Insolvency and Bankruptcy Code

& Judicial Pronouncements

1
Insolvency
&
Bankruptcy
Code, 2016
Corporate Insolvency In India
 1956 – Companies Act, 1956
 1985 – Sick Industrial Companies (Special Provisions) Act
– SICA
 1993 – Recovery of Debts Due to Bank and Financial
Institutions Act – RDDB
 2002 – Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act –
SARFAESI
 2013 – Companies Act – Chapter XIX & XX
 2016 –The Insolvency and Bankruptcy Code – IBC
Individual Insolvency In India
 1909 – Presidency Towns Insolvency Act
 1920 – Provincial Insolvency Act
 1932 – Partnership Act
Preamble of IBC
To consolidate and amend the laws relating
to reorganisation and insolvency resolution
of corporate persons, partnership firms and
individuals in a time bound manner for
maximisation of value of assets of such
persons
To promote entrepreneurship
Preamble of IBC
To ensure availability of credit
To balance the interests of all the
stakeholders including alteration in the order
of priority of payment of Government dues
To establish an Insolvency and Bankruptcy
Board of India, and for matters connected
therewith or incidental thereto
Consolidation
Why it is called as Code?
Separate Laws exist for Insolvency of
Corporate Persons, Partnership Firms and
Individuals
IBC consolidates all laws relating to
insolvency and bankruptcy into one law
Single Law for Insolvency and
Bankruptcy
CA 1956

Provincial
Insolvency SICA, 1985
Act, 1920
IBC
2016
Presidency
Towns
CA 2013
Insolvency
Act, 1909
Time Bound Manner
Insolvency and Bankruptcy took years to conclude
Ease of Doing Business in India – India’s Rank
stood at 136 amongst all nations
It took on an average 4.3 years to dissolve a
company
After IBC, India’s rank has jumped to 77
Maximisation of value of assets of such persons
Understanding
Insolvency and
Bankruptcy
Code, 2016
Understanding Layout
 Divided in to V Parts containing 261 Sections and 12 Schedules
 Part – I - Preliminary – Sections 1 to 3
 Part – II - Insolvency Resolution and Liquidation for Corporate
Persons
 Chapter I – Preliminary – Sections 4 & 5
 Chapter II – Corporate Insolvency Resolution Process – Sections
6 to 32
 Chapter III – Liquidation Process – Sections 33 to 54
 Chapter IV – Fast Track Corporate Insolvency Resolution Process
– Sections 55 to 58
Understanding Layout
 Chapter V – Voluntary Liquidation of Corporate Persons –
Section 59
 Chapter VI – Adjudicating Authority for Corporate Persons –
Sections 60 to 67
 Chapter VII – Offences and Penalties – Sections 68 to 77
Understanding Layout
 Part III - Insolvency Resolution and Bankruptcy for Individuals and
Partnership Firm
 Chapter I – Preliminary – Sections 78 & 79
 Chapter II – Fresh Start Process – Sections 80 to 93
 Chapter III – Insolvency Resolution Process – Sections 94 to 120
 Chapter IV – Bankruptcy Order for Individuals and Partnership
Firms – Sections 121 to 148
 Chapter V – Administration and Distribution of the Estate of the
Bankrupt – Sections 149 to 178
 Chapter VI– Adjudicating Authority for Individuals and Partnership
Firms – Sections 179 to 183
 Chapter VII – Offences and Penalties – Sections 184 to 187
Understanding Layout
 Part IV - Regulation of Insolvency Professionals, Agencies and
Information Utilities
 Chapter I – The Insolvency and Bankruptcy Board of India –
Sections 188 to 195
 Chapter II – Powers and Functions of the Board – Sections 196
to 198
 Chapter III – Insolvency Professional Agencies – Sections 199 to
205
 Chapter IV – Insolvency Professionals – Sections 206 to 208
 Chapter V – Information Utilities – Sections 209 to 216
Understanding Layout
 Chapter VI – Inspection and Investigation – Sections 217 to 220
 Chapter VII– Finance, Accounts and Audit – Sections 221 to
223
 Part V – Miscellaneous – Sections 224 to 255
Understanding IBC
Individuals & Partnership
Corporate Person (Sole Proprietorship Authorities
included)
• Insolvency Resolution • Fresh Start • Adjudicating
• Liquidation • Insolvency Resolution Authorities – NCLT and
• Bankruptcy DRT
• IBBI
• Insolvency Agencies
• Insolvency
Professionals
• Information Utilities
Corporate Person

