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Insolvency and bankruptcy code - A game changer

CS Udbhav 
on 08 June 2018

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History

There were multiple laws governing the recovery of debt before the advent of Insolvency and Bankruptcy Code in India, the code seeks to consolidate various laws and acts which deals with the recovery of debt dues of Banks, PFI hitherto, into single legislation. The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha on 21 December 2015 by Finance Minister, Arun Jaitley under the NDA Government. The Code was referred to a Joint Committee of Parliament on 23 December 2015, and recommended by the Committee on 28 April 2016. The Code was passed by the Lok Sabha on 5 May 2016 and by the Rajya Sabha on 11 May 2016. The Code received assent from Hon'ble President Pranab Mukherjee on 28 May, and was notified in The Gazette of India on 28 May 2016The Code was passed by parliament in May 2016 and comes in force in December, 2016 the code seeks to repeal The Presidency Towns Insolvency Act, 1909 and Sick Industrial Companies (Special Provisions) Repeal Act, 2003 beside others.

Introduction

The Insolvency and Bankruptcy Code, 2016 was one of the major reform in Indian Corporate World along with GST Act, 2017, the Code is infact the demand of the modern era which seeks to provide one stop solution to resolving of insolvencies and boost the process of recoveries of debt extended by the Banks, Public Financial Institutions and other stakeholders, the Code helps India to improve its ranking in Ease of Doing Business, the major contention of the investors and banks who extend credit to the Corporate, partnership or LLP firm and Individual is the recovery of their dues, if the any corporate, partnership or LLP firm or individual fails to run its business profitably thus the credit extended to the Corporate Partnership or LLP firm or individual put on high risk and the recovery process of the debt is very slow particularly in India which take on an average a decade, thus it leads to substantial  erosion in the value of the assets over the period and lenders often lands on bad deal, the Code has taken all the matter in cognizance and was drafted in such a manner to phase-out all the difficulties faced by the Corporate hitherto, The Insolvency and Bankruptcy Code, 2016 has introduced one of the best of the mechanism available in the world for recoveries of debt, Code also seeks to put business of the promoter back on track through resolution process the process of resolution initiated by the Resolution Professional or Resolution Professional Agency who endeavors to find the flaws associated with the organization, corporate and come out with the best option available while keeping in mind the interest of all the stakeholders.

Amendment in Other Laws and Acts

The Insolvency and Bankruptcy Code, 2016 seeks to provide an amendment in various laws i.e. Partnership Act, 1932, Companies Act, 2013, Income Tax Act, 1961, Custom Act, 1962, Sick Industrial Companies (Special Provision) Repeal Act, 2003, The Payment and Settlement Act, 2007, SARFAESI Act, 2002, The Recovery of Debts Due to Banks and Financial Institution Act, 1993 and many more to align such act with the Code.

Imperative of Code in today’s Business Environment

Keeping in mind the elephantine size of pile-up of the non-performing assets of banking sectors in an Indian economy which considerably slows down the pick-up rate of economy and failure of other corporate law in existence to address the problem of recovery of bank dues with the corporate in time was one of the major issue which currently haunt all most all the bank in India and one of the major reason which slow down the lending process  of banks and affect the profitability of banks adversely. The introduction of the I & B Code may turn out a savior to the banking sectors whose current NPA with the corporate is as high as INR 8.41 lakhs in December, 2017, thus advent of the I & B Code utmost required and demand of time. The I & B Code has introduced the time-bound revival or closure of the corporates whose debts are long due with bank and their business prove unviable and who fail to pay back its due in time. The Code seeks to introduce the resolution process for resolving the insolvencies in time bound manner let’s find out how process initiated and works.

  • Insolvency resolution petitions can be initiated immediately on default of Rs 1 lakh or above, as per section 6 of the code if any corporate debtor commits a default, a financial creditor, operational creditor and corporate debtor may initiate corporate insolvency resolution process.
  • Such resolution process requires to be file with the adjudicating authority i.e. NCLT (for corporate applicant) DRT (for individual and partnership)
  • The resolution professional proposed to be appointed as Interim resolution professional, such professional must possess requisite qualification and experience as mandated by the Code.
  • The plan submitted by the IRP requires 75% approval of the committee of Creditors (CoC) which is now being reduced to 66% approval of CoC after president approval to the promulgation of I& B (Amendment) Ordinance, 2018.
  • The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order- (i) admit the application, if it is complete in all manner or (ii) reject the application if it found any incompleteness.
  • The resolution professional should submit the plan of resolution within 180 day once it is accepted by the authority, which may be further extended for 90 days thus aggregate time in any situation may not exceed 270 days. If the CoC agree to accept the resolution plan then corporate entity would be revived else it would be liquidated.

