An effective legal framework for timely resolution of insolvency and bankruptcy proceedings will support the growth of credit market and encourage entrepreneurship. Here is a look at the Code 2016 a year after its inception with an overview at the legal and regulatory landscape of the ongoing regime.
In a latest development to the insolvency and bankruptcy regime in India, the Government brought an Ordinance amending the Insolvency and Bankruptcy Code 2016 (the Code) to prevent defaulters from bidding for their assets under resolution proceedings. The Ordinance which has got the approval of President Ram Nath Kovind has incorporated some safeguards in the Code to prevent ‘unscrupulous, undesirable people from misusing or vitiating the provisions of the Code’.
The Finance Ministry in its official statement said, “The Ordinance aims at putting in place safeguards to prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of the Code. The amendments aim to keep-out such persons who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company. In addition to putting in place restrictions for such persons to participate in the resolution or liquidation process, the amendment also provides such check by specifying that the Committee of Creditors ensure the viability and feasibility of the resolution plan before approving it. The Insolvency and Bankruptcy Board of India (IBBI) has also been given additional powers.”
So, the ordinance blocks companies which had failed to repay lenders from gaining control of their own distressed entities. It bars wilful defaulters from gaining a backdoor entry into their own companies. It also restricts other individuals such as associates and personal guarantors from bidding as well as those who have had their accounts classified as non-performing assets (NPAs) for an year or more and have been unable to settle overdue amounts including interest & charges before submission of the resolution plan to National Company Law Tribunal(NCLT).
The Ministry points out that Government’s efforts are directed towards strengthening the economy and to encourage honest businesses and budding entrepreneurs to work in a trustworthy & predictable regulatory environment. Let’s have a look at the specifics of the amendments.
Section 29A is a new Section that makes certain persons ineligible to be a Resolution Applicant. Those being made ineligible inter alia include:
IBBI had earlier issued a notification that said that the information on the details or antecedents of the applicant submitting the Resolution Plan must be placed before the Committee of Creditors in order for it to take an informed decision on the matter. The amendment now barring the eligibility for resolution applicant brings more clarity in the process.
So, now those who are forbidden from submitting a resolution plan include undischarged solvents, wilful defaulters, individuals whose accounts have been NPAs for over a year, individuals disqualified as directors under Company Act 2013, individuals banned by Security and Exchange Board of India (SEBI) and those banned under IBC for fraudulent activities, individuals who executed guarantee in favour of creditor, any connected individual of the defaulter and those convicted of imprisonment for over two years.
The amendment says, that the Committee of Creditors (CoC) shall reject a Resolution Plan, which is submitted before the commencement of the Ordinance, but, is yet to be approved, and in cases where the Resolution Applicant is not eligible as per the new Section 29A. In such scenarios, on account of the rejection, if there is no other plan available with the CoC, it may invite fresh resolution plans.
Besides, the committee will approve this resolution plan by 75% majority subject to any other conditions specified by the Insolvency and Bankruptcy Board.
In order to ensure that the provisions of the Code and the Rules & Regulations prescribed are enforced effectively, the new Section 235A has been added that provides for punishment for contravention of the provisions where no specific penalty or punishment is provided. The punishment is fine which shall not be less than one lakh rupees but may extend to two crore rupees.
Besides, the Ordinance also amends Sections 2, 5, 25, 30, 35 and 240 of the Code. They are as follows:
In the whole debate around the amendment and its significance to weed out anomalies in the newly created insolvency and bankruptcy code in India, the terms default and willful default assume a lot of significance. While the Code 2016 in Sec. 3(12) defines ‘default’ as non-payment of debt when whole, any part, or instalment of the amount of debt has become due and payable but, is not repaid by the debtor or the corporate debtor, the Reserve Bank of India in a notification has defined it as a ‘wilful default’.
The RBI says a Wilful Default would be deemed to have occurred if any of the following events is noted:
The Code was introduced in India a year ago after it gained the Presidential assent on 28th May’16 and its provisions were brought into force in December 2016. The Code aims at plugging the loopholes in laws which did not allow credit growth affecting the liquidity of banks and ultimately, the business environment in India. The then provisions in multiple of laws which governed the insolvency and bankruptcy were not sufficient enough to deal with problems of stressed assets and corporate malpractice.
