Bankruptcy & Insolvency

Report of the Insolvency Law Committee: The New Way Forward

Report of the Insolvency Law Committee: The New Way Forward

On November 16, 2017, the Government of India constituted a committee to undertake a comprehensive review of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) in light of the experiences of various stakeholders during the past year. The Ministry of Corporate Affairs (‘MCA’) constituted the Insolvency Law Committee (‘ILC’) which comprises representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners (‘Firm’) and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.

The MCA released ILC’s report on April 3, 2018 (‘Report’). The Report proposes various amendments to the IBC and the rules and regulations thereunder. The Parliament is likely to consider the Report in the near future to make the relevant legislative changes. Some of the major changes proposed by the Report are as below:

  • Homebuyers upgraded 

The IBC does not explicitly categorise homebuyers who have paid advances towards completion of real estate projects as financial or operational creditors in the corporate insolvency resolution process (‘CIRP’) of the real estate developer.The ILC took the view that advances paid by homebuyers are effectively used by real estate developers as working capital to finance the completion of projects thereby giving it the commercial effect of a borrowing and has proposed that homebuyers be treated as financial creditors. Note that their secured status depends on the nature of their contract with the developer and the bank providing the home loan. The ILC has also proposed that a large block of creditors be allowed to participate in meetings of the committee of creditors (‘CoC’) through an authorised representative.

  • Interest clock on interim finance extended

Under the IBC, interim finance and any interest on it is classified as insolvency resolution process cost which receives the highest priority on any payout under a resolution plan. However, in the event of liquidation, though the principal amount of interim finance still retains its highest priority, the interest stops accruing from the date of the liquidation order.The ILC felt that the clog on accrual of interest in liquidation was affecting liquidity and raising the coupon on interim finance. The ILC has proposed that interest on interim finance shall continue to accrue for up to one year from the liquidation commencement date. Note that the Insolvency and Bankruptcy Board of India (‘IBBI’) has already made necessary changes to this effect in the IBBI (Liquidation Process) Regulations, 2016.

  • Disqualification for bidders – revisited again

Section 29A of the IBC was introduced to address concerns that persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, should be disqualified from being resolution applicants. However, the market felt that the range of disqualifications and the affected persons was too large. To address this issue, the ILC has made several proposals, some of which are set out below:

i.  Section 29A of the IBC lays down eligibility criteria vis-à-vis the resolution applicant as well as any person acting jointly or in concert with the applicant. The term ‘acting jointly or in concert’ is not defined in the IBC and causes market participants to rely on the definition contained in the Securities and Exchange Board of India (‘SEBI’) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This results in inclusion of an extremely broad range of persons, including even those who are involved in the resolution plan in an ancillary way. The ILC proposes to restrict the eligibility test only to the applicant and its connected persons. Additionally, any person acting with a common objective of acquiring voting rights or control over the company would also have to pass the eligibility test.

ii. Section 29A(c) of the IBC bars persons who have been in control of a non-performing asset (‘NPA’) for more than one year. However, this provision effectively disqualified several ‘pure play’ financial investors who are in the business of investing in companies across the credit spectrum. For instance, asset reconstruction companies, private equity and distressed debt funds are quite likely to have some distressed assets in their portfolios. The ILC has proposed that the test under Section 29A(c) of the IBC should not apply to such pure play financial entities.

 iii.  Section 29(A)(d) of the IBC bars persons who have been convicted of a criminal offence punishable with imprisonment for more than two years. This disqualification was thought to be very expansive and would disqualify applicants for offences, the commission of which have no nexus to the ability of the person to run the corporate debtor successfully. The ILC has proposed that the nature of offences, the commission of which will incur the disqualification should be economic in nature and a schedule listing such specific crimes be provided. Additionally, the disqualification should also not apply in case a stay against the conviction has been obtained from a higher court.

iv. Section 29A(h) of the IBC disqualifies persons who have executed an enforceable guarantee in favour of a corporate debtor currently undergoing CIRP. The ILC felt that the scope of the disqualification is overreaching since it bars guarantors solely on account of issuing an enforceable guarantee. The ILC has proposed that the disqualification should only apply against guarantors against whom the underlying guarantee has been invoked by the creditor and remains unpaid.

  • Curious case of guarantors’ liability – now resolved

Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, a few recent judicial pronouncements have suggested that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor since it is not feasible to determine the liability of the relevant third party until the CIRP is concluded.The committee felt that the scope of the moratorium is very clear and should not be interpreted broadly. The intent of law could not have been to deprive creditors of contractually negotiated remedies against third parties as long as the corporate debtor’s assets remain unaffected. The ILC proposes that an explanation be added to Section 14 of the IBC to clarify that the moratorium does not apply to any recovery action that does not impact the assets of the corporate debtor.

