LD: Brief Analysis of the Major Amendments to Insolvency and Bankruptcy Code, 2016

30 March 2019: The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) undergoes to second amendment to ensure enforcement of the provisions of the Code aiming towards the fulfilment of its objective of time-bound resolution process. These amendments will make easier effective implementation and obtain desired results. 

Following are the significant amendments introduced in the 2018:

(a)  Home Buyers are recognised as Financial Creditors

In the matter of Jaypee Infratech Limited, the Supreme Court held that, home buyers have now been recognized as “financial creditors” under the IBC. This amendment has been carried out keeping in mind the peculiarity of under construction apartments in India where almost 25% to 30% of the projects face various delays causing suffering to home buyers.

Since the monies raised by home buyers are a means of raising finance for construction, and on failure of the project the monies are require to be returned based on the time value of money, it has been decided to treat homebuyers as financial creditors.

Accordingly, Section 5(8) of the IBC Code has been amended to clarify that homebuyers are financial creditors and can initiate corporate insolvency resolution process (“CIRP”) against defaulting developers under Section 7 of the IBC code. This also gives them the opportunity to be a part of the Committee of Creditors (“CoC“) and contribute to the decision-making during the CIRP. 

(b) Withdrawal of CIRP Application with the approval of 90% of CoC members

The newly inserted Section 12A of the Code provides for withdrawal of application after admission, if the same is approved by at least 90% of the CoC members.

Prior to the Act, withdrawal of application after initiation of CIRP was not permitted, as CIRP once initiated cannot be rolled back. Considering the preference of resolution over liquidation and settlement over resolution, it was realized that there might be a situation wherein the Corporate Debtor agrees to settle the dues with its creditors by way of an out-of-court settlement; and thus, if at least 90% of the CoC gives assent to such withdrawal, the same shall be allowed.

(c) Extension in the tenure of IRP till the appointment of RP

Once CIRP is initiated, the Board and Management of the Corporate Debtor stands suspended and the control shifts to the hands of the IRP/ RP. Section 16(5), of the Code provides that the tenure of the IRP (Interim resolution professional) shall not exceed beyond thirty days of his appointment, whether or not the RP is appointed. Thus, in situations where the RP was not re-appointed within the tenure, it was considered as expired; the Corporate Debtor was technically left un-administered.

Thus, to make up for this lacuna, Section 16(5) of the Code has been amended to provide that the tenure of IRP shall continue till the RP is appointed.

(d)  Requirement of special resolution in self-filing cases under section 10 of IBC

Section 10(3)(c) of the Ordinance provides that in case of self-filing of Application u/s 10 of the Code for initiation of CIRP, a Special Resolution (SR) must be passed by the shareholders of the Corporate Debtor.

Prior to this Amendment, filing of such application was decided upon among the directors of the Corporate Debtor themselves. Hence, to rule out chances of maltreatment of this power bestowed upon the directors by the Code and to prevent the BOD (board of directors) of the Corporate Debtor from taking a unilateral decision in this regard, this provision was introduced by way of the Ordinance.

(e) Reduction in voting percentage for key decisions

As per the Code, for decisions concerning the resolution process, there existed a voting threshold of at-least 75%. However, a voting threshold as high as this was frustrating the essence of the Code.

For example, “Resolution over Liquidation”, it was observed that Resolution Plans were not approved by the Committee of Creditors (COC). It was finally in the case of Synergy-Dooray, the NCLT’s Hyderabad Bench passed an order for approval of Resolution Plan with 66% votes in favour. Thus, with a view to effectuate a smoother CIRP, voting thresholds were reduced from 75% to 66% and 51% for serious decisions and routine matters respectively. 

(f) Moratorium under CIRP

Section 14(3) (b) provides that moratorium during CIRP shall not apply to a guarantor in a contract of guarantee to the corporate debtor (guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP).

  • Creditors can invoke personal or corporate guarantees during the CIRP.

  • Will provide better co-operation from promoters during resolution process.

(g)  Resolution Professional (RP) responsible for on-going legal compliances

Under Section 17(e) provides that RP shall be responsible for complying with requirements under any law for the time being in force on behalf of Corporate Debtor.