The Government made changes in the Companies Act as well and brought amendments in SARFESI Act but they all lacked in solving the problems of insolvency and bankruptcy which were regulated by multiple of laws and multiple judicial fora. The bankruptcy proceedings were governed by the Companies Act, SARFAESI Act, Sick Industrial Companies Act, etc which made the resolution process slow and cumbersome. Hence, the Government thought to bring in legislations which could plug the loopholes, punish the wrongdoers and help those in need.
In the words of the architect of the Code, TK Viswanathan, “The Insolvency and Bankruptcy Code 2016 is a comprehensive law which covers the entire subject matter of corporate as well as individual insolvency under a single umbrella eliminating multiple judicial fora and laws each impacting the other not always complimenting the other. The Insolvency and Bankruptcy Code 2016 is a landmark legislation of the third Millennium since the Code will accelerate the flow of credit into the market easing the burden on the public sector banks and enhance our ranking in ease of doing business. Entrepreneurs can raise money from the market and need not depend upon banks for finance.”
The Code amended many laws to deal with insolvency and bankruptcy. It established Insolvency and Bankruptcy Board of India as the regulator and a specialised bench at the NCLT to adjudicate bankruptcy cases.
The Code created time-bound processes for insolvency resolution of companies and individuals. These processes have to be completed within 180 days. However, if within 180 days, 75% of creditors do not agree on the revival plan, the firm automatically will go into liquidation. If the three-fourths of the creditors decide that the case is complex and may not be addressed within 180 days, an extension of 90 days can be provided.
The resolution processes will be conducted by licensed insolvency professionals (IPs) who are members of insolvency professional agencies (IPAs). IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.
Information utilities (IUs) are to be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
The NCLT will adjudicate insolvency resolution for companies and Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
The Insolvency and Bankruptcy Board of India will regulate functioning of IPs, IPAs and IUs. The Code also sets up a fund called the Insolvency and Bankruptcy Fund of India.
As for the distribution of proceeds after the liquidation, firstly, insolvency resolution process cost and liquidation costs are to be paid in full. It will be followed by the debts owed to secured creditors, then the workmen’s dues for 12 months, followed by unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors. The Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment. Importantly, the Code also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.
In the one year period, the new regime has taken up many cases for resolution. According to insolvency board data, at least 353 cases were undergoing resolution under the Insolvency and Bankruptcy Code till September this year. In fact, within seven months of the notification of final rules of the Code, over 237 applications were filed by financial creditors against defaulting companies for initiating corporate insolvency resolution process and admitting in various benches of NCLT.
However, notwithstanding the new Act which facilitated insolvency and bankruptcy in a new regime, initially banks were using their discretion to refer only to those accounts for resolution proceedings which they deemed fit. The reason was, there was nothing in the Code to ensure that applications are made to it by the banks or other creditors in the first.
This led to introduction of The Banking Regulation (Amendment) Ordinance, 2017 which was promulgated by the President of India. The Ordinance amended the Banking Regulation Act, 1949 and gave extensive powers to Reserve Bank of India to issue directions to banks for resolution of stressed assets. The government first issued an ordinance in May by amending Sec 35 A of the Banking Regulation and then it brought the Banking Regulation (Amendment) Bill 2017 in the Parliament which was passed by both the houses subsequently
In the Banking Regulation Act, 1949 two new sections 35AA and 35AB were introduced. Section 35AA: The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
Explanation.—For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.
Section 35AB: (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets.
This enabled the RBI to issue directions with respect to stressed assets. Based on the recommendations of the Internal Advisory Committee (IAC), the RBI issued directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts which were taken up by the NCLT with priority. The IAC, in the meeting on June 12 2017, identified 12 accounts of borrowers with Rs 5,000 crore of nonperforming assets, each for insolvency proceedings under Insolvency and Bankruptcy Code 2016 (IBC). The cases referred to NCLT are at various stages at present. Later on in August last year, the Central bank again sent commercial banks a list of at 35-40 defaulters for taking up process of debt resolution before initiating bankruptcy proceedings.
Moreover, measures for faster resolution of bank’s stressed assets were also taken by SEBI by relaxing the norm for acquiring listed companies under distress. In a press release dated 21 June, 2017, SEBI said that the acquisition of shares of a listed company in distress by a new investor will be exempted from preferential issue requirements under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and also, from open offer obligations under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. By this decision, SEBI tries to help the lenders to sell the distressed assets under resolution plans to new investors. Besides, the Government last year permitted 100% foreign direct investment in asset reconstruction companies (ARCs) through automatic route so as to attract investments into the distressed assets by ARCs and clean up bank’s NPAs.