The time bound approach is the unique feature of the code which helps to put economy on tract and boost the flow of liquidity in the market, earlier due to prolonged delay in recoveries of dues leads to substantial erosion and deterioration in the value of assets and corporate were seems to buying as much of time which please their mischievous intent, with the advent of the code would be count as a face of change for the Indian economy which helps the bank to recover its NPA through liquidation of defaulting corporate assets.

Closure of Business become easier and economical

The code seeks to mitigate one of the major worries of the investors and other stakeholders who invested their money in the business, winding-up or wrap-up of the business affairs in India was not easy to process earlier, even a voluntary winding-up takes an average four years to complete    thus in the event when business failed to yield the required returns or when organization accomplished its desired objective and it becomes an unfruitful venture for the investor to carryon business any more exit option remains very cumbersome for the investors and organization requires to adhere the compliance procedure till complete closure of the Organization, therefore it makes India an unattractive destination for investors. The early exit option not only attracts the investors it also helps in improving the rank of India in ease of doing business destination.

High Demand for Haircut.

Initial trend shows that there is as much as average 60% haircut demanded by the bidders on the NPA of banks, a success of the resolution plan is highly depends on the compromised and haircut on the part of the Bankers, thus it hurt the sentiment of bank in particular and economy in general, if banks unable to recover the fair amount of NPA thus code would remain high on promise and lack on delivery, however, it would be too early to draw any conclusion as the code in its nascent stage, the experts of the banks, industry, and economy hopes that code would gradually develop as a game changer only time will tell how far code helps to address the issue of Insolvencies and Bankruptcy.

 Ineligibility criteria U/s 29, keep Promoter Group and Willful defaulters at bay.

There is different views coming from the different stakeholders groups, however it was the much require insertion to the code, but views of the different sectors of the corporate may not seems align, where on one hand said insertion was much celebrated by the bankers on the other hand it was criticized by the experts and promoter group, the new section 29 A of the code is seems to be bit harsh, because the net is too wide that it keep entire group of the promoters at bay and not allow the promoter to sit on the bidding of their companies along with the willful defaulters, seldom it was found that corporate may fail due to delay in approvals from regulatory authority which leads to delay in the commencement of the business and escalate the overall cost of the project which further leads to delay in the payment of dues of bank, although such promoters intent remain fair and they were committed to payback the dues to investors, if investors and promoters reach to some logical solution, but after insertion of section 29 A in the code, such promoter stands parallel to the willful defaulter, but the experience of banker in the most of the case reveals the darker side of the picture it was found in many cases that promoter group indulge in the practices of delay in the payment of banks dues, so as to get concession on the interest part of the loan and reschedule the loan and stretch the payment period for long horizon, another experience also finds the in the case of Micro, Small and Medium sector enterprises (MSME) not much of the bidders is interested in buying the assets of MSMEs and if the said provision of the said act remain there it would prove only unfruitful for the lender thus it would be in the interest of the economy to relax the harsh provision to some extent and should deal the willful defaulter with the iron hand, therefore representation has been made to the concerned law ministry to relax the provision of the said section, after president approval to promulgation of I& B (Amendment) Ordinance, 2018 the picture seems like changing to large extent for Micro, Small and Medium sector enterprises (MSME), keeping in mind the huge potential of MSME, which is the backbone of the Indian economy and providing huge employment and growth to the economy, the Ordinance empower the government to relax the provision in the favour of MSME and allow its promoter to submit bid for its enterprises going under Corporate Insolvency Resolution Process provided he is not a willful defaulter and does not attract other disqualifications not related to default.

Provision of Section 29 A with respect to ineligibility copied hereunder.

According to Section 29A, a person suffering from the disqualifications as mentioned hereunder shall not be eligible to submit a resolution plan. Further, any other person acting jointly or in concert with the prospective resolution applicant shall not be covered under the following disqualifications–