  • RP to ensure compliance with all the laws for the time being in force viz. Companies Act 2013, SEBI regulations, factories act, labour related laws, etc. on behalf of the Corporate Debtor.

  • This was already emphasized by IBBI circular dated 3 January 2018.

(h) Limitation On Insolvency And Bankruptcy Code, 2016: No Phantom Claims Allowed

In the matter of B.K. Educational Services Private Limited v Parag Gupta, the apex court held that, Section 238A provides for the mechanism to apply the the provisions of Limitation Act 1963 to applications made under IBC 2016.

  • Applications for default of time barred debt would be ineligible under IBC.

(i) Insertion of new section 29A. Persons not eligible to be resolution applicant.

In the case of Essar Steel India Limited, the Supreme Court of India not only interpreted Section 29A of the Insolvency and Bankruptcy Code, 2016 in depth, but also threw light on certain ambiguities relating to its applicability. The following amendments were suggested by the court:-

NPA related disqualifications of resolution applicant u/s 29A (C) :

  • Persons controlling accounts which have remained Non-Performing Assets (NPA) in excess of one year at the time of submission of resolution plan.

  • Disqualification shall not apply to financial entities which are not related parties to Corporate Debtor.

  • This clause is not applicable to a resolution applicant who has acquired a NPA through corporate insolvency resolution process during the last three years before the date of submission of resolution plan.

Disqualification of resolution applicant due to criminal conviction u/s 29A (D):

  • Conviction for two years or more would be ineligible only if the offense relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC 

  • Conviction for seven years or more would be ineligible irrespective of statute.

  • Section 29A (d) will not apply if more than two years have elapsed from the date of release from imprisonment.

Reducing the Scope of Connected Person u/s 29A:

The definition of “financial entities” now includes the following additional classes of entities: 

(i) Any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and 

(ii) Any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017.

Affidavit for eligibility u/s 29A:

As per Section 30(1), the resolution applicant shall submit resolution plan along with an affidavit stating they are eligible u/s 29A.

  • Onus shifted to resolution applicant to state its eligibility u/s 29A.

  • RP/CoC may not have to go overboard in investigating 29A compliance from a completeness standpoint.

(j)  Management of the Corporate Debtor from end of CIRP till approval of Plan

Section 23 Resolution Professional shall continue to manage operations of the Corporate Debtor even after the end of 180 / 270 days period if the Resolution plan is submitted to NCLT.

Implications:

(i) Eliminates any ambiguity between the role of RP/ suspended board after the CIRP period. 

(ii) Ensures preservation of value in the Company until the resolution plan is approved by NCLT.

(k)  Shareholding by virtue of conversion of loan into equity shall not be treated as Related Party.

Section 21(2) provides that those persons, who became a “related party” solely on account of conversion of any loan or debt into equity, shall be exempted from the prohibition of being a Resolution Applicant. The very rationale behind such exemption is that conversion of loan/ debt into equity after a particular time-period or on happening of any trigger event happens to be a very common clause of several loan/ debt agreements executed between the lender and borrower. Thus the conversion that takes place is only on account of an agreement which was essentially of a debt nature.

Some Landmark Judgments In The Year 2018:

(i) In B.K. Educational Services Private Limited v. Parag Gupta and Associates, a division bench of SC held that, the Limitation Act, 1963  will apply to applications that are made under s. 7 and s. 9of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on and from the commencement of IBC on 01.12.2016. The SC has through this judgment clarified that IBC proceedings cannot be initiated based on time barred claims.

(ii) In Binani Industries Limited v/s Bank of Baroda, the NCLAT held that the maximisation of the value assets of Corporate Debtor cannot be ignored and interests of all stakeholders are to be taken into account in the resolution plan.  

(iii) In State Bank of India v. MBL Infrastructures Ltd., the NCLAT held that Section 61 clearly stipulates that an appeal has to be preferred within 30 days from the order of the adjudicating authority but a delay not exceeding 15 days can be condoned in filing the appeal if the appellant is able to satisfy the appellate authority that there was sufficient cause for not filing the appeal within the prescribed period of 30 days.

