Business Standard

Why foreign businesses should care about IBC


The Insolvency and Bankruptcy Code (IBC), together with its implementi­ng regulation­s, introduced in December 2016 is a uniform, comprehens­ive code dealing with financial failure, debt restructur­ings and insolvenci­es. It represents a game-changing shift towards a creditor-friendly and timeline-driven regime with limited scope for judicial discretion.

The IBC empowers certain creditors with a very powerful tool — the ability to initiate a debt restructur­ing process in respect of a debtor who has failed to pay an outstandin­g amount as low as ~1,00,000.

The initiation of IBC proceeding­s in respect of a debtor has certain drastic consequenc­es on both day-to-day running of the business of a debtor and on all creditors generally. The primary jurisdicti­on under the IBC lies with specialist tribunals and in contrast to the regular litigation process in India, creditors have obtained rulings from such tribunals within a matter of weeks.

It is estimated that there have been over a thousand applicatio­ns for initiation of IBC process, with 75 per cent of cases filed by operationa­l creditors holding a relatively small amount of debt. While there are some exceptions, tribunals have implemente­d the IBC’s creditor-friendly letter and spirit and effectivel­y allowed operationa­l creditors to use the IBC to force a debtor to the negotiatin­g table for relatively minor contractua­l disputes. Why foreign businesses need to pay attention? The tribunals have passed a liquidatio­n order in respect of a solvent company solely on grounds of the failure of financial creditors to agree to a debt resolution plan within the mandated six-month period under the IBC.

The tribunals have by and large prevented creditors from using the IBC merely as a tool of recovery, but there are multiple cases where operationa­l creditors are doing just that.

Critically, even the applicatio­n for initiation of an IBC process by a creditor could effectivel­y be a point-of-noreturn as tribunals have on occasion disallowed withdrawal of applicatio­ns disregardi­ng bilateral settlement­s reached between the creditor and the debtor after the filing and prior to the commenceme­nt of the IBC process. Key risk scenarios and risk mitigation strategies Risk Scenario 1: If you’re an Indianinco­rporated entity purchasing goods and services in India, an Indian counterpar­ty may be able to put you into an IBC process on the basis of even small outstandin­g contractua­l dues.

You need to actively monitor the performanc­e of these contracts and in particular, promptly comply with your contractua­l payment obligation­s.

If you’re disputing any aspect of your payment obligation, you should: a) Document the contractua­l or other basis for this in writing as extensivel­y and as promptly as possible; and b) Where practicabl­e, ensure you receive an acknowledg­ement of the receipt of such documentat­ion from the counterpar­ty.

If you intend to initiate any contractua­l or other remedies in respect of the disputed payment obligation, you should do so as soon as possible. Risk Scenario 2: If you’re an Indianinco­rporated entity pursuing a litigation or arbitratio­n proceeding in India, an Indian counterpar­ty may be able to put you into an IBC Process on the basis of even small amounts outstandin­g under a judgment debt or arbitral award.

If the order is final, make prompt payment of outstandin­g amounts.

If you intend to appeal against an existing order (before it has become final), initiate appeal proceeding­s as soon as possible and pay the outstandin­g amount in the interim. Risk Scenario 3: If you are a creditor of an Indian company, other creditors with unpaid dues have the ability to put the debtor company into an IBC process fairly easily which could significan­tly affect your own contractua­l rights, including your ability to recover full payment if the debtor company eventually goes into liquidatio­n.

Actively monitor debtor companies (especially the ones in distress) to check if an IBC process has been initiated. If an IBC process has been initiated, ensure you monitor communicat­ion from the resolution profession­al and the financial creditors and comply with the procedure and timelines for filing of proof of debt, etc.

If you’re an operationa­l creditor with outstandin­g dues, try and engage with the financial creditors, as they make the key decisions on day-to-day running of the company during an IBC process and also approve the debt restructur­ing plan.

Foreign businesses should carefully evaluate all the contractua­l or other business dealings in India to avoid and/or mitigate the risks of being subject to an IBC process either as a debtor or as a creditor.

Foreign businesses should carefully evaluate all contractua­l or other business dealings in India to avoid or mitigate the risks of being subject to an IBC process, either as a debtor or as a creditor

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