A prag­matic leg­is­la­tion

The In­sol­vency and Bank­ruptcy Code 2016 is a ma­jor over­haul of the ex­ist­ing frame­work deal­ing with in­sol­vency of cor­po­rates, in­di­vid­u­als, part­ner­ships and other en­ti­ties. Two ex­perts dis­cuss the pro­vi­sions

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The cen­tral gov­ern­ment has en­acted the In­sol­vency and Bank­ruptcy Code (IBC) 2016 to over­ride other ex­ist­ing laws on mat­ters per­tain­ing to in­sol­vency and bank­ruptcy. The code in fact aims at a ‘cred­i­tor in con­trol’ regime with fi­nan­cial cred­i­tors ex­er­cis­ing con­trol. This is done through what is de­scribed as In­sol­vency Pro­fes­sion­als in the event of a sin­gle de­fault in re­pay­ment of any loan or in­ter­est. This will mean de­fault­ing en­ti­ties need to im­ple­ment an ac­cu­rate cash flow fore­cast­ing mech­a­nism to iden­tify mis­matches of in­flows with com­mit­ments on a timely ba­sis.

“IBC en­ables the banks to place a cor­po­rate debtor into a res­o­lu­tion process that is time bound,” says Ashish Ch­hawch­haria, part­ner - Re­struc­tur­ing Ser­vices, Grant Thorn­ton Ad­vi­sory. “If a res­o­lu­tion is not achieved within a max­i­mum of 270 days, the cor­po­rate debtor en­ters liq­ui­da­tion. IBC en­ables the banks to pur­sue a res­o­lu­tion with­out the need for the con­sent of the pro­moter. It there­fore pro­vides a mech­a­nism for the banks to proac­tively seek a so­lu­tion to its NPAs,” he adds.

COMPREHESIVE LAW

Prem Ra­jani, man­ag­ing part­ner, Ra­jani As­so­ciates, holds sim­i­lar views. Says he: “IBC of­fers a uni­form and a com­pre­hen­sive in­sol­vency leg­is­la­tion, which is ap­pli­ca­ble to all com­pa­nies, part­ner­ships and in­di­vid­u­als. One of the fun­da­men­tal fea­tures of the code is that it al­lows cred­i­tors to as­sess the vi­a­bil­ity of a debtor as a busi­ness de­ci­sion and agree upon a plan for its re­vival or a speedy liq­ui­da­tion. This will ben­e­fit not just the cred­i­tor and debtor com­pa­nies, but also the over­all econ­omy be­cause cap­i­tal and pro­duc­tive re­sources will get re­or­ga­nized rel­a­tively quickly.”

Ra­jani points out to a land­mark judg­ment of the Supreme Court with re­gard to IBC in the mat­ter of In­noven­tive In­dus­tries ver­sus ICICI Bank and says the apex court has held that the courts and tri­bunals across the coun­try should take no­tice of the ex­em­plary shift in the law ush­ered un­der IBC.

“The judg­ment (of the Supreme Court) also clearly rec­og­nizes the ob­ject of the code as it pro­vides a time bound regime on in­sol­vency and bank­ruptcy which can ease to some ex­tent the process of exit of com­pa­nies in dis­tress and also in pre­serv­ing value of as­sets stuck in such dis­tress sit­u­a­tions. The over­lap­ping leg­is­la­tions which would be in­con­sis­tent to the pro­vi­sions of the code present a chal­lenge and to that ex­tent the rul­ing in In­noven­tive In­dus­tries is wel­comed thereby clar­i­fy­ing the over­rid­ing na­ture of the code in case of in­con­sis­tency. Read­ing the non-ob­stante clause con­tained in Sec­tion 238 of the code in the widest terms pos­si­ble and giv­ing im­pe­tus to the strict time­lines and ob­jects of the code will bring cer­tainty and make it dif­fi­cult for de­fault­ing debtors to take shel­ter un­der sev­eral prior or state leg­is­la­tions, in or­der to de­lay the in­sol­vency process. This would clearly pro­vide an im­pe­tus for res­o­lu­tion of plethora of dis­tressed ac­counts in the In­dian bank­ing sys­tem through the regime in­tro­duced un­der the code,” he ex­plains.