(iv) In Indiabulls Housing Finance Ltd. v. Shree Ram Urban Infrastructure Ltd., the NCLAT held that such an application would not be maintainable on the ground that the stage of corporate insolvency resolution process is a stage prior to that of liquidation or winding proceedings. Hence, once the second stage proceedings have already initiated, the question of reverting back to the first stage of corporate insolvency resolution process or preparation of resolution plan does not arise.

Conclusion: 

The objective of the amendment primarily is to prevent un-scrupulous persons from misusing or vitiating the provisions of the code. The amendment has been designed to fine-tune and streamline the CIRP and deal with many of the contentious issues raised under it. Amendments ensure transparency in the CIRP by imposing strict eligibility criteria for being a resolution applicant and presenting a resolution plan and by introducing multiple layers of safeguard. It also attempts to remove backdoor entry of un-scrupulous promoters. Such wide scope of disqualifications will restrict the number of participants in the CIRP but improves its credibility.

Further, the recognition given to the homebuyers shall prove to be a strong deterrent for promoters and real estate developers from raising huge amounts from unsuspecting home-buyers foe real estate projects and defaulting on their commitment.

Moreover, it will be intriguing to see how promoters, who have defaulted because of factors beyond their control such as genuine poor business performance and now, are ineligible to submit resolutions plans, choose to react to Amendment act. Overall all amendments have brought about ample clarity qua the leniency extended to Micro, Small & Medium Enterprises (MSME’s) by the code.         

Authors:

Rahul Kanoujia and Mayank Gupta, Students at GNLU, Gandhinagar

As published on legaldesire.com

BS: Inter-Creditor pact a non-starter: Debtors to SC

30 March 2019: Corporates opposing the RBI’s February 12 circular on loans resolutions have submitted to the Supreme Court that the Inter-Creditor Agreement (ICA) among banks as a possible debt resolution framework has failed to take off as the relevant institutions like LIC, HUDCO, IFCI, IIFCL, NIACL, SIDBI, GIC are not signatory to it.

The companies have slammed the slow progress of the inter-creditor arrangement among the banks saying it is a non-starter due to the absence of relevant members even though the Reserve Bank of India (RBI) has endorsed its utility. 

The ICA is seen as helping the debt defaulters to avoid bankruptcy proceedings and a possible debt resolution mechanism.

The ICA is a non-starter because 49 out of 85 lenders (that is 58 per cent) have so far not signed the agreement even after the expiry of eight months, and 10 of the non signatories are government-owned financial institutions and major lenders in the Infrastructure sector — LIC, HUDCO, IFCI, IIFCL, NIACL, SIDBI, GIC, the pleaders’ their submission stated.

“None of the Non Banking Financial Companies/Asset Reconstruction Companies (NBFCs/ARCs) are party to the ICA, without whom the agreement mechanism will not be effective,” the companies further added.

The petitioners said: “In its written submission, the RBI has endorsed the ICA as a possible debt resolution mechanism in its submissions to the Supreme Court, since it is aimed at helping debt defaulters to avoid bankruptcy proceedings and requires only 66 per cent approval of lenders.”

Indian banks, who are trying to sell their troubled assets are part of the ICA.

A group of banks, including public sector, private sector and foreign banks, signed an inter-creditor agreement in 2018 to push for the speedy resolution of non-performing loans on their balance sheets as per which a majority representing two-thirds of the loans within a consortium of lenders should now be sufficient to override any objection to the resolution process coming from dissenting lenders. 

Under ICA, minority lenders who suspect they are being short-changed by other lenders can now either sell their assets at a discount to a willing buyer or buy out loans from other lenders at a premium. 

The inter-creditor agreement is aimed at the resolution of loan accounts with a size of Rs 50 crore, anything above that are under the control of a group of lenders. 

It is part of the broader “Sashakt” plan approved by the government to address the problem of resolving bad loans. 

ICA Chairman Sunil Mehta is of the opinion that disagreement between joint lenders is the biggest problem in resolving stressed assets. Many debters and lenders believe that the holdout problem, where the objections of a few lenders prevent a settlement between the majority lenders, will be solved through the inter-creditor agreement.