Corporate Person

Any person
Company LLP incorporated with
Limited Liability
Institutional Infrastructure
Adjudicating Insolvency and
Authorities [Part II, Bankruptcy Board
Appellate Authorities
Chp VI & Part III, Chp
VI] [Part IV, Chp I & II]

National Company Information

National Company Utilities
Law Appellate
Law Tribunal
Tribunal [Part IV, Chp V]

Insolvency
Debt Recovery Debt Recovery Professional
Tribunal Appellate Tribunal Agency
[Part IV, Chp III]

Insolvency
Professionals
Part IV, Chp IV]
Adjudicating Authorities
NCLT/
DRT/DRAT
NCLAT
Individuals other
Corporate Person than Personal
Guarantors

Personal
Guarantors of Partnership Firm
Corporate Person

Proprietorship
Firms
Objectives Desired
Low time to resolution
Low loss in recovery
Higher levels of debt financing

“Performance of the Code in

Implementation will be determined on
outcome of above objectives”
 Resolution vs Liquidation
 Differences

Factors Resolution Liquidation

Intent Revival Dissolution
Responsibility Going Concern Not necessary
Time Short (270 days max) Long (Ideally 2 years but can
go beyond)
Claims No adjudication To be adjudicated
Distribution of That’s not the objective That’s the objective
Assets
Hair cut Voluntary acceptance No choice
 Resolution vs Liquidation
 Differences
Factors Resolution Liquidation
Fee Negotiated Fixed by Regulations, if not
fixed by CoC
Initiation Can be initiated by FC, Cannot be initiated except
OC or CD voluntary liquidation
Moratorium Mandatorily applicable Limited Applicability

