Every business runs on two kinds of money: equity from its promoters, and credit from lenders and vendors. Banks and financial institutions that lend to the business are its financial creditors; suppliers who provide goods and services on credit are its operating creditors. Together, they often have more at stake in a business than the promoters themselves.
When a business cannot honour its commitments to these creditors, whether because of genuine business risks beyond the control of its management or because of mismanagement and diversion of funds, it comes under stress. Left unaddressed, its value erodes until little remains for anyone: lenders, suppliers, employees, and even the promoters. Where there has been wrongdoing or breach of trust, those responsible also face consequences under the law.
The answer is to save the business, not necessarily the people who ran it into difficulty. A business is a valuable entity in its own right, with its plants, brands, customers, workforce and licences. Revived in time, it can again generate cash flows, repay its creditors and create value for its shareholders. This simple idea is the foundation of the Insolvency and Bankruptcy Code, 2016 (IBC), and it is also why distress creates opportunity for the right investor.
How IBC Moves a Business into New Hands
Once insolvency proceedings are admitted, control of the business moves away from its promoters to an Insolvency Professional, who runs it as a going concern. The creditors, acting through the Committee of Creditors, invite resolution plans from prospective buyers, known as Resolution Applicants. A plan after the approval of the Committee of Creditors, by prescribed voting share, and then the approval of the National Company Law Tribunal (NCLT), places the business into the hands of the successful Resolution Applicant.
Many existing promoters are barred from bidding for their own businesses under Section 29A of the Code, for example where accounts linked to them have been non-performing for more than a year, or where they have been declared wilful defaulters. The law makes a considered exception for genuine business strain in the MSME sector, with relaxations for MSME promoters, subject to proper checks and balances.
Why Buying Through IBC Is Attractive
A clean slate. Once a resolution plan is approved, the company is no longer liable for offences committed before the insolvency process began, provided the new owners are not connected with the old management (Section 32A). The Supreme Court has also held, in Ghanashyam Mishra (2021), that claims not included in the approved plan stand extinguished. The buyer knows what it is taking on.
A price set by a transparent process. Value is discovered through competitive bids and approved by the creditors and the Tribunal, rather than negotiated with a promoter under pressure.
A defined timeline. The process runs to a statutory schedule, which gives investors a reasonable view of when they can take control.
Two Routes In
Resolution plan: the investor acquires the company itself as a running business, with its contracts, licences and workforce, under a plan approved by the creditors and the NCLT.
Liquidation sale: if no plan is approved, the company goes into liquidation, where its assets are sold individually or in sets, or the business is sold as a going concern. Prices are often lower, but the window is narrower and the asset usually needs more work to restart.
Where Special Situation Funds Fit
SEBI permits Special Situation Funds (SSFs), a class of Category I Alternative Investment Funds, to pool money from investors for stressed assets, including stressed loans and companies under resolution. SSFs give investors who lack the scale or expertise to bid on their own a structured way into this asset class.
What to Look For Before Bidding
A distressed business is worth buying only when its core business is viable and the problem lies mainly in its balance sheet or management. The key questions are: Is there real demand for its products or services? Are its key assets, licences and contracts intact? What capital and management will it take to restart it? Who will run it after acquisition? And does the price leave a margin of safety after all these costs? Process risks, such as pending litigation, disputed claims and objections from unsuccessful bidders, need equally careful assessment before a bid is made.
How VGNC Can Help
VGNC was founded in 1999 by two school friends, Vipin Garg and Vijay Arora, as a business advisory firm. Over more than two decades, our team has worked closely with businesses across sectors: the launch of a national apparel brand, consumer-electronics and mobile-phone distribution, a rural retail chain from inception to closure, an integrated township and group housing projects, infrastructure and construction projects, and engineering and management colleges. We have seen businesses succeed, and some fail, from close quarters.
That experience, combined with our grounding in finance and law, allows us to assist prospective Resolution Applicants and investors in identifying viable opportunities under the IBC, evaluating businesses in distress, conducting due diligence and valuation, and structuring bids at a fair and competitive value.
If you are exploring investment opportunities in distressed businesses, we would be glad to hear from you.