Such an agreement may persuade banks to embark more quickly on a resolution plan for stressed assets. This is an improvement on the earlier model, which relied solely on the joint lenders’ forum to arrive at a consensus among creditors. 

However, the companies approaching Supreme Court against the February 12 Circular on loan resolutions said this alternate mechanism is not taking off.

Indian banks have been forced by the RBI to recognise troubled assets on their books, but their resolution has remained a challenge. 

Supreme Court has heard a bunch of petitions across the sectors — Power, Ship-building, Sugar, Telecom — opposing the RBI’s February circular. 

A two-judge bench of Justice Rohinton Fali Nariman and Justice Vineet Saran is hearing a bunch of petitions moved by power, sugar, and ship- building companies challenging the RBI’s circular. 

On February 12, 2018, the RBI had asked banks and other lenders to either execute a resolution plan for big stressed accounts or file insolvency petitions against them in the National Company Law Tribunal (NCLT).

The Business Standard reported

ET: NCLAT seeks dues details from IL&FS

30 March 2019: The National Company Law Appellate Tribunal (NCLAT) has directed IL&FS to provide the details of the dues at 13 of its group companies and those of the creditors so that outstanding payments to lenders could be released. 

All but 50 of the 169 domestic group companies of IL&FS are currently enjoying a moratorium on all financial claims against them. NCLAT has given the moratorium to allow an orderly resolution of more than Rs 91,000 crore in claims against IL&FS.

“We may pass (an) order (on) slowly discharging certain liabilities (of amber companies) so that there is not a complete stoppage of payments,” the NCLAT bench led by Justice SJ Mukhopadhyaya said on Friday. The two-member NCLAT bench was hearing a plea by senior secured lenders to “amber” companies that these entities be directed to start repayments. 

All group companies of IL&FS are being classified according to their ability to meet payment obligations. Group companies able to meet all payment obligations are categorised as ‘green’. Those companies able to meet only operational payments and senior secured debt obligations are categorised as “amber”. The others are categorised as “red.”

Of the 169 IL&FS group companies, 50 entities have been classified as green, while 13 have been classified as amber and 80 as red. The total outstanding debt of the 13 “amber” companies is Rs 16,373 crore. 

The bench also clarified that while there was no stay on the resolution of the IL&FS group companies, the board needed to seek the approval of the appellate tribunal before finalising a resolution plan for any group company. The bench said it would hear the central bank on the issue of the classification of NPAs at the next hearing, scheduled for April 9.

Lenders to IL&FS group entities are currently prohibited from recognising any group account as a non-performing asset without prior permission of the appellate tribunal.

The Economic Times reported

FE: Essar Steel: Upset with NCLAT, banks to move court

30 March 2019: Lenders to Essar Steel have decided to move the Supreme Court in the event the National Company Law Appellate Tribunal pressures them to pay unsecured financial creditors more than they are inclined to. “It is unfair that CoC (committee of creditors) be repeatedly asked to reconsider commercial decisions which we have taken with all stakeholders’ interest in mind and which, most importantly, has already been approved by the tribunal,” a banker with a state-owned lender said. Banks could approach SC before April 9 with a plea that proceedings in the Essar Steel case be expedited.

The NCLAT has directed lenders to consider a higher payout to unsecured financial creditor Standard Chartered. As of now, the foreign bank is set to receive only Rs 60.71 crore or 1.7% of the admitted claims under the approved ArcelorMittal resolution plan.

Lenders will vote on Saturday on whether to set aside of Rs 1,000 crore from their receipts for operational creditors. Most lenders are understood to be in favour of this move by which the amount will be distributed pro rata to operational creditors on basis of their admitted claims, bankers aware of the development told FE.

The results of the 24-hour electronic voting will be known by Saturday and subsequently presented to the NCLAT.
“Operational creditors’ accepted claims stand at around Rs 5,000 crore and for them the CoC is likely considering setting aside Rs 1,000 crore,” a senior banker said.