Action under Stayed Creditor can opt to stay out

SARFAESI of liquidation
Interim Interim Resolution No interim liquidator
Resolution Professional is appointed
Professional for 30 days
 Resolution vs Liquidation
 Differences
Factors Resolution Liquidation
Committee of CoC oversees resolution Tribunal oversees the
Creditors process. RP acts in liquidation process. Creditors
accordance with advice not binding on
directions of CoC liquidator
Inviting Plan/Bids RP invites resolution Liquidator invites bids for
applicants for submitting properties
resolution plan
Appeal Appeal against approval For filing appeal against
of resolution plan lies on liquidation order, there is no
specific grounds such restriction
Fast Track Fast track resolution is No fast track liquidation
possible
CIRP under
IBC
Application (S. 4)
 Corporate Insolvency Resolution is possible where default
is minimum of Rs. 1 Lakh
 Amount can be increased by the CG by notification
Definitions (S. 5)
 Adjudicating Authority [S. 5(1)]
Corporate Applicant [S. 5(5)]
Dispute [S. 5(6)]
Financial Creditor [S. 5(7)]
Financial Debt [S. 5(8)]
Definitions (S. 5)
 Insolvency Commencement Date (ICD) [S. 5(12)]
IR Process Cost [S. 5(13)]
Liquidation Cost [S. 5(16)]
Liquidation Commencement Date [S. 5(17)]
Operational Creditor [S. 5(20)]
Operational Debt [S. 5(21)]
Definitions (S. 5)
 Related Party [S. 5(24)]
Resolution Applicant [S. 5(25)]
Resolution Plan [S. 5(26)]
Voting Share [S. 5(28)]
Who can Initiate (S. 6)
Corporate Debtor committing a Default
Financial Creditor (S.7)
Operational Creditor (S.8/9)
Corporate Debtor (S.10)
Initiation of CIRP by Financial Creditor (S.
7)
Initiation of CIRP by Financial Creditor
 Form 1
 Individually or Jointly [Explanation to sub-section (1)]
 On occurrence of default
 Assignee or Transferee can file
 Record of Default to be filed
 Tribunal to ascertain existence of default within 14 days
 Commences from the date of admission of application
Initiation of CIRP by Financial Creditor
Initiation of CIRP by Financial Creditor
 Copy of application to be sent to CD – Tribunal is bound
to issue limited notice
 Issues
 Notice to be dispatched to Registered Office Address
 Substituted service
 Withdrawal before admission
Initiation of CIRP by Financial Creditor
 Issues
 No reliance on NCLT Rules can be placed
 Caveat cannot be filed
 Application by Power of Attorney holder not admissible
 Application by Authorised Officers
 Proceedings under SARFAESI
Initiation of CIRP by Operational Creditor
 Section 8
 Mandatory notice of Demand to be delivered to CD (Form 3)
 Existence of Dispute to be notified; or
 Record of pendency of suit or arbitration proceedings to be
notified
 Section 9
 Application in Form 4
 Payment not received within 10 days
Initiation of CIRP by Operational Creditor
 Issues
 Who is an operational creditor?
 Signing of Demand Notice
 Pendency of Suit or arbitration proceedings
 Certificate from Financial Institution – Mandatory or
not?
 Foreign OC not having bank account in India
 Removal of Defect – 7 days
Initiation of CIRP by Operational Creditor
 Issues
 Existence of Dispute
 The principle enunciated by the Supreme Court for existence of
dispute in Mobilox Innovations Private Limited vs. Kirusa Software
Private Limited, MANU/SC/1196/2017 is summarised as follows: -
 The dispute must be pre-existing.
 The dispute should not be a patently feeble argument or assertion
of fact.
 The dispute should be supported by evidence.
 The defence should not be spurious or mere bluster.
 The dispute must truly exist.
Initiation of CIRP by Operational Creditor
Issues
Existence of Dispute
 Dispute raised for the first time in response to
demand notice is not a ‘pre-existing’ dispute

 Home Buyers
Steps in Insolvency Resolution
Filing of Application by Financial Creditor or
Operational Creditor or Corporate Debtor

Admission of Rejection by NCLT (14

days)

Appointment of Interim Insolvency

Resolution Professional (10 days)
Appointment of Committee of Creditors (30
days of appointment of Interim Resolution
Professional)
Steps in Insolvency Resolution
To hold first meeting of Committee of
Creditors (within 7 days)

Committee of Creditors may replace

Insolvency Resolution Professional

Preparation of Information
Memorandum
Submission of Resolution Plan to
Committee of Creditors by Corporate
Applicant
Steps in Insolvency Resolution
Approval of Resolution Plan by
Committee of Creditors (75%)

Submission of Approved Resolution

Plan to Adjudicating Authority

Approval or Rejection of Plan by

NCLT
Corporate Insolvency Resolution Process

Resolution plan Resolution plan

approved by rejected by
committee committee

NCLT rejects Liquidation

plan process starts

NCLT approves
plan
Liquidation
Process
Liquidation Provisions
 Part – II - Insolvency Resolution and Liquidation for Corporate
Persons
 Chapter III – Liquidation Process – Sections 33 to 54
 Chapter IV – Fast Track Corporate Insolvency Resolution Process
– Sections 55 to 58
 Chapter V – Voluntary Liquidation of Corporate Persons –
Section 59
 Chapter VI – Adjudicating Authority for Corporate Persons –
Sections 60 to 67
 Chapter VII – Offences and Penalties – Sections 68 to 77
Initiation of Liquidation (S. 33)

No Plan is received Plan is Rejected by

Tribunal

Liquidation
Order is
Passed
Initiation of Liquidation (S.33)

Committee of
Creditors takes Contravention of
decision to Liquidate Plan by Debtor

Liquidation
Order is
Passed
Liquidator’s Fee (Regulation 4)
 On Realisation
Amount First 6 6 months -1 1 Year – 2 Beyond 2
Realised Months year (75%) Years (50%) years (40%)
First 1 Crore 5.00 3.75 2.50 1.88

