Due Diligence of Corporate Debtor By Adv Sharlee Garg


The insolvency and bankruptcy code 2016, is the umbrella law that caters to all insolvencies and reorganizations taking place in our country. In comparison to other laws prevalent in our country, it is too new as the provisions relating to insolvency as well as liquidation of corporate persons came into force on December 01, 2016.

‘Due diligence’ the term is just the tip of the iceberg and there is much more to explore in this dimension. Due diligence is the cautious efforts that a rational person exercises in order to prevent any harm to the other party/person or their property. It is always advised to be extra cautious and watchful before investing your business funds anywhere. Most often, the term ‘due diligence’ is used to define the analysis and examination done before purchasing another company. A piece of expert advice is always helpful and here is where we at MUDS pitch in. Being the best insolvency law firm in Gurgaon, we provide extraordinary care and support for managing your life savings, your funds.  

Assuming that one is planning to either file for Insolvency or the Financial Creditor or Operational Creditor file against the Corporate Debtor then the need for Due Diligence arise. Exhaustive Due Diligence helps to formulate the right strategies for Resolution Plan or Winding up as the case may be.  Before actually venturing out this, you will need expert assistance to evaluate the market conditions. The following are a few points to be kept in mind while performing the process of Due Diligence:

  • Checking the cash flow of the business: It is important to check this as if the firm would be a ‘sick firm’ then there is no point in buying it.
  • Checking the record books carefully and understanding the sources of revenue.
  • Identifying and evaluating the reliability of financial projections: It is important to check what multiple these projections are placing on these earnings.
  • Identifying the profit trends: Noting whether the profits are showing a positive or negative trend.
  • Evaluating the market in terms of the company’s product/service: how many options are available in the market, checking for the company’s product viability and if it would be able to sustain in the market or not.
  • Evaluate the market: Gauging whether the market is expanding, shrinking or stagnant.
  • Assessing the competitors: It is important to assess the competitors as they directly impact our earnings.
  • Assessing the online presence of the company: The online presence of a company has a deep impact on its competitors.
  • Figuring out whether the company has physical assets or not: This evaluation is important as at times a company’s physical assets are either overvalued or undervalued in its books. A fair evaluation of assets helps in noting its accurate value.
  • Scrutinizing for any hidden liabilities
  • Investigating that all important documents of the company like tax registration, minutes of the board meeting, etc. are complete.
  • Checking whether the business is up to date on its taxes or not.
  • Finding out if there is any property that is on lease. In case, it is then when does the lease end.
  • Monitoring if the employee files are completely inclusive of their salaries and other benefits.

The below-mentioned documents are required for performing the process of Due Diligence of a private limited company or a limited company:

  • MOA (Memorandum of Association)
  • AOA (Articles of Association)
  • Certificate of Incorporation
  • Operational Records
  • Record of all the employees
  • Shareholding Pattern
  • Utility Bills
  • Financial Statements
  • Application Documents or Intellectual Property Registration
  • Income Tax Returns
  • Property Documents
  • Bank Statements
  • Statutory Registers
  • Tax Registration Certificates
  • Tax Payment Receipts

“A Due Diligence checklist is actually an organised analysis of a company that you are about to acquire either through a sale, merger or any other method.”  -xyz

Through the Due Diligence checklist, it becomes easy to evaluate the company’s assets, prevailing contracts, liabilities, and potential problems. This list is also used for:

  • Preparation of an annual report or audited financial statement
  • A typical public/private financing transaction
  • General risk management
  • Major bank financing
  • An IPO (Initial Public Offering)
  • A joint venture
A typical Due Diligence Checklist contains the following information about a company:

  • Information Technology concerns: Providing a list of software used by the company is important.
  • Antitrust and Regulatory issues: Any potential antitrust issues particularly that arises as a result of the purchase.
  • Publicity: The last three years of articles and press releases of the company.
  • Outsourced Professionals: All independent professionals that have particularly worked with the organisation in the last five years inclusive of accountants, consultants, and lawyers.
  • Insurance Coverage: It is important to see the copies of insurance claims for the last three years.
  • Litigation: This includes a list of any pending litigations along with a list of threatened litigations (if any).
  • Product and service: A list of the products and services offered along with correspondence and documents relating to the regulatory approval of the product line.
  • Customer Information: A list along with a description of competitors and SWOT analysis.
  • Tax information: IRS form 5500 and 401(k) plans. Federal, state, local as well as foreign tax returns inclusive of net profit or loss for the last three years.
  • Material Contracts: Agreements, as well as relationships with subsidiaries, partnerships or joint ventures (in case any), has to be provided. Also, the monthly manufacturing yield has to be submitted.  

The Author is associated with MUDS Management Private Limited.

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