From Chaos to Clarity: How Corporate Restructuring Can Revive Struggling Businesses

The business ecosystem in India has been rapidly evolving during the last few years and with the advent of startup culture, companies are now facing more competition than ever. Further, economic slowdowns and shifting demands of consumers make it necessary for companies to reevaluate their operations and structure. 

As the risk-taking appetite of businesses increases, companies often turn to corporate restructuring. It is commonly undertaken when companies want to reduce operational costs, adapt to new technologies, respond to changing market conditions, or expand into new markets. 

This article breaks down the various types and modes, the regulatory framework and the legal pitfalls that companies should avoid during corporate restructuring. 

Corporate Restructuring

Corporate Restructuring refers to the process by which a company redesigns its financial or operational structure to improve its efficiency and strengthen its position in the market. 

A company can be restructured in two main ways either internally or externally. Internal restructuring happens when the company's financial structure changes from within, without closing down or transferring its business. This can be done by altering or reducing the share capital of a company, through variation of shareholder's rights or through a scheme of compromise and arrangement under the Companies Act, 2013. 

External restructuring involves the transfer, consolidation, or reorganisation of a company's business, assets, or liabilities through legally recognised mechanisms. This method is used when the company is in severe financial trouble and cannot be revived internally. External restructuring can take place through various methods such as mergers and acquisitions, demergers, disinvestment, slump sale, asset sale, reverse mergers and joint ventures.

Legal Framework Governing the Restructuring of a Company

The legal framework governing the process of corporate restructuring is discussed below: 

1. Companies Act, 2013
   In India, corporate restructuring is primarily governed by the Companies Act, 2013 (the “Act”) which allows corporates to alter their share capital for internal restructuring without causing any hindrance to the business operations. However, businesses must ensure procedural compliance for such restructuring mechanisms including without limitation obtaining the requisite shareholder and board of directors' approval.
   
   Additionally, the Act also offers scheme based restructuring mechanisms that supports businesses to reach agreements or compromises with creditors. Such methods are significant for financially distressed businesses looking to restructure debt or turn their debt into equity.
   
   The Act has further established a structured and a court-supervised procedure for external restructuring, such as mergers, amalgamations and demergers which supports businesses in separation or realignment. However, multiple levels of scrutiny may be involved in such regulatory process, including necessary oversight by the National Company Law Tribunal (“NCLT”) and requisite approvals from creditors and shareholders. Considering the legislative intent of making restructuring an easy process for small businesses, the Act also allows fast-track mergers for businesses fulfilling the required criterion.
2. Securities and Exchange Board of India (“SEBI”)
   When listed entities consider corporate restructuring, they are required to comply with additional regulations as enacted by SEBI, which are laid down to ensure fairness and protection of the public shareholders. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 are the governing regulations for schemes of arrangement that require prior approval from stock exchanges, valuation reports and detailed disclosed to safeguard stakeholders of the transaction.
   
   Additionally, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 further regulates acquisitions and changes in control that arise from such corporate restructuring and mandates obligations such as an open offer, once they cross a specified shareholding threshold. Together, SEBI guidelines and regulations ensures that restructuring of listed companies is undertaken with full legal compliance, thereby protecting the minority shareholders as well.
3. Foreign Exchange Management Act, 1999 (“FEMA”)
   Cross-border corporate restructuring involving foreign investment, overseas mergers or asset transfers are governed under FEMA. With compliance oversight by the Reserve Bank of India (“RBI”), FEMA governs the capital flows, sectoral caps and reporting requirements of such corporate restructures. FEMA approvals and considerations are crucial in structuring both inbound and outbound restructuring transactions.
4. Insolvency and Bankruptcy Code, 2016 (IBC)
   When a company is in serious financial distress, restructuring may be carried out through the Corporate Insolvency Resolution Process under the IBC. It provides a time-bound and creditor-driven framework for resolving insolvency through approved resolution plans, with the primary objective of preserving the company as a going concern and maximising value for stakeholders. IBC places significant emphasis on the resolution plans and subjects the same to judicial scrutiny by the NCLT to ensure compliance with legal and procedural requirements. Where revival is not feasible, the Code also provides for an orderly exit through liquidation.
5. Labour and Employment Laws
   Several businesses tend to oversee their obligations related to employees during their corporate restructuring. However, labour and employment laws become of utmost importance where restructuring also involves transfer of employees or proposes changes in service conditions. Businesses are required to ensure continuity of all their employment benefits, statutory contributions and compliance with transfer, retrenchment or termination requirements in accordance with the newly implemented labour codes and social security legislations.