IBC has taken off very well over the last one year, wherein all the stakeholders have contributed on a very encouraging note and in a meaningful way as well. Of about 450 cases registered with NCLT till date, 50% have been filed by the operational creditors out of which 30% have been filed by corporate debtors and 20% by financial creditors. However, this trend is likely to change after the ordinance and the number of filings under Section 10 by the corporate debtors are likely to come down drastically.
A total of 6 schemes have been sanctioned by the NCLT till date out of which 5 schemes have been proposed for the corporate debtors and existing promoters and recently a scheme has been sanctioned in case of an all new management and operations of the CD by removing the existing promoters. So far as the stakeholders are concerned, there is a wave of enthusiasm with a robust filing going as an opportunity has arisen for the financial and operational creditors to have a say in the affairs, unlike earlier situations wherein they had to file civil suits and wait for decades in order to know the fate of recovery of their dues. There is now a very limited time frame of about 6-9 months within which a Resolution Plan can be sanctioned, failing which the creditors have the satisfaction, that the defaulting borrower will suffer liquidation for non-payment of their dues.
The recent ordinance is a complete reengineering of the whole process wherein ‘commercial wisdom’ has taken a back seat. The new processes now exclude wilful defaulters, personal guarantors, promoters, Directors disqualified under Companies Act and certain other categories from the CIRP/liquidation process. The relatives, related parties and connected persons relating to such disqualified persons also have to suffer disqualification for no fault of theirs. This is very inequitable and a non-workable solution. Such restrictions on an extended cross section of persons in has further increased the complexity and reduced the number of people who can participate in a resolution process. This will be detrimental to the very objective of the code in order to combat the purpose behind, as potential bidders will get restricted reducing potential recoveries for the creditors and stiffing competition. There is therefore, a dire need to re-calibrate the whole process in terms of creating value for the creditors.
India can certainly have a robust investment climate while creating a viable mechanism for recovering money from stressed assets.
The IBC and further notifications by the IBBI on 5th Oct and 7th Nov adequately took care of the issue in hand and had very clearly laid down rules and regulations in order to clear the stressed assets environ India had been going through. However, the ordinance has brought in a new diktat in terms of inclusions and exclusions which has not helped out effectively. There is need to re look at the ordinance so that there are no hiccups in the processes overall and there remains a very good buyer-oriented environment with resolution as the prime objective. As I said earlier ‘commercial wisdom’ has to be given supremacy in this case than any other consideration. We have to respect the commercial decisions of the Creditors.
They are quite capable to protect their own interest and weed out undesirable promoters. With a vibrant Bankruptcy law, the debt markets will develop faster and credit off take at a viable interest rate will improve the entrepreneurship and investment climate of the country.
I am glad about the good progress made by the current Indian Government in bringing in IBC, 2016, establishing IBBI, thus having the new law in India to replace SICA, 1985 and the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. It is a sincere attempt to unclog the Indian commerce and economic system from stressed assets. But I must add here, nothing major happened except the Govt. showing its full intent to make things roll out as per the new IBC and jettison out the earlier SICA, BIFR, AAIFR in so far as dealing with corporate debt. Now we have 26 judges at NCLTs in total for entire India who are expected to deal with nothing less than about 7000 cases + transferred cases from DRTs and CLBs which may be an additional 20,000.
The IBC (Amendment) Ordinance promulgated on 23.11.2017 appears to bring about specific changes in the IBC, 2016 in particular excluding some persons from their ability to participate in any insolvency resolution process and making them ‘ineligible to be resolution applicants’.
India has been making fast-paced changes in legal provisions aimed at vastly improving investment climate and this is an encouraging sign for the Indian economy. Be it dispute resolution and corporate insolvency or bankruptcy resolution, India has already demonstrated intent and rolled out specified timelines under the Arbitration Act, under the IBC and in addition, establishing the Commercial Courts. It is now a matter of time and process for the statutory machinery to deliver the results. India has also laid to rest the FIPB regime and then brought in uniformity in taxation regime making India one market through GST and most recently lowered the tax rates on a number of goods. It has also taken steps to form a new task force which will work on recommendation for a new Direct Tax Code. The IBC in particular aims to ensure that the unlocking of stressed assets is targeted through ‘Resolution Plans’ approved by the Adjudicating Authorities in a time bound manner. The NCLT and NCLAT’s methods of working and adhering to the timelines is what is going to announce to the world whether the corporate debtors and their insolvency & bankruptcy will be made to go through a resolution with time-bound adjudication. The scheme of the IBC is appearing to be having sufficient remedies to address the malady of stressed assets. However, Government needs to have a re-look and amend the Ordinance due to 6 points raised by me regarding the recent ‘ineligibility aspect’ in relation to some persons.
