options and schemes. Under IBC, it gives dispute resolution support, professional development, ethical standards and discipline.
Prevent Entrance into IBC
As prevention is better than cure, there must be establishment of financial system and discipline which includes- i. voluntary registration with information utility as stated above, ii. addition of interest for bills pending for more than 1 year, iii. execution of contract/ agreement with all the suppliers and customers iv. Inclusion of MSME registration number in the invoice, if applicable, v. Submission of MSME copy to corporate debtor with interest statement if applicable, vi. Maintenance of relevant GSTR Forms if applicable and vii. Disclosure in the notes to accounts of the balance sheet voluntarily.
Turnaround Strategies in Pre-IBC stage
Expansion allows for the company to enter new markets and make revenue through additional sources. The expansion of a company can be horizontal or vertical, where the types of horizontal expansion include- in geometry or orientation, in business and economics, in technology and software, in medicine and health. The types of vertical expansion include- forward integration (downstream expansion), backward integration (upstream expansion), balanced vertical integration and contractual vertical integration. The other turnaround strategies include: –
- Financial Restructuring and System Establishment
It includes asset monetization which is sale of non- core assets, negotiations with creditors to reschedule debt, managing cash flow and debt equity swap, infusing fresh capital and checking personal guarantor agreements.
- Operational Restructuring and Cost Optimization
It involves cutting non-essential expenditure, divesting weak elements and focus on core units streamlining processes and reorganizing workforce without hampering productivity and improving price strategies.
- Strategic Partnerships and Stakeholder Engagement with Competitors
In times of struggle the company must even be willing to engage with the competitors in its own interests. It consists of entering into joint ventures to share resources and experience, reassuring shareholders and potential investors and retaining and motivating employees.
- Risk Management and Market Repositioning
It can be achieved through ensuring proper coverage over risks faced, dealing with currency fluctuations and commodity price volatility, rebranding to regain consumer trust and adopting new technologies and adjusting to rapid changes in the market.
- Changes in Leadership and Governance
In certain cases, poor leadership can be the cause of distress which must be combatted with changes in management to bring in experienced persons, restructuring and strengthening the board structure, shifting to and fostering good governance practices and maintenance of minimum directors.
- Divestment of Distressed Assets
It is the pooling of distressed assets and allowing investors to purchase shares of portfolio of distressed assets. This action enables separation of distressed assets from operational business thereby allowing the company to focus on core operations while injecting liquidity into insolvent firms.
Legal Remedies or Strategies
- Approaching High Court for questioning the Non-Performing Asset status.
- Filing the cases before the commercial courts or approaching for arbitration as if disputes are existing regarding the debt, then in certain circumstances, action cannot be initiated under IBC.
- Approaching the MSME mediation cell.
During IBC stage
This stage is meant for companies which are in distress and action has been initiated against them and also normal companies. The distressed companies can use the strategies to take the opportunities in the Code and prevent failure of the resolution process. The normal companies can identify such companies under IBC for their growth and expansion.
In the during IBC stage, the process in brief includes i. filing of application before the NCLT upon default of debtor, ii. admission or rejection of the application by the Adjudicating Authority, i.e NCLT, iii. Appointment of interim resolution professional, iv. Constitution of committee of creditors (CoC), v. approval of resolution plan, vi. Submission of resolution plan to NCLT, vii. In case of approval of resolution plan by NCLT, it shall be implemented, in case it gets rejected or no plan has been submitted, then the matter shall proceed to liquidation.
The important role players in the process include- banks financial institutions and operational creditors, promoters and directors of the company, insolvency professional agencies, insolvency professionals, information utilities, government officials. The adjudicators include NCLT and NCLAT.
Turnaround Strategies
In this there can be two parties where the company under IBC would become the prey company for the company out of IBC, is looking to acquire it as a predator company. The prey companies can include companies admitted under IBC under section 7, 9, 10 or 59. The predator companies hunting to acquire can use mechanisms such as: –
- Resolution Plan
The resolution plan submitted should have crystal clear clauses which include previous litigations and liabilities, strategic and financial investors and relief for statutory dues like cess.