Due Diligence and Risk Assessment

Thorough due diligence helps uncover potential issues early, this can be done by undertaking:

1. Financial due diligence by verifying the counterparty's assets, liabilities, debts, and overall financial health.
2. Legal due diligence undertaken by a law firm to review contracts, licenses, statutory filings, litigations, and intellectual property of the investee company.
3. Operational due diligence to assess internal processes, employee obligations, and stakeholder approvals as per the Act.
4. Creditor and stakeholder checks by identifying hidden risks, potential disputes, and consents needed.
5. Identifying legal obligations and complying with all applicable laws, approvals, and sector-specific rules, including FDI caps, competition thresholds, and IBC/Companies Act timelines.

Legal Pitfalls in Corporate Restructuring

Even with multiple statutory mechanisms in place, corporate restructuring often fails due to inadequate legal planning of businesses and procedural lapses. One of the most common issues faced by companies is insufficient due diligence, specifically with respect to the business approvals and licenses, financial debts and liabilities and employee obligations, which often results in post-transaction disputes and regulatory intervention. 

Companies are also exposed to additional risks where such restructuring is undertaken without proper consultation from legal experts. Further, failure to secure requisite approvals or to communicate transparently with the creditors and stakeholders of the transaction can minimize and derail the restructuring efforts, especially when such schemes are supervised by regulatory authorities. 

Another issue faced by companies more frequently is the inadequate valuations of assets and shares, leading to objections from shareholders, regulatory authorities and creditors and consequently delaying the process of obtaining requisite approvals. 

Furthermore, non-compliance with labour laws or sector specific regulatory requirements and overlooking tax implications is another one of the common reasons why the proposed corporate restructuring may result in unintended liabilities and loss of the anticipated benefits of restructuring.

Judicial Approach

Indian courts and tribunals have played a significant role in shaping the restructuring landscape through their interpretative approach. Under the IBC, the Supreme Court has consistently upheld the principle of commercial wisdom of creditors, limiting judicial interference in approved resolution plans except where there is a clear violation of law or procedural irregularity. 

JSW Steel and Bhushan Power & Steel Ltd (“BPSL”) acquisition: After BPSL entered insolvency in 2017 due to heavy debt, JSW Steel emerged as the successful resolution applicant in 2019 with its plan approved by the Committee of Creditors and the NCLT. In May 2025, the Supreme Court set aside the resolution plan and ordered liquidation, citing procedural lapses and violations of the IBC. However, in September 2025, the Hon'ble Court reversed its decision and reinstated JSW Steel's plan, emphasising the importance of the creditors' commercial wisdom. This case shows both the legal scrutiny involved in IBC-based restructuring and its potential to successfully revive distressed businesses.

Further, Indian courts have discouraged the misuse of restructuring mechanisms as tools for tax avoidance or regulatory arbitrage. Transactions lacking genuine commercial substance, or designed primarily to obtain tax benefits, have been subjected to heightened scrutiny. 

In the context of schemes of arrangement, the NCLT's scrutiny extends to assessing whether the scheme is commercially reasonable, legally compliant, and not oppressive or prejudicial to any class of stakeholders. The NCLT closely examines valuation reports and the overall fairness of proposed schemes to ensure that the interests of minority shareholders and creditors are adequately protected.

Conclusion

Therefore, corporate restructuring transforms chaos into clarity, offering struggling businesses a lifeline through internal changes like capital reduction or external transformation like demergers and mergers. Timely action regarding corporate restructuring unlocks value, reduces debt, and improves the efficiency of the business. However, businesses need to avoid mistakes like skipping diligence or regulatory delays, as it can derail their gains. 

In the Indian economy, restructuring provides for strategic revival, balancing growth with compliance for long-term success. 

This content is originally shared on: https://www.ahlawatassociates.com/blog/corporate-restructuring-in-india-legal-guide