1 -10 Crores 3.75 2.80 1.88 1.41

10 – 50 2.50 1.88 1.25 0.94

Crores
50 – 100 1.25 0.94 0.68 0.51
Crores
Over 100 0.25 0.19 0.13 0.10
Crores
Liquidator Fee (Regulation 4)
 On Distribution
Amount First 6 6 months -1 1 Year – 2 Beyond 2
Realised Months year Years years
First 1 Crore 2.50 1.88 1.25 0.94

1 -10 Crores 1.88 1.41 0.94 0.71

10 – 50 1.25 0.94 0.63 0.47

Crores
50 – 100 0.68 0.51 0.34 0.25
Crores
Over 100 0.13 0.10 0.06 0.05
Crores
Powers and Duties of
Liquidator(S. 35)
 All powers and duties of liquidator are subject to
the directions of AA.
Powers and duties mentioned in S. 35(1) – clause
(a) to (o), which interalia, include –
Verification of claims
Custody of all assets, property, effects and
actionable claims of the corporate debtors
Valuation of assets and property of the corporate
debtor
Powers and Duties of
Liquidator(S. 35)
Protection and preservation of assets and properties
of the corporate debtor
Carrying on business for its beneficial liquidation, if
necessary
Selling movable and immovable properties by public
auction or private contract
Sign cheques, operate bank accounts
Obtain professional assistance
Powers and Duties of
Liquidator(S. 35)
Invite and settle claims
Institute or defend suits
Investigation of financial affairs of the CD
Execution of Papers
Application to AA for orders and directions
Perform such functions as specified by IBBI
Power to consult any stakeholder entitled to
distribution u/s 53 (Consultation not binding on the
liquidator)
Reporting (Reg 5)
To prepare Reports
 Preliminary Report – 75 days from LCD (Reg 13)
 Asset Memorandum
 Progress Reports – 15 days from the end of quarter (Reg
15)
Last quarter Progress report – Attach audited accounts
Sale Reports
Minutes of consultation with stakeholders (stakeholders
entitled to distribution) (Form A of Sch II of Regulations)
Final report prior to dissolution
Reporting (Reg 5)
Reports (physical and electronic) to be
maintained for 8 years after the dissolution of CD
Copies to be given to stakeholders
 on application in writing
 on payment of cost and
 undertaking of confidentiality
Claims (S. 38)
 Receive Claims within 30 days from the liquidation
commencement date
 Financial Creditor to submit Claim in Form C (Electronic
means)
 Operational Creditor (Other than workman and
employee) to submit claim in Form D (Post or by
electronic means)
 Workmen/Employees to submit claim in Form E
 Other stakeholders to submit claim in Form G
 Claims can be withdrawn within 14 days of submission
Verification of Claims (S. 39)
 Verification of claims by Liquidator – 30 days from the last of
receipt (Reg 30)
 Can ask for any evidence to be produced
 Cost of Proof to be borne by claimant
 Debt in Foreign Currency – Use exchange rate at LCD (Reg 26)
Verification of Claims (S. 39)
 Rent, Interest can be claimed only upto LCD (Reg 27)
 Debt payable at future date – calculate Present value –
X/(1+r)n - (Reg 28)
 Mutual Credits and Set Off - Net amount is payable (Reg 29)
 List of stakeholders
 To be filed with AA within 45 days from the last date of receipt
of claims
Avoidance of Preferential Transactions (S. 43 - 46)
 Preferential Transactions with Creditors can be avoided (S.
43) – Application by RP or Liquidator
 Undervalued Transactions can also be avoided (S. 45)
 If it is related party transaction – 2 years preceding the
insolvency commencement date
 If it is non related party transaction – 1 year preceding the
insolvency commencement date
 Application for setting aside of undervalued transaction can
be made by RP, Liquidator, creditor, member or partner
Realization of Assets (Reg. 32-40)
Manner of Sale – standalone, slump sale, collectively, in parcels
Mode of Sale
Auction
Private sale
Perishable
Deterioration in price is possible
Getting price higher than reserve price of failed auction
Prior permission of AA
 No sale to related party of Cd or his related party or professional appointed
by him)
No sale if cartelization/collusion is there
Realization of Assets (Reg. 32-40)
Asset Memorandum – 75 days from LCD – to be filed with
Preliminary Report
Valuation – at least two registered valuers – average of estimates is
considered as the value of asset
Asset sale report – to be attached with progress report
Realization of Security Interes by the Secured Creditor
Secured Creditor to inform Liquidator dale price
Liquidator to inform within 21 days if higher price buyer is available
Who will bear cost of identification of buyer
Secured Creditor if buyer buys it
Liquidator if buyer does not buy it
Secured creditor can sell under SARFAESI
 Distribution of Assets (S. 53)
 Priority
 Insolvency Resolution Process Cost/Liquidation Cost
 Secured Creditors/Workmen’s dues – 24 months preceding the date of
liquidation commencement date – Pro rata
 Rest of workmen’s dues & Employees dues
 Financial Debts to unsecured creditors
 Government Dues/Unpaid Secured Creditors dues
 Remaining Debts and Dues – Operational and other creditors
 Preference Shareholders
 Equity Shareholders
 Liquidator’s Fee shall be deducted proportionately from proceeds
payable to each class
 Workmen’s dues – Same meaning as assigned u/s 326 CA 13
 Fast Track CIRP (S. 55-58)
 Small Companies
 Start-up [G.S.R. 501(E), dated the 23rd May, 2017]
 Unlisted Company whose total assets do not exceed Rs. 1
Crore
 Period – 90 days, Extension 45 days (s. 56)
 Application can be filed by a creditor or corporate debtor (s
57)
 Process of CIRP applies (s. 58)
 Voluntary Liquidation (S. 59)
 Not committed any Default
 Declaration of Solvency – Majority of Directors
 Audited Financial Statement of last 2 years
 Valuation of Assets Report
 Special Resolution
 2/3 Creditors (in value) must approve resolution for
voluntary liquidation – within 7 days
 Liquidation Commencement Date – Date of Resolution
 NCLT (S. 60)
 Corporate Person and Personal Guarantors to CD
 Pending applications to get transferred to NCLT
 NCLT to have all powers of DRT for personal guarantor’s
insolvency resolution
 Claims by or against the CD to be decided by NCLT
 Question of priority, question of facts and law
 Limitation Act, 1963 does not apply during moratorium
period
 NCLAT (S. 61)
 Appeal to NCLAT
 30 days – Extension of 15 days
 Order u/s 31 can be challenged –
 Resolution Plan in contravention of law
 Material Irregularity in exercise of power by RP
 Debts of OC not provided for
 Insolvency Resolution Cost have not been provided for
 Resolution Plan does not meet other criteria
 Appeal to Supreme Court (S. 62)
 Appeal to SC on question of law
 45 days – Extension of 15 days
Exam pointers
IBC only Part III not applicable to J & K
Minimum amount of default – 1 lakh can be increased to 1 crore