IBC has changed the entire outlook of India’s credit market. It has created a much-required fear in the mind of the borrowers, as how to carry out credit transaction in an ethical manner while complying with the law. It’s a revolutionary initiative and no doubt shall contribute in times to come on a positive note to the Indian credit market.
On 23.11.2017, the Ordinance was passed with the object of closing the loop holes in IBC. The initiative is highly appreciable and reflects the Government’s determination, proactiveness and willingness to take steps to improve the Indian credit market. Without any doubt, it will give a better chance and scope in getting best value for the stressed assets by avoiding participation of parties with vested interest.
The only way to ensure that India has a good investment climate including procedures for unblocking stressed assets, is by assuring that the corporate world is conducting proper statutory compliances. IBC has no doubt forced the Indian corporate world to change and rethink their mindset, because, if change is not brought from within, then the consequences under IBC are really draconian.”
The past year has been intriguing one with the Insolvency and Bankruptcy Code firmly beginning its journey. In the initial six months itself over a hundred applications were filed before the various benches of the NCLT of which close to 60 percent were admitted. Operational creditors have been first movers in taking advantage in this paradigm shift in regime, with close to 60% of the application being filed by them, whereas both the financial creditors and debtors have been closer to 20% of the pie. Further, we have seen appeal being filed in only around 15% of the matters. We have also started witnessing a few resolution plans being passed like, SreeMetaliks, Prowess etc. Therefore, the initial trends and data seem to portray a positive picture vis-àvis the impact of the Code. However, these are initial trends and I believe the real impact of the Code will be visible once the 180 days period for the 12 major accounts which were recommended for insolvency by the RBI, will be nearing its end.
In my opinion, the recent IBC Ordinance which bars certain sets of persons and entities from participating in the insolvency processes is well intended. At a principle level, it is not desirable to have a situation where a promoter of an insolvent entity reacquires the entity at a discount after the banks and other creditors take a huge haircut, particularly where such promoter’s inappropriate management has caused the insolvency. However, there is an equally strong counter argument. Firstly, the categories of people who are restricted from bidding in insolvency resolution process is much wider than unscrupulous promoters and wilful defaulters. The fact that many entities may run in financial distress due to factors beyond their control (in spite of best of effects by the promoter) cannot be ignored. Additionally, barring a significant section of bidders would impact competition and thus depress the financial value in the entity for the creditors. In fact, in view of such significant exclusion, some of the entities may not even be marketable at the resolution stage, which effectively means there may be higher liquidation than resolution as a going concern. So, to conclude, I think the ordinance with some moderation may be the best course going forward.
One can see that a lot of effort has gone in improving investment climate. In the last few years, we have witnessed a huge amount of changes in the Indian legal system. We have witnessed a new bankruptcy code, a new Companies Act, significant improvement in arbitration law, commercial courts, strengthening of SARFAESI and DRT, access of SARFAESI to most NBFC of size. Accordingly, India has risen by 30 spots in the World Bank’s Ease of Doing Business global rankings this year. Unlocking stressed assets and investment climate goes hand in hand. The most critical aspect, in my mind, is to create an atmosphere, where insolvency resolution happens as a going concern, and I see significant movement in that direction. In view of the steps taken, we expect both timeline and quantum of realization in resolution process to improve. However other critical aspect in improving investment sentiment would be to improve the contract enforcement timelines, and we have miles to go in that direction.
The amendments will lead to transparency and improve credibility of the insolvency regime in India, which is a must of a robust investment climate in the country. the amendments have put the agenda of unlocking stressed assets in focus by barring errant promoters from filing resolution plans.
Undoubtedly, the IBC is a landmark legislation which would attempt to deal with the issue of resolving large amounts of non-performing/stressed assets in the banking system in our country. However, I personally believe that while the IBC will solve problems created over the years to ensure that we are not faced with similar situations in the future, a stronger risk management framework in the banking and financial system is essential.
