The Insolvency and Bankruptcy Code

The IBC was established as an extensive code to consolidate laws dealing in reorganization and insolvency resolutions of corporates, partnerships as well as individuals. The entire process starting from the institution of proceedings until approval of a resolution plan or liquidation is expected to be time bound.

The IBBI (i.e. Insolvency and Bankruptcy Board) has also framed the Insolvency Resolution Process for Corporate Persons Regulations, 2016 (“CIRP Regulations”) in order to focus on several aspects pertaining to the insolvency resolution process of a corporate debtor.

What are the various types of Due Diligence?

Due Diligence is one of the most valuable, substantial as well as lengthy procedures in an M&A deal. The procedure of due diligence is something that the buyer conducts to validate the certainty of the seller’s claims. A probable M&A deal includes various types of due diligence.

Types of Due Diligence

DD (i.e. Due Diligence) is a lengthy procedure undertaken by an acquiring enterprise in order to comprehensively and completely evaluate the target organization’s business, capabilities, assets as well as financial performance. There may be about twenty or more angles of due diligence analysis.

The fundamental types of due diligence inquiry are as follows:

1. Administrative Due Diligence

Administrative Due Diligence is the phase of due diligence that comprises of authenticating admin-related items such as facilities, occupancy rate, number of workstations etc. The motive behind going for due diligence is to authenticate the varied facilities possessed or engaged by the seller and decide if all operational costs are rounded up in the financials or not. Administrative Due Diligence also provides a better picture of the kind of expenditure that the buyer is expected to bring upon itself in case they plan to opt for the extension of the target organization.

2. Financial Due Diligence

One of the most critical and crucial types of due diligence is the financial due diligence as it investigates and checks if the financials demonstrated in the CIM (i.e. Confidentiality Information Memorandum) are authentic or not. Financial Due Diligence intents to provide complete understanding of all the company’s financials, including, but not limited to, audited financial statements for the past three consecutive years, latest unaudited financial statements with comparable statements of the previous year, the organisation’s predictions and basis of such predictions, schedule of inventory, capital expenditure plan, debtors and creditors etc.

3. Asset Due Diligence

Another type of due diligence conducted is asset Due Diligence. These reports basically involve a specific itinerary of fixed assets as well as their locations (if in case possible, physical authentication should also be done), all lease agreements for equipment, a schedule of sales along with purchases of major capital equipment during the last three to five financial years, mortgages, real estate deeds, title policies, and use permits.

4. Human Resources Due Diligence

Human resources due diligence is comprehensive. It includes all of the following:

  • Analysis of the total number of employees, inclusive of vacancies, current positions, due for retirement, and also those serving their notice period
  • Analysis of current remuneration, bonuses paid during the last three financial years, and the total number of years of service
  • All employment contracts with non-solicitation, non-disclosure, and non-competition agreements between the organization and its members. In case there are a few violations concerning the general contracts, all questions or issues need to be sorted.

5. Taxes Due Diligence

Due diligence in the aspect of tax liability involves an analysis of all taxes that the organization is needed to pay and assuring their proper calculation with no motive of under-reporting of taxes. Furthermore, validate the status of any tax-related case pending with the tax authorities.

The report of a tax agreement and potential issues specifically involves authentication and analysis of the following:

  • Transcripts of all tax returns – including sales tax, withholding, and income tax– for the last three to five financial years
  • Knowledge about any past or pending tax audits of the organization
  • Transcripts linked to Net Operating Loss (i.e. NOL) or any unused credit carryforwards of deductions or tax credits
  • Any substantial, out-of-the-ordinary correspondence with tax agencies

6. Intellectual Property Due Diligence

Almost every organization has intellectual property assets that they can use to monetize their business. These intangible assets are things that separate their product as well as service from their opponents, and may often consist of a few of the organization’s most valuable assets. Some of the items that need to be considered in due diligence review are as follows:

  • Schedule of patents along with patent applications
  • Schedule of trademarks, copyrights as well as brand names
  • Pending patents authorization form
  • Any pending claims case by or against the company in regard to contravention of intellectual property

7. Legal Due Diligence

Legal due diligence is, of course, extremely crucial and it typically consists of examination as well as a review of the following elements:

  • Memorandum and Articles of Association copy
  • Minutes of the meeting for Board Meetings held in the last three financial years
  • Minutes of all meetings as well as actions of shareholders for the last three financial years
  • Transcript of share certificates circulated to Key Management Personnel
  • Transcript of all guarantees to which the company is a party
  • All material contracts, including any limited liability company or operating agreements; joint venture or partnership agreements
  • Licensing as well as franchise agreements
  • Transcripts of all bank financing agreements, loan agreements and lines of credit to which company is a party