Mayukhar Cement Industries Limited ('MCIL/the Company'), a leading cement manufacturing company based in southern part of India was established in the year 1998. Its founder Mayanth, was an engineer having industry exper

Mayukhar Cement Industries Limited ('MCIL/the Company'), a leading cement manufacturing company based in southern part of India was established in the year 1998. Its founder Mayanth, was an engineer having industry experience and was keen to be an entrepreneur. He established a full-fledged manufacturing entity to manufacture and supply cement at a reasonable cost, to develop the hinterland and provide job to local people. The Company was run by Mayanth and his relatives. Over a period, more than 8 factories were established in and around Karnataka and the Company had created a brand for itself. Mayanth was a first-generation entrepreneur and he had come from an agrarian background. As the Company grew in its operations and revenue, he employed more people from local areas around the factories. Mayanth with his strong leadership skills and vision, expanded the business of the Company, which grew exponentially over few years. The Company had gone for an IPO in the year 2005 and its shares were listed at premium. It adopted all the necessary corporate governance policies in its functioning. It also had a risk management framework which provided for review of the risk assessment and mitigation procedures, including periodical review of the procedures to ensure the executive management mitigates the risks through a properly defined framework. The Audit Committee, which has been designated by the Board for this purpose, also reviewed the adequacy of the risk management framework of the Company, the key risks associated with the business operations and the measures in place to mitigate the same. The Company also had well qualified Audit Committee members, who usually asked questions in the audit committee meetings. Though the members of audit committee were well qualified independent directors, they were very close and well known to Mayanth. At the operational level, the Company had established all the necessary policies and procedures like risk management policy, whistle blower policy, etc. Mayanth wanted to retire from business and he introduced this son Mahanth, as an executive director. Mahanth had done MBA from Standford Universtity and was trained in finer aspects of management. He was aspirational and wanted to further expand the business of the Company to other industries as well. He diversified the manufacturing business into various other sectors like brick and motor, steel and other ancillary industries relating to cement and its products. Initially, it required huge capital outlay, which they raised by way of borrowings and loans. The diversification of business took couple of years, but it did not yield the expected returns or growth. Meanwhile, MCIL had developed a complex governance structure to accommodate its diversification aspirations and it had grown way too much to simplify. Each vertical had its own Finance manager who would report to a central Finance team headed by the CFO. Each Financial Manager was unaware of the perfomance of other vertical. The top management consisted of a few professionals and family members. In this process, many relatives and close associates of Mahanth were also given jobs in the Company to take care of the multiple verticals. Being promoter's relatives, they had easy access to information and decision-making, which they used for personal purposes. All top executives were allotted large number of ESOPs to ensure that they work hard for the Company and thereby aiding the boost in the share price. Mahanth, was greedy and wanted to increase the share value of the Company by showing results and did not mind to opt for any path, even though it may not be appropriate. The present directors of the Company and Committees of the Board, were well known to Mahanth and were aligned to his ideas and ideologies. Whilst things seemed going fine apparently, but all was not well within the Company. The complex structure of verticals, allowed the MCIL to manage accounting in a way to conceal the perfonnance of some verticals without impacting the profit numbers. The Financial reporting and accounting team of the Company, though aware about these matters but never dared to speak about it. Ghirya, a new employee in the team, noticed that the accounting of transactions was getting circumvented and was not appropriate. She informed the same to her manager, who nudged her to be silent for the sake of her job. Later, the independent directors of the Company also received an anonymous letter stating that the Company's financial records were being fudged. Though it was brought to notice of all the Directors, it was not acted upon. The statutory auditors of the Company had rotated out in the year 2016 and Mahanth proposed to appoint, T & P LLP (one of the largest audit firms in the country), as the statutory auditors of the Company. Incidentally, the Director and Partner of the firm, were very well known to Mahanth. During the statutory audit, the audit team did raise few points regarding the controls and accounting policies of the Company. As the Partner of the firm and Mahanth, were close friends now, those points were not pursued, rather the audit fee was increased and new consultancy assignments were given to the audit firm. It could be easily