Persons who may initiate corporate insolvency resolution process

Financial creditor, an operational creditor or the CD itself may initiate CIRP
Financial creditor either by itself or jointly with other FC. Record of default. Name of IRP
AA i.e. NCLT within 14 days to decide on application. AA may give 7 days to rectify defect
in application if any. AA shall inform FC & CD in 7 days of admission or rejection.

Operational Creditor on the occurrence of a default, deliver a demand notice of unpaid

invoice to CD. CD in 10 days of receipt either inform dispute or pay the due amount.
After 10 days OC will file application to AA. AA to decide in 14 days.

Corporate Debtor on default can apply to AA with books & special resolution (75%).
Who cannot apply:
(a) a corporate debtor undergoing a CIRP
(b) a corporate debtor having completed CIRP in past 12 months
(c) CD or FC who has violated any of the terms of resolution plan
(d) CD in respect of whom a liquidation order has been made

Time-limit for completion of insolvency resolution process

180 days from date of admission of application + 90 days extension can be applied by RP
with 2/3 i.e. 66% of approval from Committee of Creditors.

Withdrawal of application admitted under section 7, 9 or 10

AA may allow the withdrawal of application admitted under Sec. 7,9,10 on an application
made by the applicant with the approval of ninety per cent of COC.

Appointment and tenure of interim resolution professional

AA to appoint IRP in 14 days of admitting application. IF FC, OC, CD nominates any IRP at
time of filing application then that will be considered by AA. If not nominated by them
then AA will request IBBI Board to appoint IRP. IBBI in 10 days will appoint IRP.
IRP term will be till the time RP is not appointed.
Powers of interim resolution professional –From date of Appointment-
• the management of the affairs of the CD shall vest in IRP
• powers of the board of directors vest in IRP
• officers and managers of the CD shall report to IRP
• financial institutions maintaining accounts of the CD to act on the instructions of IRP

Committee of creditors - IRP to make COC by including all FC. Related party FC have no
right to vote/particpate/represent in COC meetings. Generally all decisions to be
approved by 51% minimum. COC can ask any information from RP & he has to submit in 7
days.
Where no FC then COC will be formed by top 18 OC.

Appointment of resolution professional

First meeting of COC shall be held within seven days of its constitution. COC with 66%
vote either accept IRP as RP or appoint new RP & request to AA to approve new RP.

Any person will submit Resolution plan. RP will review the plan submitted. RP will send to
COC for approval not less then 66%. Once COC approves the plan AA will decide on it.
If AA approves then plan go ahead else liquidation.
Fast track corporation insolvency resolution – Period 90 days +45 days ext. (75%)

An application for fast track process may be made in respect of the following CD: -
(a) CD with assets and income below a level as may be notified by the Central Govt. or
(b) CD with such class of creditors or such amount of debt as notified by the CG; or
(c) such other category of corporate persons as may be notified by the CG.

Adjudicating Authority for corporate persons. - National Company Law Tribunal

Appeal against NCLT goes to NCLAT. Time for appeal filing 30 days plus 15 days extn
Appeal against NCLAT goes to SC. Time for appeal filing 45 days plus 15 days extn
Judicial
Pronouncements
Cases
On
IBC
Bhavna Ruia case
Judicial Pronouncements
AMR Infrastructure Case
BRIEFING OF THE CASE:
AMR Infrastructure had 906 buyers (236 for residential can have implications
for other homebuyers in projects such as jaypee and amrapali), where
confusion over voting rights have created uncertainty.
Only 535 of the buyers in the AMR’s residential and commercial projects
voted , the NCLT’s principal bench observed that the corporate insolvency
resolution process has now “meet a road block “ and sought interpretation of
law as the interim resolution professional could not appoint valuers, take
control of assets or even invite resolution plans.
Judicial Pronouncements
NCTL said :”The voting Thresholds in the IBC are
merely directory in nature , and that preference
can be given to decisions taken by the largest %
in the committee of creditors in case of deadlock
. Only this Interpretation would make the code
workable and advance the object of this
progressive legislation (IBC) rather than defeating
it.”
. NCLT has ruled that it will appoint RP even
though only half of them voted for resolution
moved , against the statutory requirement of 66%
backing it .
Judicial Pronouncements
Pawan Dubey Case
- Flat booking amount do not come under
Financial creditor & come under operational
creditor.