- Liquidated Companies under Going Concern basis
It can happen in multiple ways such as a) takeover of total company including assets and liabilities, b) taking account of liabilities and visualising future liabilities also. There must also be an alert for the validity period and termination of leases and licenses.
- Acquisition of Assets of Liquidation Company
It can also be done through different methods which involve taking acquisition of certain assets of company such as a) plant and machinery and other facilities, for instance- US audit for pharma companies, b) land bank, for instance- for setting up of industrial corridors or agricultural universities, c) land and building, real estate, leasehold rights, d) intangible assets for instance- IPR, video rights, streaming rights and others.
- Shell Companies
This can be done for any or a combination of the following- a) for usage of name, b) for usage of brand, c) for absorption of authorized capital, d) for usage of track record.
For distressed companies under IBC, settlement after the case has been initiated is also a powerful tool to bring back the company. The IBC has provided this option of withdrawal under section 12A. The Hon’ble Supreme Court in the case of GLAS Trust Company LLC v. BYJU Raveendran & Ors. has laid down the stages when the withdrawal application can be filed, all of which have a procedure prescribed under the existing framework:
- Before the application under Sections 7,9 or 10 is admitted by the NCLT.
- After an application under Sections 7,9 or 10 is admitted, but before the CoC has been constituted.
- After an application under Sections 7,9 or 10 is admitted, the CoC has been constituted and the invitation for expression of interest has not been issued.
- After an application under Sections 7,9 or 10 is admitted, the CoC has been formed and the invitation for expression of interest has been issued.
The other turnaround strategies during IBC stage include: –
- Operational Restructuring
It includes process optimization, focus on core competencies, technology integration and supply chain optimization.
- Stakeholder Engagement
This is a strategy which keeps all the involved stakeholders informed regarding the process which is done through frequent updates, collaborative decision making, conflict resolution and creating win- win situations. It is an action which can and has to be done in all three stages.
- Financial restructuring
It can be done through equity infusion, cost cutting, financial reporting and transparency and liquidity management.
- The others include negotiations with financial and operational creditors- and scouting for investor for funding or takeover.
Legal Remedies or Strategies
They include approaching- a). High Court, b). NCLAT and c). Sectoral regulators viz. SEBI, TRAI, RERA and IRDAI.
Table: Recovery Rate by Industry
Source: https://ibbi.gov.in/uploads/whatsnew/59f737b213b4700cc16428aefd62869a.pdf
Post IBC stage
This stage is meant for companies which have come out of the resolution stage and can use the strategies for sustaining the resolution successfully.
In the post IBC stage, there are two possibilities based on approval or rejection of resolution plan. The approval leads to monitoring of implementation of the resolution plan, whereas the rejection leads to liquidation wherein the liquidator is appointed after which the assets are identified and sold. The sale proceeds are distributed to pay off the dues in a mentioned order.
Alert for Reliefs, Exemptions or Advantages and Cautions and Precautions
The order should be carefully examined for reliefs such as power bills and tariffs, exemption of registration fee, local municipal taxes exemption, income tax and other tax issues, exemption form ROC fee and pending land revenue issues, provident fund dues, and from previous liabilities and litigations.
The above issues must also be carefully examined in the resolution plan or in acquisition in liquidation in going concern basis and there must be realization of maximum value in CIRP or liquidation process so that the personal guarantor of the promoter will be captured.
Turnaround Strategies
The turnaround strategies in post IBC stage can be used by a company under IBC or by a company outside IBC to acquire a company under IBC. In the strategies for acquisition of companies under IBC, there are ways where only assets are to be acquired and where only brand goodwill is to be acquired. The acquisition need not be only in liquidation on going concern basis, it can also be on piecemeal basis of assets also viz name of the company, land and building, shell and listed companies and others.
