Despite facing its share of challenges, the IBC has been a step in the right direction in order to create a robust debt market in India...The implementation of the Insolvency and Bankruptcy Code, 2016 (IBC) was started on December 1, 2016 with an intent to provide a consolidated legal framework to allow resolution of the corporate debtor in a time-bound manner. The journey of the IBC right...
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Despite facing its share of challenges, the IBC has been a step in the right direction in order to create a robust debt market in India...
The implementation of the Insolvency and Bankruptcy Code, 2016 (IBC) was started on December 1, 2016 with an intent to provide a consolidated legal framework to allow resolution of the corporate debtor in a time-bound manner. The journey of the IBC right from the onset has been subjected to various challenges such as (a) reluctance on the part of the financial creditors in taking companies to the National Company Law Tribunal (NCLT) under IBC; (b) preventing backdoor entry for the promoters with significant haircut on the debt due and payable to the creditors; (c) the rights of home buyers when the real estate company ended up in NCLT; (d) difficulties in attracting investors to buy the distressed corporate debtor under a resolution plan; (e) withdrawal of the corporate insolvency resolution process post its commencement; (f) issues with respect to sharing between financial creditors and operational creditors; and (g) delay in completion of the resolution process. The Government, the Reserve Bank of India (RBI), the courts and the Insolvency and Bankruptcy Board of India (IBBI) have been addressing these challenges in a proactive manner. In fact, this has led to three amendments to the IBC by the Parliament, several amendments to the regulations by the IBBI, and the laying down of important legal principles to uphold the spirit of the IBC by the courts including the Hon'ble Supreme Court of India. In this article, we highlight some of the key developments that have taken place to address the challenges.
First Amendment: In order to prevent backdoor entry by the promoters despite their antecedents such as being declared a willful defaulter or undischarged insolvent, the first amendment to the IBC was made in 2017 by introducing Section 29A. Section 29A provides a list of past conducts, which makes a person ineligible to submit a resolution plan for a company undergoing insolvency resolution. The introduction of Section 29A primarily made the promoters ineligible. It also had impact on many high-profile resolution applicants like Arcelor Mittal, who had to clear the dues of Uttam Galva to become eligible to bid for Essar Steel.
The second amendment, brought in the year 2018, introduced comprehensive changes to the IBC. Many home buyers contested for their role as financial creditor, where the matter reached the Hon'ble Supreme Court. The Hon'ble Supreme Court in the matter of JP Infratech2 recognized home buyers as financial creditors. Later, by the second amendment, the home buyers were specifically recognized as financial creditors under the IBC.
The second amendment also reduced the voting percentage from 75% to 66% for approval of various matters in a Committee of Creditors (COC), including approval of resolution plan. This brought much relief to various matters where decisions were not getting through due to non-participation of many financial creditors. The second amendment introduced Section 12A, which gave power of withdrawal to the original applicant with approval of 90% of the COC. This helps in arriving at a settlement with creditors by the promoters after admission of the insolvency application.
The resolution plan and its implementation are critical elements in the overall success of the IBC. One of the key challenges was distribution of the proceeds of the resolution plan and settlement of various creditors. Payment of liquidation value to the operational creditors became the focal point of the legitimacy of such distribution. This led the National Company Law Appellate Tribunal (NCLAT), in the matter of Binani Cement3, to propound a principle of equal treatment of stakeholders who are similarly placed. Later, in the Essar Steel matter4, the NCLAT further expanded it to put the operational creditors on an absolute equal footing with the financial creditors. It was felt that this will be counterproductive and will lead to less resolution as the lenders may prefer liquidation over resolution. The Government took cognizance of this immediately and the third amendment was introduced and passed within a month of the NCLAT's judgment in Essar Steel. The third amendment has specifically conferred power on the COC to consider the manner of distribution under a resolution plan. It has also recognized the order of priority under Section 53 applicable to a distribution under a resolution plan, which was otherwise held to be not applicable in the Essar Steel judgment.Earlier, the time limit of 270 days was extended due to a host of legal proceedings and other reasons under the principle of exclusion. This resulted in many resolution processes getting dragged way beyond 270 days. The third amendment has put an overall cap of 330 days for completion of the resolution process, which includes time spent in legal proceedings. This will help bring some certainty as to completion and end of resolution process. Another change which will promote resolution is a specific provision mentioning that a resolution plan is binding on the statutory authorities to whom statutory dues are owed. This helps in effectively addressing tax claims under a resolution plan and bringing certainty as to their settlement.
In order to ensure that banks took defaulting companies to NCLT under IBC, the RBI had come up with a first list comprising 12 defaulters and a second list, comprising 25 defaulters, against whom banks were mandated to commence proceedings under IBC. However, when the RBI came up with the circular dated February 12, 2018 mandating banks to pursue action against companies having an exposure of more than '20 billion under the IBC, the same was challenged and struck down by the Hon'ble Supreme Court in the Dharani Sugar matter5, on grounds that it did not have Central Government authorization and did not deal with a specific default.
Later, the RBI issued another circular dated June 7, 2019. Under that, the RBI provided for the framework to deal with default including the requirement to come up with a resolution plan within seven months from the default, failing which additional provisioning of 20%-35% (i.e. over and above the provisions already held) would be required to be made, depending on the timeframe, from the date of default. The additional provisions may be reversed if either a resolution plan is implemented or where resolution is pursued under IBC. This circular does not mandate the banks to take a company to IBC however the decision in this regard will be taken by banks factoring the impact of provisioning on the banks' books. Interestingly, in this circular, the RBI has clarified that it reserves the right to issue specific directions for initiation of insolvency proceedings against specific borrowers.
Dealing with cross-border insolvencies is a matter of significant importance in today's world. Sections 234 and 235 of the IBC provide for limited access to overseas assets on the basis of reciprocal arrangements with the concerned country. A committee on cross-border insolvency has recommended a comprehensive law on cross-border insolvencies based on the UNCITRAL model. However, no action has been taken on that yet.
We also have situations where almost an entire corporate group has been dragged into insolvency i.e. Videocon, Reliance Communications, etc. The complexities arising out of a group insolvency require a special treatment of law. Individual insolvency resolution processes for each corporate in a group may not yield desired results due to overlapping of assets and liabilities at group level. This was recently recognized by the NCLT in the Videocon group matter6, where Corporate Insolvency Resolution Professionals (CIRPs) of 13 Videocon group companies have been consolidated. However, such consolidation does not have any support from the legal framework under the IBC. Consolidation of such insolvencies in absence of such legal framework may be counterproductive.
Home buyers have been recognized as financial creditors by the second amendment. This was also upheld recently by the Hon'ble Supreme Court in the matter of Pioneer Urban Land7. However, that has not rendered significant help in finding any resolution in distressed residential projects. The matters like JP Infratech and Amrapali are still not resolved. The Hon'ble Supreme Court had to rope in the National Buildings Construction Corporation Limited to take control of development of distressed projects in Amrapali. However, that is not a solution for all distressed residential projects facing insolvencies. Home buyers, in an insolvency situation, need an out of box solution with respect to resolution from the Government. The Hon'ble Finance Minister has recently promised to deliver that.The IBC is being regarded as one of the key economic legislations post liberalization. The fear of losing an asset looms large before promoters who are unable to service the debt. It has changed the way credit appraisals happen and the manner in which debt obligations are being dealt with. Just like any change, the initial cycle of the implementation of the IBC has had its share of hits and misses. However, the ushering in of the IBC has been a step in the right direction in order to create a robust debt market in India.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.