When stakeholders were initially invited to submit claims, Standard Chartered had lodged its claim for Rs 3,487.09 crore. The lender was later classified as a secured financial creditor with Rs 2,646.05 crore as principal outstanding. However, the value of `60.71 crore was arrived at based on the value of the security possessed by the applicant and the liquidation value of the assets of the company.

According to the ArcelorMittal resolution plan approved by the National Company Law Tribunal, operational creditors (OCs) and other stakeholders, having a debt value of Rs 1 crore and above, on the basis of their admitted claims, would receive nil amount. There is a provision of Rs 196 crore for those OCs whose outstandings is less than Rs 1 crore.

The plan envisages an upfront payment of Rs 42,000 crore to secured financial creditors. Moreover, unsecured financial creditors are to be paid Rs 17.4 crore while Rs 30.5 lakh is to be paid upfront to unsecured FCs whose admitted claims are less than Rs 10 lakh.

On March 20, the appellate tribunal directed Essar Steel’s resolution professional to call for a fresh bankers’ meet to reconsider distribution of the Rs 42,000-crore upfront payment, under the ArcelorMittal resolution plan, between financial and operational creditors. The NCLAT was hearing an urgent application moved by Standard Charted Bank and is next scheduled to hear the matter on April 9.

The appellate tribunal also reportedly said that the March 8 order of the Ahmedabad-based NCLT bench approving ArcelorMittal plan should be implemented in “letters and spirit”. According to the Ahmedabad bench’s March 8 written order, the two-member bench proposed and advised that of the Rs 42,000 crore to be received from ArcelorMittal as upfront payment to financial creditors, the CoC could allot 85% for distribution on a pro rata basis among all financial creditors, which could address Standard Chartered’s concerns.

The NCLT further suggested that another 15%, amounting to Rs 6,300 crore be distributed among other OCs and other stakeholders, who are going to receive nil amount, i.e. those OCs whose outstandings are more than Rs 1 crore and more so they recover at least 50% of their principal dues.

The Financial Express reported

BS: Banks face higher provisions on resolution delays to big-ticket NCLT cases

30 March 2019: Four big-ticket National Company Law Tribunal (NCLT) cases — Essar Steel, Bhushan Power and Steel, Jaypee Infratech, and Alok Industries — will see their resolution getting pushed to the next financial year (2019-20), increasing the provisioning burden on lenders. It will also postpone the benefit of reversal of money set aside as provisions.
 
These cases were in advanced stages of resolution, and their settlement was expected by the end of the March quarter of 2018-19. This would have brought relief to lenders in the form of release of provisions made, which could have been used for some other stressed accounts.           
Instead, many banks will now have to make extra provisions, said senior public sector bank executives. These accounts, part of the RBI’s first list, were classified as non-performing assets (NPAs) in March 2016, and were taken to the NCLT in 2017-18 for insolvency proceedings.
 
In the normal course, lenders would have to make 100 per cent provisions in four years. The aggregate provisions for these were about 70 per cent, according to ICRA’s estimates.
 
Banks with exposure to Essar Steel were expecting significant write-backs on account of the account’s resolution by March 31, 2019. However, if the account remains unresolved, they would need to increase the provisions, affecting their balance sheets.
 
For example, SBI is expecting to write back about Rs 6,000 crore from Essar’s resolution in Q4, according to a senior official at SBI. However, if the resolution does not happen, the bank would need to make additional provisions, said the official. SBI’s provisions for List 1 cases were about 66 per cent.
 
Earlier, Mallikarjuna Rao, MD and CEO of Allahabad Bank, had said the bank was expecting a write-back of Rs 360 crore from all NCLT accounts by the end of Q4. Of this, a major chunk would be from Essar, he had said.
 
According to Mrutyunjay Mahapatra, MD and CEO of Syndicate Bank, if the Essar Steel account remains unresolved till March 31, the bank will have to make ageing provisions.
 
In June 2017, the RBI had asked banks to refer 12 accounts with exposure of Rs 2.5 trillion to the NCLT under the Insolvency and Bankruptcy Code. Out of these, three accounts aggregating Rs 80,000 crore have been resolved:  Bhushan Steel (went to Tata Steel), Electrosteel (to Vedanta) and Monnet Ispat (JSW).
The Business Standard reported