The other turnaround strategies include: –
- Execution of Resolution Plan
It must include detailed planning, compliance and governance, resource allocation and stakeholder engagement.
- Focus on Revenue Growth
It can be done through market expansion, product or service diversification, customer retention and pricing strategies.
- Strengthening of Governance and Risk Management
It requires establishment of clear leadership roles, improvement of board oversight, implementation of robust internal controls, risk identification and assessment.
- Financial and Operational Stability
It consists of cash flow management, cost control and optimization, debt restructuring and revenue consistency.
Legal Remedies
It includes approaching a) Supreme Court, b). High Court, c) IBBI, d) Regulators viz SEBI, TRAI, RERA and IRDAI.
Lessons learnt from successful resolutions
- Bhushan Steel Limited
It is one of the major steel producing company in India, established in 1983, and provided specialized steel, sponge iron, steel strips, galvanised coil and sheets among numerous other products. However, it had to face financial stress due to factors such as failure of allocation of certain projects, coal blocks and accidents in plants. In addition, the financial conditions in 2008 were not suitable for the economic growth of the company such as the decrease in cost of steel and others. The company had large long term and working capital debt and the increase in debt from the years of 2011 to 2017 was more than 100 % and there was also huge overdue of principal and interest. The debts were taken from State Bank of India, Punjab National Bank, ICICI Bank, Canara Bank and other banks. The CIRP was initiated in 2017 with State Bank as the lead in the consortium, where the total claims received amounted to Rs. 56080 crores from financial creditors alone and more from operational and other creditors. The plans were submitted by 3 applicants including Tata steel, which was approved by the CoC and the NCLT. A settlement was made with the creditors.
Lessons can be learned from the case study, where certain steps were taken by the resolution professional such as managing operations and working capital, there was constant meetings and communication with the key stakeholders such as customers and suppliers and also to regulatory authorities. There were a few challenges faced in the process as well such as insufficient cooperation of management, gaps in finance and accounting and others regarding claims. However the process was concluded successfully, and the company has been revived successfully, where the company had a revenue of more than INR 21,000 crore in 2021. The case serves a guide for many on the dos and don’ts of revival of a company.
- Ruchi Soya Industries Limited
The company was established in 1986 at Indore and was among the top FMCG (fast moving consumer goods) supplier. Its various areas included soya products, refining, crushing and others and had plants at more than 20 places across the country. The reasons of distress included- 1. The unfavourable conditions faced in trading of certain products such as lack of demand at a global level, fluctuations in price based on various factors, 2. The plants could not be utilised to their full capacity due to the low price of the product, 3. Insufficient working capital and others. After defaults in payment there was also a study conducted with a SWOT analysis and the supply demand aspects were observed in detail. The total debt amounted to Rs. 12,000 crore and the financial creditors included State Bank of India, Central Bank of India, Punjab National Bank and Standard Chartered Bank. It was also classified by the Reserve Bank of India as one of the big bad loans. The efforts at restructuring prior to CIRP were also not successful as there was lack of support from creditors and other forensic problems.
The NCLT admitted the case and the interim resolution professional was appointed. Though 28 EOIs (expression of interest) were presented, many were not considered due to the eligibility criteria and due diligence measures, only four were taken and out of which two from Adani Wilmar Limited and Patanjali Ayurveda Limited were considered. A detailed evaluation criteria was also made and the case also became the first for implementation of the Swiss challenge method. However, Adani Wilmar Limited withdrew its plan after litigation regarding its eligibility and Patanjali Ayurveda Limited’s plan was approved by the creditors and the NCLT.
The lessons which can be learned from the case include the efforts made at revival through restructuring prior to CIRP, assessment regarding the immediate needs of the company, steps taken to secure liquidity, measures taken for continuance as going concern during CIRP and securitisation of assets of company. In implementation of the resolution plan, the monitoring committee and consistent communication with the applicant and the action plans and compliance played a major role in the success. The case emphasises the importance of the effectiveness of the phases after the approval of the resolution plan.