I also feel that this Code has been drafted “by financial creditors for financial creditors” and the operational creditor has been force fitted with an intent to have one consolidated Code for Insolvency and Bankruptcy. The Code should have considered practical aspects with respect to Operational creditors. This is particularly important in my view, as Operational Creditors can find themselves on either side of the table under the Bankruptcy Code. And when a CIRP is initiated on frivolous grounds, it could be quite disruptive for the Corporate and have a negative effect on the overall investment climate of India. In fact, statistics show that under the Code, more number of cases have been filed by Operational creditors than financial creditors. I wonder whether people involved in drafting of the Code, had anticipated this.
I hope the government and people responsible for implementation of this Code would pay attention to practical aspects with respect to Operational Creditors whereby bona fide claims lead to CIRP process and not frivolous and mala fide ones. After all, investment climate is congenial when promoters feel safe to invest in ventures. I do strongly feel courts or the legislation carves out provisions for Operational creditors which takes in account practical aspects of doing business.
This Code however, is a great example of how fast our Government can act and I must compliment the Insolvency & Bankruptcy Board of India for putting together the unique piece of legislation and so quickly”
The Insolvency and Bankruptcy Code (IBC) was passed in 2016 replacing three existing laws on insolvency and bankruptcy. The purpose of the enactment was to provide greater clarity in the law by consolidating bankruptcy and insolvency law under a single legislation and facilitate the application of consistent and coherent provisions to different stakeholders affected either by business failure or inability to pay debt.
The Insolvency Code seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-avis business failure and clearly allocate losses in macroeconomic downturns. The commencement of IBC proceedings has led to 75% of the cases being filed by operational creditors holding a small amount of debt. The NCLT has effectively enforced the IBC provisions and allowed the creditors to force a debtor to the negotiating table for contractual disputes.
The Govt. has now brought out an Ordinance which would debar promoters or rather former promoters from becoming buyers of their erstwhile company. In brief, the ordinance bars wilful defaulters, undischarged insolvents, persons convicted of an offence with over two-year imprisonment, individuals disqualified as directors under the Companies Act, persons banned by SEBI from securities market and persons banned under insolvency law for fraudulent activities.
The Ordinance some may say is a blunt tool. However, one needs to understand that we have lived in a decade where loans were advanced without much checks and balances, while both lenders and borrowers kept the defaults very discreetly. The Ordinance, may turn out to be unfair to some promoters, who may want a second chance, but seen purely from a moral perspective it is the right way forward. A important aspect to be observed in the Ordinance is the disqualifications introduced. As stated the Ordinance has listed categories of persons who stand disqualified from participating in a resolution process. In the process the concept of a connected person with such disqualified person also stands disqualified. In other words, once any person is disqualified, the scope of disqualification is quite vast and may prove to have unintended consequences. For example, the disqualification of any guarantor of a debt owed by any insolvent under the IBC. Keeping out such a person may not prove to be rationale in every such case. It is quite drastic. With the Ordinance, expect behavioural changes.
Effective implementation of the code will help the Asset Reconstruction Companies (ARCs) to be able to churn capital and enhance returns. In addition, 100% foreign direct investment (FDI) in ARCs through the automatic transmission route may also boost capital flows. This may in turn attract investments into the distressed assets space.
One year has passed since Insolvency and Bankruptcy Code was enacted. The historic legislation was described by Finance Minister Arun Jaitley as the most important economic reform next to Goods and Services Tax (GST) since independence. The new Bankruptcy regime in India is expected to bring about a paradigm shift in the business environment in India. While talking to press, MS Sahoo chairman at the Insolvency and Bankruptcy Board of India said that a lot of issues have been settled with amazing clarity and speed since the inception of the Code. Till September this year, 353 corporates were undergoing the resolution process in the NCLTs. The cases which have been successfully resolved by various benches of NCLTs before the Ordinance are those of Synergies-Dooray, Chhaparia Industries, Sree Metaliks, the West Bengal Essential Commodities Supply Corporation, and Prowess International. In the three of the cases above, the promoters were the resolution applicants and they were successful in gaining control of their distressed assets. An effective legal framework for timely resolution of insolvency and bankruptcy will support the development of credit markets and encourage entrepreneurship. It would also improve ease of doing business, and facilitate more investments leading to higher economic growth and development. The two ordinances have clearly given the Central bank more teeth to ensure compliance and bring about timely resolution of the stressed assets which will help develop a healthy atmosphere for India’s economy to grow. Even as the companies who have been barred from bidding for their assets may not be happy with the November Ordinance, but the objective of the Government is to create a transparent and predictable insolvency regime which would maximize value of stressed assets and help grow a robust credit market.
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