EAR­LIER LAWS

Ra­jani main­tains that the ear­lier regime re­cov­ery pro­ceed­ings by cred­i­tors, ei­ther through the agree­ments or through special laws such as the Re­cov­ery of Debts Due to Banks and Fi­nan­cial In­sti­tu­tions Act, 1993 or the SARFAESI Act, 2002 - has not had the de­sired out­comes, leading to a fall of In­dia’s rank­ing in ease of do­ing busi­ness. The wind­ing up pro­vi­sions of the Com­pa­nies Act, 1956 have also not been able to pro­vide an ef­fec­tive re­cov­ery of out­stand­ing debts and nei­ther re­struc­tur­ing of debts. “In this con­text, the code was in­tro­duced to plug the gaps. It also amends 11 im­por­tant leg­is­la­tions. In­dia now has a bank­ruptcy and in­sol­vency frame­work which is com­pa­ra­ble with in­ter­na­tional stan­dards and this will go a long way in bring­ing an el­e­ment of cer­tainty and pre­dictabil­ity to com­mer­cial trans­ac­tions in the coun­try and fa­cil­i­tat­ing the ease of do­ing busi­ness,” says he.

Ch­hawch­haria points out that the ear­lier regime did not pro­vide the cred­i­tors (the banks) with suf­fi­cient lever­age, nor was it time bound. “IBC is what is known as a ‘cred­i­tor in pos­ses­sion’ law, pro­vid­ing the banks with con­sid­er­able say in the process. The max­i­mum 270 days pro­vides a suit­able in­cen­tive to all stake­hold­ers to be proac­tive,” he says.

HELP­FUL TO BANKS

Ch­hawch­haria is of the view that bank lend­ing de­pends on many fac­tors, in­clud­ing the bal­ance sheet of the in­di­vid­ual bank con­cerned, the lend­ing prospects avail­able to it and not the least the gen­eral econ­omy. “One view is that a bank can get rid of many

of its NPA prob­lems and it should be able to fo­cus more on lend­ing. An­other view is that in the light of the di­rec­tive of the RBI, it might make cer­tain banks more risk averse when it comes to new lend­ing.,” he adds.

Ra­jani is con­fi­dent that banks can take ad­van­tage of the code to im­prove per­for­mance on a sus­tained ba­sis to re­main com­pet­i­tive. In­stead of wait­ing for reg­u­la­tory di­rec­tions, banks can file in­sol­vency pro­ceed­ings on their own to re­al­ize promptly the best value for com­pany’s as­sets. “I strongly feel that banks should strengthen their in­ter­nal due dili­gence, credit mech­a­nism and mon­i­tor­ing of loans to min­i­mize the risks of such events, which even­tu­ally re­sult in NPAs. This will in turn also help in growth of the econ­omy. The code was a sys­tem put in place when the gov­ern­ment and RBI flagged the bad loan cri­sis of the coun­try. It will al­low fast res­o­lu­tion of bad loans. The code de­bars wil­ful de­fault­ers and ex­ist­ing pro­mot­ers from bid­ding for stressed as­sets of com­pa­nies un­der­go­ing in­sol­vency pro­ceed­ings,” says he.

CASE STUDY

Ra­jani men­tions that re­cently, the Na­tional Com­pany Law Tri­bunal (NCLT), Hy­der­abad, in the mat­ter of Syn­ergiesDooray Au­to­mo­tive ap­proved a res­o­lu­tion plan un­der the code. The plan in­volved fi­nan­cial re­struc­tur­ing of the dues of fi­nan­cial and op­er­a­tional cred­i­tors, pay­ment of dues to the gov­ern­ment, and also in­fu­sion of cap­i­tal (in­clud­ing eq­uity) from the pro­mot­ers. It also en­vis­aged fund­ing against re­ceiv­ables from other cor­po­rate debtors and through op­er­a­tions. The pay­ments to the cred­i­tors and the gov­ern­ment will be stag­gered over the next few years too. “This goes to show that the code does look into the aspect of tak­ing out the cor­po­rates from the debt trap and also cre­ate fur­ther cap­i­tal for the com­pany. There have been other cases too, wherein res­o­lu­tion plans have been ap­proved and in few cases liq­ui­da­tion or­der has also been passed’” says he.

He, how­ever, feels that one of the key as­pects of time-bound res­o­lu­tion is the in­fra­struc­ture of the NCLT. Sep­a­rate benches are needed for the IBC mat­ters and also to in­crease the num­ber of mem­bers. The gov­ern­ment is plan­ning to in­crease the strength of mem­bers and the var­i­ous NCLTs which will stream­line the process, says he.