Caution
Judicial Pronouncements
JAYPEE Infra. – Flat owners considered as
Financial creditors now
 Cases
On
Valuation
(1.4.2019)
Judicial Pronouncements
Hindustan Leve Employee’s Union (1995)
Supp (1) SCC 499
Issue
What method should be adopted for arriving at a
proper exchange ratio, and also discussed the
problem of valuation in the case of amalgamation
of two companies?
Judicial Pronouncements
Following factors will have to be taken into account in
determining the final share exchange ratio :
The Stock Exchange prices of the shares of the two
companies before the commencement of
negotiations or the announcement of the bid.
The dividends presently paid on the shares of the
two companies. It is often difficult to induce a
shareholder, particularly an institution, to agree to a
merger or a share-for-share bid if it involves a
reduction in his dividend income.
Judicial Pronouncements
The relative growth prospects of the two
companies.
The cover (ratio of after-tax earnings to dividends
paid during the year) for the present dividends of
the two companies. The fact that the dividend of
one company is better covered than that of the other
is a factor which will have to be compensated for at
least to some extent.
Judicial Pronouncements
In the case of equity shares, the relative gearing of
the shares of the two companies. The 'gearing' of an
ordinary share is the ratio of borrowings to the equity
capital.
The values of the net assets of the two companies.
Where the transaction is a thorough-going merger, this
may be mere of a talking-point-than a matter of
substance, since what is relevant is the relative values
of the two undertakings as going concerns.
Judicial Pronouncements

