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Criminalising Corporate Restructuring

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If you are one of those corporate consultants who advise clients on business restructuring, here is a piece of gratuitous advice: get out of it. It’s too dangerous. If you are a professional manager who has consented to sit on the board of a spun off business, or its holding company, resign immediately. It’s way more dangerous. And finally, if you are a shareholder who has consented to have any part of a company’s business spun off, or restructured a debt into equity, get out of the country as of last night. Your goose is definitely cooked. I’m serious and I’m going to give you some hard facts to support my gratuitous advice. Let me describe an actual transaction.

You are the CEO of an entity that has been pursuing the usual CSR initiatives through an independent bankrupt company whose destiny you dictate. There are questions whether it is appropriate for you to be undertaking your CSR activities under the umbrella of a bankrupt company. Some advisors believe these initiatives won’t have traction till you divest them into a separate not-for-profit company. You also want to save this bankrupt company from total ruin. Fortunately, the bankrupt company sits on valuable but little used real estate. What if you were to take this real estate, rent some of it and use the money to fund the CSR? It seems like a great idea because then the CSR would be self-sustaining. You register a Section 25 not-for-profit company.

You now need honourable men to serve on the board of this not-for-profit company. You choose two such men: an eminent journalist and just retired CEO of Dow Jones and a well-known Indian technocrat from America with over a hundred patents to his name. You sign an MOU with the not-for-profit company and assign the money this bankrupt company owes you at a discount to the Section 25 Company. In turn, the bankrupt company obtains shareholders approvals and converts this debt into equity. This way, the Section 25 Company becomes a holding company. Thus freed of the debt burden, the bankrupt company now has liquidity and is able to negotiate credit lines and banking facilities so that it may smoothly go about its CSR business.

But long before it is able to start any business at all, along comes a sensationalist scandal sniffer who claims that the whole thing is one colossal scam, that billions are being transacted as rake offs, that public money has been converted to private use, etc. Before you can say Subramanian Swami, you find yourself in a criminal court accused of serious criminal offenses such as breach of trust, misappropriation, cheating and conspiracy. Whatever may be the legal status of the charges against you, as far as the TV Talking Heads and the Twitterati Terrorists are concerned, your are a criminal under trial and your reputation takes an irreparable beating. To add agony to anxiety, you will now spend a fortune and a bit on hotshot lawyers to get you off the hook.

If you haven’t already got the drift of what I am saying, this is more or less what the National Herald case is all about; the difference being only that you are not the CEO of this company, Mrs Sonia Gandhi is, and it’s a not a company we are talking about, it’s a political party. All the rest is the same. I can and should fill in some colour though.

Pt Jwaharlal Nehru doted on the National Herald. Three years back, the Congress decided that they wanted to revive it, not least because they wanted to project a certain political viewpoint. Since every political party has its mouth piece, that’s not something to go into catatonic shock over. They also didn’t want to revive the newspaper within the umbrella of the political platform which was probably smart since the Income Tax department is now threatening to take away the Congress Party’s charitable status because they gave away money (as a loan) to a newspaper airing their political views.

The case itself is no surprise. Politicians using courts to settle their scores are pretty much par for the course.The surprise though is that widely accepted rules of the M&A game are being undermined to achieve this purpose.The implications of this development on both CSR activities and the restructuring activities of the corporate world are enormous. Allow me show you how.

First, there is the business of giving away charity money, or receiving it. If you make a political donation, do you tell the party how you want the money spent? ‘Make sure that your use it to order dal for your election campaign canvassers but not chicken since I am vegetarian okay?’ The idea that political donations cannot be used to publish print media projecting a certain political ideology is a strange notion. Political donationcomes without strings and if there is no “entrustment”, there is no breach of trust either. Besides, if a double talking political turkey wants to dish out tripe about political donations being public money, open you own damn accounts to the Right to Information Act and then pontificate bro. The idea that third parties can read conditions into a donation, political or corporate, when neither donor nor donee have any problem with the manner in which the money is used, is alarming.

Then there is this business of a creditor selling a debt owed by a bankrupt company cheaply to a non-profit SPV. What can I say? I told you, if you are a restructuring specialist, you’ve probably done this a hundred times and you need to go through Birganj to Kathmandu and catch the next flight to Argentina. Similarly, there is an allegation about the Gandhi’s being shareholders of this not-for-profit entity. I mean really? If you want to run a CSR initiative, won’t you make the promoter’s family the shareholders? The criminal prosecution is premised on the basis amongst others that ‘valuable properties’ owed by the bankrupt company will be usurped by the holding company. This kind of proactive initiative is to be admired. Now that we are at it, I suggest that the cops stand outside every car dealership and arrest every car buyer on the ground that they could conceivably kill someone on the road someday.

That takes us to Criminal Misappropriation? Please don’t laugh derisively but the basic allegation here is that if a creditor converts debt in a company into equity of a new holding company, then the directors of the holding company automatically misappropriate the properties of the subsidiary into their ‘personal kitties’ without anything more being done. To support this allegation, you would have to lift the corporate veil without legal basis, obliterated the distinction between shareholder and professional non-shareholder director, assume that the assets of a subsidiary company are the personal property of the directors of a holding company, and launch an anticipatory prosecution of a misappropriation that may occur at some uncertain future date. I hope you don’t mind if I don’t insult your intelligence anymore.

Finally, there is the cheating allegation. Let’s keep it simple okay? You can’t cheat someone of their money when they are willingly entrusting it to you. Breach of Trust and Cheating don’t go into the same rave party. Besides, who exactly got cheated? Not the shareholders of the bankrupt company because they approved the conversion of debt to equity. I have heard of minority shareholders approaching the Company Law Board against dilution, but a third party politician approaching a criminal court? Like Leonard Cohen, I sink beneath the wisdom of this allegation like a stone.

As a lawyer, I am sorry that a case as crappy as this has, like an energetic cartoon rabbit, bounded exuberantly into the chatter rooms of the talking heads on prime time TV as opposed to being summarily bounced out of court. But this is just one case and it’s political anyway. For those of us who do not answer to this higher calling, the implications for business are scary. I need shareholders approvals if I want to write down a debt or convert debt into equity. If my client’s shareholders agree to such proposals, that I think is as much compliance as we need. But can we have a situation where the shareholders are happy with the debt write down or conversions of debt to equity but third party busybodies are able to come be and sabotage business restructuring? Worse, can we have a situation where a competitor is able to launch criminal proceeding because you decided to unlock real estate value in your company or optimise your CSR initiatives by engaging in a business restructuring? In today’s highly competitive business environment, can you credibly have a legal regime that threatens to take you to jail even if you comply with every law and every rule in every regulation? And never you mind that this is a political case, blah de dah: legal principles don’t change because the personalities do.


(The author is managing partner of the Gurgaon-based corporate law firm N South. He is the author of “Winning Legal Wars” and “Bullshit Quotient: Decoding India’s corporate, social and legal Fine Print”. He can be contacted at [email protected] or [email protected]).