Key Takeaways and Best Practices
The turnaround strategies may differ based on the company and its situation however there are certain essential elements which need to be adhered to at all times for the best interests of the company.
- Proactive Approach
Early intervention and strategic planning are needed to counter the rapid changes and prevent losing control.
- Collaboration and Communication
It takes a team to achieve revival of a company and therefore open communication and stakeholder engagement will ensure unity and avert chaos,
- Focus on sustainability
The revival objective of the strategy will not be served if the plan does not have long term viability and sustainable growth.
Challenges Faced
Though the strategy may be well suited and implemented, it may still face challenges, which include: –
- Time Constraints
IBC proceedings have strict timelines needing swift action and decision making.
- Complexity of IBC Framework
Understanding and navigating intricate legal and regulatory aspects is challenging. If they are not understood properly, it is possible that the opportunities provided by the Code are lost or the turnaround strategy may not be implemented properly if contradicting the Code.
- Stakeholders Conflict
While one of the objects of the Code include balancing the interests of various stakeholders such as creditors, employees and management, it become difficult to do so when they collide.
Findings
The following are the findings and the contributions through this article to the various stakeholders, which are as under: –
- For New Entrepreneurs- The cautions and precautions before setting up of the industry and the strategies to be adopted prior to set up were indicated and enlightened.
- For Existing Entrepreneurs- Based on the nature and size of the company, they can take preventive, precautionary and advanced steps for strengthening of company and also to set up financial and operational discipline systems and other procedures in their operations, administration and management.
- For Professionals- This article has helped in explaining certain avenues and practicing areas in detail, to the professional to serve their clients or management. Insolvency professionals can along with their practice, plan and proactively do their resolution professional job as well as initiate advisory and consultancy services simultaneously along with the designated duties mentioned in the Code.
- For Regulators- They can also keep an eagle eye on the overall system for monitoring and surveillance depending on the nature and size of the company and also stage connected with the Insolvency and Bankruptcy Code.
Conclusion
Turnaround strategies are to be used by companies for revival from distress or to enhance their growth. It is important to understand that no matter the strategy it has to be implemented in a particular manner, where all the steps are covered to gain proper effect of the strategy. The root causes play an important role in deciding the strategy, as if it does not suit the circumstances of the distressed company, it will not bear any fruit. Though the strategies may differ based on their availability and the stage of IBC, they are certain strategies which can be implemented in all of the stages. Stakeholder engagement, is one such strategy which plays vital role in the existence of a company. Apart from the legal remedies, the companies should also explore other options such as settlements which can help in withdrawal of the case, which have certain advantages compared to litigation such as expense, time and others. The post implementation period of the strategy should also be carefully considered for the precautions to be taken and the benefits to avail, to sustain the vision for a long term.
References:
1. Vijaykumar V. Iyer, Performance Analysis of Bhushan Steel Limited, Pre, During and Post CIRP IIIPICAI https://www.iiipicai.in/wp-content/uploads/2022/03/Performance-Analysis-of-Bhushan-Steel-Limited-Pre-During-and-Post-CIRP.pdf
2. Nisha Vyas, A Study of Corporate Insolvency Resolution Process of Bhushan Steel Ltd. with reference to ‘Insolvency and Bankruptcy Code 2016’ IJFMR https://www.ijfmr.com/special-issues/2/89.pdf
3. Case Studies of Successful Resolutions Under IBC https://www.iiipicai.in/wp-content/uploads/2021/11/CASE-STUDY-of-Successfull-Resolutions-Under-IBC.pdf
4. Ruchi Soya: A Brief Analysis https://icsiiip.in/panel/assets/images/performance_analysis/16774828763295Ruchi%20Soya%20Analysis-1.pdf
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.
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