May 10, 2018

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- Santosh B. Parab, General Counsel & Head – Legal [ IDFC Bank Limited ]

Santosh B Parab

It was possible for banks to prepare and implement a resolution plan with regard to a stressed asset under the RBI Extant Instructions similar to that under the provisions of IBC, just that the resolution plan under IBC requires approval of National Company Law Tribunal (NCLT) and is implemented by Insolvency Resolution Professional, a third party appointed with the approval of NCLT

The Reserve Bank of India (RBI) circulars/ guidelines on the resolution of stressed assets including Framework for Revitalizing Distressed Assets, Strategic Debt Restructuring Scheme, and Scheme for Sustainable Structuring of Stressed Assets issued from time to time (“RBI Extant Instructions”) were overlapping with the provisions of the Insolvency and Bankruptcy Code (IBC) post its enactment and coming into effect. It was possible for the banks to prepare and implement a resolution plan with regard to a stressed asset under the RBI Extant Instructions similar to that under the provisions of IBC, just that the resolution plan under IBC requires approval of National Company Law Tribunal (NCLT) and is implemented by Insolvency Resolution Professional, a third party appointed with the approval of NCLT. The bankers pursuant to RBI Extant Instructions were required to set up a Joint Lenders Forum (JLF) and under IBC, required to form a Committee of Creditors (CoC), with powers to both JLF and CoC to decide on the resolution plan and with such decisions, taken respectively by JLF and CoC binding on all the other lenders. Therefore, there was need to remove this overlap between the RBI Extant Instructions and IBC.

RBI has, vide its circular dated February 12, 2018, about Resolution of Stressed Assets – Revised Framework (“Revised Framework”), withdrawn the RBI Extant Instructions. However, still there are lot of overlaps and/or similarities between the Revised Framework and the IBC and it looks like the ultimate destination for all the stressed assets is NCLT.

The Revised Framework has also discontinued the JLF, which was an institutional framework for resolution of stressed assets, leaving it to an individual lender to decide whether to proceed under the Revised Framework or refer the stressed assets to NCLT under IBC. This Article is an attempt to bring out the comparison between the IBC and Revised Framework.

IBC Revised Framework
Who can initiate the process? Any one of the Financial Creditors, Operational Creditors or Corporate Debtors (either individually or jointly).
Board of Directors becomes defunct.
Any Lender, all Lenders - singly or jointly.
Lenders include all scheduled commercial banks and all India financial Institutions.
NBFCs are not covered under the definition of lenders.
Trigger for initiation of the process Where minimum amount of default is Rupees One Lakh. As soon as there is default in borrower’s entity account.
Default defined as non-payment of debt when the whole or part of the installment of amount of debt has become due and payable and is not paid by the debtor or corporate debtor, as the case may be.
Applicability Irrespective of the amount of debt. It seems the circular is applicable for the borrower whose aggregate debt is above `100 crore.
Type of Process Corporate Insolvency Resolution Process Resolution Process
Content of Resolution Plan Resolution Plan may provide for measures required for implementing it, including but not limited to those mentioned in Regulation 37 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Resolution Plan may involve any actions/plans/reorganization including but not limited to regularization of the account by payment of all overdues by the borrower entity, sale of exposures to other entities/investors, change in ownership or restructuring.
Moratorium/Standstill/Calm Period Applicable as per Section 14 of the IBC. No provision pertaining to Moratorium/Standstill.
Appointment of IRP/IP IRP to be appointed immediately on admission of application. No concept of appointment of IRP.
Control of Management of the Borrower Control of the Management vest in IRP. Board of Directors becomes defunct. Control remains with the Promoters.
Valuation The IRP has to appoint two registered valuers for calculating Liquidation Value and Fair Value. Resolution Plan involving structuring/change in ownership in respect of large accounts (above `100 crore) shall require independent credit evaluation of the residual debt by credit rating agencies (CRAs) authorized by RBI. While accounts with aggregate exposure of `500 crore and above shall require two independent credit evaluation.
Purpose of Valuation For evaluating bids received from Resolution Applicants. Only such Resolution Plans which receive a credit opinion of RP4 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation.
Reporting/Public Announcement Insolvency Resolution Professional shall make a public announcement of the initiation of the corporate resolution process as soon as the application is admitted by the NCLT (within three days of his appointment). The lenders are required to report credit information, including classification of account as SMA to CRILC on all the borrower entities with aggregate exposure of `5 crore and above with effect from April 1, 2018. In addition, the lenders shall report to CRILC all borrower entities in default (with aggregate exposure of `5 crore and above) on a weekly basis at the close of business every Friday.
Timeframe for completion The Corporate Insolvency Resolution Process shall be completed within a period of 180 days from the date of admission of the application (plus 90 days at the discretion of NCLT). The Resolution Process has to be implemented within 180 days from the date of first default (for account with aggregate exposure at `2000 crore and above).
For exposure below `2000 crore and above `100 crore, RBI intends to announce over a two-year period.
Decision-making/conditions for RP All decisions of the Committee of Financial Creditors are required to be taken by a vote of not less than 75% of voting share of the financial creditor. Such decisions would be binding on all the creditors.
Resolution Plan agreed by Committee of Financial Creditors and approved by NCLT.
The decision must be taken unanimously by all the lenders.
The Borrower entity is no longer in default. If RP
involves restructuring, all related documentation
including creation and perfection should have been
Consequences of nonimplementation/failure of RP The Corporate Debtor will undergo liquidation process. The Lender is required to file insolvency application under IBC within 15 days from the expiry of 180 days period provided for implementation of the resolution process.
Is the RP compulsory Yes. However, the Corporate Debtor can also be directly referred for liquidation. The Lenders are free to file insolvency petitions under the IBC against borrowers even before expiry of the timelines, or even without attempting a RP outside IBC.
Cost of the process To be borne by the applicant and may be made a part of Insolvency Resolution Process Cost to be paid in priority as per the Resolution Plan. Fees of the CRAs to be paid by the Lenders.
Recovery Action against Borrower Recovery Action can be initiated before admission of application by NCLT, however, post admission of application (i.e., during moratorium period, the recovery action cannot be continued). The Lender would have a right to take recovery action (which may or may not form a part of RP). However, if recovery does not happen within 180 days whether the application will have to be made under IBC against the Borrower is not clear.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.


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