The voting strength in the merged enterprise

of the shareholders of the two companies.
The past history of the prices of the shares of
the two companies.
 Judicial Pronouncements
Ratio
Since the valuer had adopted the combination
of three well known methods of valuation of
shares to arrive at the exchange ratio of the two
companies and the financial institutions holding
41% of the shares of the transferor company
and did not find any fault in the method of
valuation of the shares, the Court should not
interfere with such valuation.
 Judicial Pronouncements
Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (1997) 1 SCC 579
It was held that once the exchange ratio of the shares of the
transferee-company to be allotted to the holders of shares in the
transferor company has been worked out by a recognized firm of
chartered accountants who are experts in the field of valuation, and if
no mistake can be pointed out in the said valuation, it is not for the
court to substitute its exchange ratio, especially when the same has
been accepted without demur by the overwhelming majority of the
shareholders of the two companies or to say that the shareholders in
their collective wisdom should not have accepted the said exchange
ratio on the ground that it will be detrimental to their interest.
 Judicial Pronouncements
Re: Brooke Bond Lipton India Ltd. [1999] 98 Comp Cas
496 (Cal)
The Calcutta High Court has held that in a scheme of
amalgamation, if the ratio of exchange has been fixed by an
experienced and reputed firm of chartered accountants,
then in absence of any charge of fraud against them, court
will accept such valuation and ratio of exchange. A mere
allegation of fraud is not enough; it must be a proper
charge of fraud with full particulars. In the instant case,
there is no charge made or established.
 Judicial Pronouncements
Dinesh Vrajlal Lakhani vs. Parke Davis (India) Ltd.
[2005] 124 Comp Case 728 (Bom)
The Court will not for instance interfere only because
the valuation adopted by the valuer may have been
improved upon had another method been adopted.
The Court is neither a valuer nor an appellate forum to
reappreciate the merits of the valuation. What the
court has to ensure is that the determination should
not be contrary to law or unfair to the shareholders of
the company which has been merged.
 Judicial Pronouncements
Dr. Renuka Datla vs. Solvay Pharmaceuticals B V
AIR2004SC321
Supreme Court held that the valuer approached the
question of valuation having due regard to the terms of
settlement and considered from all appropriate angles.
No case has been made out that any irrelevant
material has been taken into account or relevant
material has been eschewed from consideration by the
valuer. The plea that the valuation is vitiated by
fundamental errors cannot but be rejected.
 Judicial Pronouncements
G.L. Sultania vs. SEBI (SAT)
The grievance of the appellants before the SAT was that the SEBI as
well as the Merchant Banker had not properly valued the shares of
the target company in accordance with SEBI(Substantial Acquisition
of Shares and Takeovers) Regulations.
Shares were valued by 3 CA firms, namely, Deloitte, Chadha & Co.
M/s. Patni & Co. who valued shares at Rs.43.02 , Rs.60.04 &
Rs.64.17 respectively. SEBI Board accepted higher valuation report.
Learned counsel argued that price approved by the Board was not a
fair price.
Judicial Pronouncements
COURT concluded that the Board committed no error
in accepting the report of Patni & Co. The Board has
acted in a reasonable manner and made its best
efforts to secure a reasonable price for the shares of
the shareholders. It has exercised its discretion wisely
and we find no reason to interfere.
We, therefore, find no merit in these appeals and
they are accordingly dismissed but without any order
as to costs.
Additional Cases
 Judicial Pronouncements
Bengal Tea Industries Ltd. & Ors. v. Union of India (Company Appeal No.
418/1986 decided on 25.08.1987), a Division Bench of the Calcutta High
Court held that in a scheme of amalgamation of two companies, it is not
