Uncovering Hidden Risks: The Crucial Role of Tech Due Diligence in NCLT Proceedings

Navigating the complexities of the Insolvency and Bankruptcy Code (IBC) process in India requires a thorough understanding of a company's financial and legal standing. However, one crucial element often overlooked is the technology layer. Technical due diligence (Tech DD) plays an essential role in identifying the hidden risks and opportunities within a distressed company, especially during National Company Law Tribunal (NCLT) proceedings.

The Bidding Problem Nobody Talks About

In many NCLT cases, resolution applicants face significant challenges post-acquisition due to inadequate technical evaluations. Often, the financial and legal assessments are robust, but the technological infrastructure remains unexamined until after the deal closes. This oversight can result in unexpected costs and operational difficulties, as the technology backbone might be outdated or poorly maintained. Such scenarios highlight the necessity of including technology assessments as a fundamental part of the due diligence process.

The Scale of What's at Stake

The numbers are telling. Since the inception of the IBC framework, India has admitted over 8,700 corporate debtors for Corporate Insolvency Resolution Process (CIRP). With an average resolution timeline of over 700 days, prolonged proceedings can lead to asset depreciation and knowledge attrition, significantly affecting the value of the technology assets that were initially bid on. In this environment, understanding the technological foundation of a company is not just advisable, it is indispensable.

Why the Information Memorandum Isn’t Enough

The Information Memorandum (IM) is a critical document prepared during CIRP, outlining a company's financial and legal status. However, it often falls short in detailing the technological framework. Key elements such as system architecture, code quality, infrastructure health, and security posture are typically underserved. Without these insights, resolution applicants are left to make assumptions that can lead to overbidding on obsolete technologies or underbidding and missing hidden technical values.

The Two Ways Applicants Get It Wrong

Without proper Tech DD, resolution applicants can fall into two costly traps. Firstly, they might overbid based on an inflated perception of the technology's value, only to discover post-acquisition that the systems require substantial investment to become operationally viable. Alternatively, they might underbid, dismissing potentially valuable technical assets due to a lack of understanding. Both scenarios result in financial setbacks that could have been avoided with a comprehensive Tech DD.

What a Technology Due Diligence Actually Covers in NCLT Context

A thorough Tech DD in the NCLT context transcends a simple IT audit. It is a focused evaluation that links technical findings directly to business risks, costs, and opportunities. The RCOI framework—Risk, Cost, Opportunity, Impact—guides this process by assessing architecture vulnerabilities, estimating remediation costs, identifying hidden technological opportunities, and projecting the potential ROI of technological improvements.

The Five Things Every Resolution Applicant Should Demand Before Bidding

Resolution applicants should insist on answers to the following critical questions before submitting a bid:

1. True Remediation Costs: An independent assessment of the costs required to stabilize and modernize the technology stack.
2. Knowledge Concentration: Identification of key personnel and potential risks if they leave the organization.
3. Security and Compliance Liabilities: Evaluation of existing vulnerabilities and compliance with data protection regulations.
4. Support for Turnaround Thesis: Assessment of whether the technology can support planned business expansions or transformations.
5. Integration Timeline and Cost: Understanding the complexities and costs involved in integrating the acquired technology with existing systems.

Where Tech DD Fits in the CIRP Timeline

Despite the time constraints inherent in CIRP, Tech DD can be strategically integrated at various stages to provide valuable insights. From an initial rapid assessment at the Expression of Interest (EOI) stage to a comprehensive audit during Virtual Data Room (VDR) access, Tech DD ensures that the resolution plan is grounded in reality. This structured approach mitigates risks and informs more accurate bidding.

What Happens After the Bid: From DD to Turnaround

Tech DD’s role extends beyond bid preparation. The insights gained feed directly into post-acquisition strategies, guiding the remediation of technical deficiencies and the integration of new technologies. Engaging with specialized services, such as remediation workshops and CTO office support, can streamline the transformation process, ensuring the technology aligns with business objectives.

A Word for Resolution Professionals and CoC Members

Resolution Professionals (RPs) and Committee of Creditors (CoC) members also have a vested interest in promoting comprehensive Tech DD. Including technology evaluations in the standard due diligence process enhances the credibility of resolution plans and mitigates post-implementation failures. As the IBC evolves, the incorporation of technology assessments will likely become a standard practice.

The Bottom Line: Price What You Can’t See, or Pay for What You Didn’t Know

The success of a resolution plan hinges on accurately pricing the technological assets involved. Without thorough Tech DD, resolution applicants risk making decisions based on incomplete information, leading to financial and operational setbacks. By prioritizing technology assessments, applicants can ensure their bids are not only competitive but also grounded in an understanding of the true value and risks inherent in the acquisition.