  • The person is an undercharged insolvent
  • The person is a willful defaulter in terms of the RBI Guidelines issued under the Banking Regulation Act, 1949.
  • the person has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with RBI Guidelines issued under the Banking Regulation Act, 1949 and at least a period of 1 (One) year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;
  • The person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;
  • The person is disqualified to act as a director under the Companies Act, 2013;
  • the person is prohibited by SEBI from trading in securities or accessing the securities markets; the person has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the adjudicating authority under the provisions of the Code;
  • a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;
  • connected persons, i.e. persons connected to the person disqualified under any of the aforementioned points, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of the business of the corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons – exception has been carved out for scheduled banks asset reconstruction companies registered with RBI under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and alternative investment funds registered with SEBI.
  • Situation after president approval to the promulgation of I& B (Amendment) Ordinance, 2018
  • There are various substitution has be made in the said provision of the section which is the demand of the time now promoter group of the MSMEs being relaxed,
  • the person has an account has been substituted with “ at the time submission of resolution plan has an account”.
  • The person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more under twelfth schedule  or
  • 7 years or more under any law for the time being in force, provided that such clause shall not apply to the person after the expiry of two year of release form imprisonment etc.
  • Note this is just an illustration to the recent amendment to the said section for more detail you would ask to refer I& B (Amendment) Ordinance, 2018 available on http://www.prsindia.org.

Now Home Buyers treated as financial creditors.

This would be welcome news for the home buyers that the code seeks amendment through ordinance in favour of the home buyers which got green signal after president approval to promulgation of I& B (Amendment) Ordinance, 2018 , hitherto claim of home buyers would be not be accounted for and the sum generated through liquidation of corporate debtors distributed amongst the financial creditors i.e. bankers and investors, operational creditors i.e. vendors and creditors and employees and home buyers is treated as customers, keeping in mind the huge unsold real estate stock the classification of home buyers as a financial creditors would give huge relief to the home buyers whose hard-earned monies and saving taken away by the defaulters and safe the interest of the prospective home buyers, now home buyer can be one of the party who can initiate the resolution process u/s 7 of the code as financial creditors and they would be given proper representation in decision making of the CoC.

Provision for withdrawal of application after admission under IBC 2016.

Keeping in mind the sanctity of the code the provision for withdrawal of cases or petition once it got admitted under code by the Adjudicating Authority is made more stringent, now such withdrawal would seeks approval of 90 percent of Committee of Creditors of the voting share, adding to more sticker provision to the code now withdrawal would only be allowed before publication of notice inviting Expressions of Interest (EoI). Thus there can no escape route or withdrawal option if commercial process of inviting Expressions of Interest (EoI) and bids once initiated.

BINANI a Success Story

Binani cement resolution is so far a success story for the code, the case of the BINANI Cement resolution was filed with the Kolkata Bench of NCLT, earlier the CoC considered the Dalmia’s offer of (Rs 6,590 crore) but later when UltratTech’s has bid for acquiring the stake of Bianai Cement (Rs 7,600 crore plus working capital loans), then Kolkata bench of the NCLT ask the CoC considered the bid tendered by the  UltraTech’s and ask the Dalmia’s group to fetch the amount of bid parallel to UltraTech’s bid, the CoC of creditors has recently approved the bid of the UltraTech’s as it settle the amount  if full of all the financial, operational creditors, however the banker not booking the amount as recovered because the matter is under the jurisdiction of apex court whose final say on the Dalmia’s petition that the bid of the UltraTech’s would require to pass the litmus test of the ineligibility criteria u/s 29 A of the code, The Dalmia’s group alleged that NCALT was not scrutinized the case whether UltraTech’s group is eligible for the biding or not, Dalmia’s group has filed petition with the apex court of the country to first decide on the matter of the eligibility of UltraTech’s Bid, Dalmia’s group has also contented that UltraTech’s stands ineligible on various front of the provision of section 29 A, It also ask the CoC to take the cognizance of the ineligibility criteria before finalizing the bid, however Dalmia’s group also said that it has no problem with the bid of the ultratech’s if they found eligible bidder, in the light of such development whatever the decision of the apex court would be one can say that Creditors of the Binani cement group going to recover almost all the debt dues, if we compare the fate of the Banani cement creditors with rest of the creditors we can loudly say that Binani Creditors is lucky enough to not bare the pain of haircut.

Conclusion  

The success of any legislation may lies in its implementation and clear drafting, so far the code seeks to address the very demand of the industry although it was drafted well, but keeping in dynamic nature of the law every legislation has to pass through several amendments in their life, Thus Insolvency and bankruptcy code is no exception, before its implementation it was being expected largely by the bankers that the Code would help to recover the NPA on large scale and there was much  excitement and roar amongst the Bankers but the ground realities remain far distant, the moment the resolution plans moves to the NCLT bidder starts demanding heavy haircut and the success of the resolution plans largely depends on the compromise and haircut on the part of the resolution. Although it is too early to say anything about its effectiveness, but it is believed amongst the banker, experts and the corporate chamber that the code in the long run would emerge as a game changer.

Ref : Wikipedia, prsindia, mint newspaper, business standard. 


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