necessary in law to call for a meeting of the creditors and obtain their views
on the scheme.
Regarding objection raised by the Regional Director, Govt. of India that the
exchange ratio of the shares between the Transferor Company and
Transferee Company as provided in the scheme was unfair to the
shareholders of the Transferor Company, the Calcutta High Court held that
when no complaint was raised on behalf of the shareholders, Regional
Director was not entitled to raise objection as to fairness or unfairness of a
proposed exchange ratio of shares in an amalgamation of two companies
which is a matter concerning only the shareholders of the companies
involved.
Valuation is ultimately a matter of expert opinion.
 Judicial Pronouncements
Bengal Tea Industries Ltd. & Ors. v. Union of India
(Company Appeal No. 418/1986 decided on 25.08.1987)
There are more than one method of valuation of shares
and valuation would vary if different methods are adopted.
While observing that the shares are the properties of the
shareholders and they are the ultimate and the best judge
of the value which they would put on their shares, it was
however stated that in the best interest of all concerned
and to prevent controversy, a proper basis of valuation
should be recorded.
 Judicial Pronouncements
Bengal Tea Industries Ltd. & Ors. v. Union of India (Company
Appeal No. 418/1986 decided on 25.08.1987)
The Division Bench of the Calcutta High Court put in a caveat
that in the event any shareholder of the Transferor Company
had appeared before the Court and had objected to the
valuation of the shares or to the exchange ratio, the matter
would have taken an entirely different complexion and the Court
would have been inclined to probe further into the question of
exchange ratio to ensure that shareholders were not treated
unfairly. In the absence of any challenge from any of the
shareholders of the Transferor Company, the Court declined to
interfere in the matter at the instance of the Regional Director.
 Judicial Pronouncements
Jitendra R. Sukhadia v. Alembic Chemical Works Co.
Ltd. (1987) 3 Comp LJ 141 : (1988) 64 Comp Cases 206.
This was a case of amalgamation. In the case, it was
held that the exchange ratio of the shares of the two
companies, which were being amalgamated, had to be
stated along with the notice of the meeting. How this
exchange ratio was worked out, however, was not
required to be stated in the statement contemplated
under Section 391(a).
 Judicial Pronouncements
Swift Formulations Private Ltd., In. re (2004) 121
Comp Case 27 (Punjab and Haryana)
Held that where the shareholders of two companies
in their collective wisdom had accepted the share
exchange ratio worked out by experts and if no mistake
was pointed out then it was not for the court to
interfere with the decision of shareholders
 Judicial Pronouncements
Gulmohar Finance Limited, In.re., (1995) 5 SCL 207
(Del) Delhi High Court
Held that valuation and exchange ratio can be
accepted if the shareholders, creditors etc., have
approved the scheme, even when central Government
has raised objections to exchange ratio
 Judicial Pronouncements
In re: Indian Petrochemicals Corporation Limited,
MANU/GJ/7533/2007
Further, the Share Exchange Ratio has been calculated by the
recognized valuers i.e. two eminent Chartered Accountants
Firms and once the same has been decided by the valuers the
Court may not go into the technicalities of the case and
adjudicate the share exchange ratio as an appellate Court
 Judicial Pronouncements
In re: Organon (India) Limited, 7th June 2010, Bom HC
Even in the present case, no one has doubted the integrity and
honesty of the valuers, who have given their share valuation
report or fairness report, as the case may be. Nor the objectors
have been able to point out that the method adopted by the
valuers was impermissible or absurd. If so, I find no reason to
discard the valuation of shares or the swap ratio determined by
the Experts
Thank you for your patience!

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