DEBT-SER­VIC­ING

Ch­hawch­haria says many of the cor­po­rate debtors com­ing to IBC are very ma­te­ri­ally over-lever­aged, so much so that the value of the en­ter­prise is ma­te­ri­ally less than the to­tal quan­tum of the debt. “In such cir­cum­stances the eq­uity of the cor­po­rate debtor is ar­guably of neg­li­gi­ble or nil value. It is there­fore likely to be im­pos­si­ble for such debtors to at­tract new cap­i­tal in the ab­sence of a fi­nan­cial re­struc­tur­ing. One could also re­fer to their cur­rent debt­ser­vic­ing obli­ga­tions as a noose around their necks. It is an­tic­i­pated that one re­sult of IBC res­o­lu­tions will be cor­po­rate debtors with sig­nif­i­cantly lower debt obli­ga­tions go­ing for­ward, ie they will have to come out of the debt trap. This does not guar­an­tee that there will be no prob­lems in the fu­ture. How­ever, with sig­nif­i­cantly lower debt, the cor­po­rate will at least have a much im­proved chance of mak­ing a full re­cov­ery,” he ex­plains.

What about the pro­vi­sion in the law for even sup­pli­ers to pro­ceed against en­ti­ties in cases of de­fault?

“If a sup­plier of goods or ser­vices to a cor­po­rate is not paid for such goods or ser­vices, then it should have re­course; it should be able to pur­sue pay­ment through le­gal means,” avers Ch­hawch­haria. “If hav­ing clearly es­tab­lished that a debt is due if it re­mains un­paid then it is not un­rea­son­able to as­sume that the debtor has fi­nan­cial prob­lems and may ben­e­fit from the IBC process. On one view, the bank is also a provider of ser­vices - the lend­ing of money - so why should other sup­pli­ers not also be al­lowed to avail them­selves of the IBC? In­deed, while many banks ben­e­fit from se­cu­rity for their loans and could take en­force­ment ac­tion, most other sup­pli­ers of goods or ser­vices are un­se­cured with no such op­tion,” he coun­ters.

Ra­jani ex­plains the process un­der sec­tion 9 of the code where sup­pli­ers can ini­ti­ate cor­po­rate in­sol­vency res­o­lu­tion process in case a de­fault is com­mit­ted by cor­po­rate debtor: “An ap­pli­ca­tion can be made be­fore the NCLT for ini­ti­at­ing the res­o­lu­tion process by an op­er­a­tional cred­i­tor who will give a de­mand no­tice of 10 days to cor­po­rate debtor be­fore ap­proach­ing the NCLT. If cor­po­rate debtor fails to re­pay dues to op­er­a­tional cred­i­tor or fails to show any ex­ist­ing dis­pute or ar­bi­tra­tion, then the op­er­a­tional cred­i­tor (sup­plier) can ap­proach NCLT.”

SIM­I­LAR­I­TIES

He says the code in In­dia is sim­i­lar to the ad­min­is­tra­tor-led regime in the United King­dom and is in con­trast to the U.S. Chap­ter 11 process, where the debtor re­tains pos­ses­sion of the busi­ness un­der the su­per­vi­sion of the U.S. Bank­ruptcy Court.

Ch­hawch­haria con­curs: “The IBC has many sim­i­lar­i­ties to the pri­mary UK in­sol­vency leg­is­la­tion and that of other for­mer Com­mon­wealth coun­tries - for ex­am­ple the abil­ity to chal­lenge an­tecedent trans­ac­tions such as pref­er­en­tial treat­ment of cer­tain cred­i­tors or avoid­ance of un­der­val­ued trans­ac­tions. “How­ever, there are also parts that are likely to be unique to In­dia such as the dis­qual­i­fi­ca­tion of cer­tain par­ties from be­ing res­o­lu­tion ap­pli­cants.”

Prem Ra­jani is con­fi­dent that the In­sol­vency and Bank­ruptcy Code will fa­cil­i­tate ease of do­ing busi­ness in In­dia

Ashish Ch­hawch­haria points out to the ‘cred­i­tor in pos­ses­sion’ aspect of the new law, pro­vid­ing banks with con­sid­er­able say

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