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CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy

Meenakshi Steels Ltd is acquiring Godavari Alloys Ltd through a scheme. In due diligence, a secretarial review shows Godavari allotted shares last year without filing the required return of allotment and has an unregistered charge on its plant. Which course best reflects sound diligence practice?

Sound practice is to record the defaults, estimate penalties and rectification costs, and make remedial action or an indemnity a condition before closing. Compliance gaps affect risk and price, but they neither void the scheme automatically nor can they be ignored or accepted on mere management assurance.

  1. ARecord the defaults in the report, quantify penalty and rectification cost, and require remedial action or indemnity before closingCorrect
  2. BOmit them from the report as they are minor procedural matters
  3. CCancel the scheme automatically as the defaults void the shares
  4. DRely on the target's management representation without verification

Explanation

Non-filing of returns and unregistered charges are compliance defaults that carry penalties and may affect validity or priority of security. The report should record them, estimate cost, and the deal should provide for rectification, indemnity or price protection. Defaults do not automatically cancel a scheme, and mere management representation is inadequate.

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