Execution will be Key to Bankruptcy Law’s Success
T he buzzword now is the “bankruptcy law”. It is seen as a panacea for the problem of nonperforming loans, but it is a lot more than that provided the execution matches the intent.
That workers’ claim is above the dues to state and any dubious transaction two years prior to bankruptcy with related parties and one year in case of other contracts can be scrapped should offer protection to debtors.
Onceacorporatedebtordefaults,acorporate insolvency resolution process (CIRP) can be initiated through the National Company Law Tribunal (NCLT). The CIRP should be completed within 180 days from the date of admission and can be extended by a maximum of 90 days. This way all stakeholders come to an agreement to restructure the balance sheet with write-offs and provide an opportunity for thedebtortoturnaroundwithoutgoingunder the hammer. This is different to CDR, where only the debt repayment is deferred.
NCLT shall declare a moratorium until completion of the resolution process, or a liquidation order that prohibits all legal actions, including under the SARFAESI Act.
On appointment of a resolution professional (RP), the powers of the board of directors will be suspended and the management shall vest with the RP. A committee of creditors, consisting of only financial creditors, shall be formed with voting share determined based on exposure. In case there are only operational creditors, such creditors shall form the committee. Each decision shall be taken with the support of not less than 75% of voting share of the committee of creditors.
The RP shall submit the resolution plan approved by the committee to NCLT. Once approved by the NCLT, the plan shall be binding on the corporate debtor, employees, creditors, guarantors and other stakeholders, after which the erstwhile board of directors shall resume its position. If NCLT finds the plan not in accordance with the Act or not submit- ted within the time frame, it shall order liquidation. The RP can perform the role of the liquidator. The secured lenders have the option of enforcing their security to realise the debt or relinquish their security interest for recovery from the sale of assets. Any shortfall in direct enforcement of security would rank along with unsecured creditors.
Interestingly, 12 months’ workmen wages rank equal with secured creditors, while statutory or state dues rank below financial debts of unsecured creditors. Preferential, undervalued and extortionate credit transactions: If the RP identifies such transactions to be within two years priortothecommencementof CIRPincaseof related parties and one year in other cases, then the NCLT can cancel such transactions.
Penal provisions: The bill proposes severe penalty, from prison term ranging from one year to five years, to fine of up to ₹ 1 crore for directors and officers, besides their personal liability to compensate, for actions such as:
Initiating insolvency or liquidation proceedings with fraudulent or malicious intent;
Fraudulent or wrongful trading — directors knew or ought to have known that there was no reasonable prospect of avoiding commencement of CIRP and did not exercise due diligence to minimising the loss to creditors.
Misconduct during CIRP Willful omission, false representation to creditors
Contravention of moratorium Some of the penal provisions equally apply to creditors and RP to ensure fair process. Though developing an ecosystem would take a few months, the fact remains that the law is imminent. Sceptics include some bankers and ARCs who believe the law cannot be enforced successfully in India. Well, time would tell that. However, it is important that corporates review their cash flow and balance sheet and avoid knee-jerk actions that may prove detrimental not only to the promoters and directors but also to officers.
Banks and other creditors may have to gear up their systems and most importantly train their employees to adhere to the proposed law and avoid actions that may compromise their security and recovery. Beyond job opportunities as resolution professionals and turnaround specialists, hedge funds and vulture funds may also come on to the scene.