deciphered that T & P LLP had compromised its independence with a large audit fee and also consultancy income worth several times the audit fee. MCIL was such an important and large client for statutory auditor firm, that they could not go against the management. It was aware about the deficiencies in the financial records and signed off the financial statements to protect the management of the Company. It was also aware that, there were several significant internal control deficiencies including no effective management oversight of the external reporting process and a disregard of the relevant accounting standards. Gradually, over the next four years, the situation of the Company went from bad to worse and the Company was running into losses and eroded its entire networth. The Company which was a leading manufacturer of cement, went into immense losses due to mismanagement. It had no option but to declare itself bankrupt, the Company issued a press statement that there were deviations between actual and reported results due to accounting errors. The obvious question which arose was, why the auditors, who were the first line of defense had not spotted and flagged off the issues in accounting & reporting by the Company. The independent directors of the Company and Mahanth, resigned from their positions. Meanwhile MCIL, also had an impact on its market reputation and credibility. From a valued stock, MCIL is now a penny stock. Suraksha Materials Private Limited (SMPL) was supplying materials to MCIL since last many years. Due to operational issues and cash crunch, MCIL failed to pay SCPL's total outstanding amount of ₹1.75 Crore. The amount remained unpaid for more than a year. MCIL has been incurring losses for the last many years and it was expected that within the next 3 months, there might be a major financial crisis. The Company may not be able to pay its outstanding debts to many of its creditors, as its financial position could deteriorate further. The operational creditors with long over dues were worried, demand notices along with the photo copies of relevant invoices and outstanding statements as per the ledgers were officially sent to MCIL. The Company tried to convince SCPL and other operational creditors about the future plans of the business. Neither they were able to clear their dues, nor were they able to make any future commitments. After having meetings with the operational and financial creditors of MCIL, the Board of Directors of SCPL finally took a firm decision to file an application along with the required documents for initiation of the Corporate Insolvency Resolution Process (CIRP) against MCIL before the National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016 ('IBC'). SCPL proposed the name of Vihaan, a Chartered Accountant and a leading Insolvency Professional as an Interim Resolution Professional (IRP). NCLT admitted the application filed by financial creditors, operational creditors, and SCPL. The CIRP, commonced on the scheduled date, following the process under the provisions of the IBC. NCLT by an order issued a moratorium. As an IRP, Vihaan started managing all the Company's affairs. The powers of the Board of Directors of MCIL were suspended. The officers and managers of MCIL, started acting on the instructions issued by Vihaan and provided him with all the necessary information and documents. After receiving all the claims against MCIL and determining its financial position, Vihaan constituted a Committee of Creditors. In the first meeting of the Committee of Creditors, the committee approved to appoint Vihaan as the Resolution Professional. He took prior approval of the Committee of Creditors, whenever required. Vihaan prepared the required Memorandum for the Resolution Plan and invited prospective lenders, investors, and other persons to prepare Resolution Plans. In consultation with various stakeholders, Vihaan prepared a Resolution Plan. MCIL and all the stakeholders agreed with the resolution plan submitted during the Meetings of the Committee of Creditors. Vihaan had a firm belief that liquidation of MCIL is not at all necessary. Finally, all the stakeholders agreed with MCIL revival possibilities. Vihaan then submitted the Resolution Plan to the Committee of Creditors for approval. The Committee discussed it in detail and approved the Resolution Plan to revive MCIL with the required majority. The Revival Plan also approved the payments of debts due to SCPL and other Creditors. Vihaan submitted a Resolution Plan, approved by the Committee of Creditors to NCLT, which approved the Resolution Plan. MCIL was likely to back on track in the next 1-2 years and it could repay, its overdue debts to all of its Creditors. There has been a change in the present management of MCIL, and the Board is confident and is of the opinion that with certain financial decisions and concrete actions like the restructuring of some of the term loans MCIL had borrowed from banks, reduction in debtors' credit period for the faster realization to sort out liquidity issues, controlled inventory levels, certain other cost savings measurement, removal of some of the non-profitable items from the product mix, etc. might positively help the Company. Assuming MCIL is under moratorium, in the background of IBC, analyse the validity of following transactions: The licence of MCIL with some sector regulators was suspended, regarding which license fee is already paid by MCIL in advance.