  • CoC voting thresholds reduced

The IBC provides that all decisions by the CoC be taken by vote of 75% of the CoC, by value. The ILC felt that effectively granting minority lenders constituting 25% of the CoC a veto right to any proposed resolution plan could cause many companies to be liquidated. To ensure that there is a higher likelihood of resolving a distressed company as a going concern under the IBC, the ILC has proposed that the voting threshold for important matters during the CIRP including voting on resolution plans be reduced to 66% of the CoC. Additionally, for other routine decisions that the CoC is required to take during the CIRP, the voting threshold should be reduced to 51% to assist the resolution professional in ease of conducting day to day operations.

  • IBC trigger threshold now ten times    

To keep debt recovery actions from small operational creditors at bay, the ILC recommended that the minimum amount to trigger the IBC be raised to Rs. 10 lakh (approx. US$ 15,000). This may reduce pressure on the NCLT – as statistics suggest that many small creditors used the IBC to coerce recovery. But what of the small creditor? Back to the long queues in the debt recovery tribunals? Perhaps small creditors can accumulate their debt and then trigger IBC.

  • In and out with ninety percent

Currently, once an IBC case is admitted, the law does not permit withdrawal of the same without the consent of all creditors. This is consistent with the philosophy that this is a collective and representative process for all creditors and settlement with the ‘filing creditor’ should not permit withdrawal. The Supreme Court has thought otherwise and has permitted withdrawal post admission. The ILC reiterated the aforesaid philosophy but saw merit in permitting withdrawal post admission if 90% of the committee of creditors deem fit. Would this have been of use in the Binani Cement saga?

  • Regulatory approvals window

An immediate issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Should the bidders bear this risk or the CoC live with the uncertainty? Today, negotiations resolve this tug-of-war to some extent while bidders draft their resolution plans treating the NCLT as a single window clearance. The ILC observed that single window clearance was not the intent of the IBC. This is a critical observation for bidders. Some solutions were debated but a comprehensive solution remained elusive. Instead, the ILC has recommended that a requirement be placed to obtain consents, dispensations and permits within a maximum of one year. It’s unclear how this will impact the fine balance currently trying to be achieved in practice by bidders.

  • Competition approval fast tracked

 In a welcome development, the ILC has been informed that the Competition Commission of India will clear notifications for combinations arising out of the IBC within 30 days, with an extension of 30 days for exceptional cases. This is already being borne out in practice and echoes the collaborative effort being taken by Indian regulators to make the IBC work.

  • Liquidation waterfall and priority of security

Concerns had been raised that the language in the IBC liquidation waterfall may override inter se ranking of security amongst creditors; i.e., in liquidation, a secured creditor with a first charge over an asset may receive the same amount as another with a second charge over such asset. After reviewing the language, related laws and relevant case law, the ILC felt confident that any such interpretation would be incorrect and valid subordination agreements should not be disregarded by the IBC and so no change has been proposed.

  • MSME promoters get a breather

Micro, small and medium enterprises are thought to be the bed rock of the Indian economy. When such companies go through the IBC process, keeping their incumbent promoters out of the bidding process has raised concerns of mass liquidation of such companies leading to potentially significant job losses. The ILC has recommended that promoters of such companies be permitted to bid for their companies in the IBC process (despite Section 29A disqualifications) unless they are willful defaulters. In balancing the opposing forces involved, this seems to be the socially appropriate decision.

  • Limitation now uncomplicated

Lenders benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although doctrine of laches might still apply). But this was yet to be confirmed by the Supreme Court, which had declined to comment on this issue in one matter. The ILC has recommended that limitation should apply to IBC applications other than those made by a corporate debtor itself.

  • No man’s land now occupied

 A resolution plan is approved by the CoC and submitted to the NCLT for confirmation. At this stage, the role of the resolution professional ends and the CoC ceases to exist. But the NCLT order may take weeks or months. Who runs the company during this time and what duties, powers and protections apply to such person? The ILC has recommended that the resolution professional be statutorily required to continue during this period, presumably with the same duties, powers and protections as during the CIRP.

For queries, please email bahram.n.vakil@azbpartners.com, ashwin.ramanathan@azbpartners.com, piyush.mishra@azbpartners.com, nilang.desai@azbpartners.com or suharsh.sinha@azbpartners.com. Bahram N Vakil, one of the founding partners of the Firm, leads the Restructuring and IBC Practice Group at the Firm. Ashwin Ramanathan, Piyush Mishra and Nilang Desai are partners and Suharsh Sinha is a senior associate in the Restructuring and IBC Practice Group at the Firm.

 

 

 

 

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The Dirty Dozen – first off the block

The Dirty Dozen – first off the block

 

Electrosteel Steels Limited was one of the twelve large stressed accounts directed by the Reserve Bank of India (‘RBI’) to be placed into the corporate insolvency resolution process of the Insolvency and Bankruptcy Code and has now become the first to be resolved under that process. The National Company Law Tribunal yesterday (i.e. April 17, 2018) approved the resolution plan submitted by Vedanta Limited. News reports suggest that the haircut taken by lenders is in the region of 55%. Vedanta awaits clearance from the Competition Commission of India before it can complete the acquisition. Many of the other ‘dirty-dozen’ are in the closing stages of their corporate insolvency resolution process and the next few weeks will see more resolutions and in some cases objections and litigation. The litigation in this space may settle some of the issues that lenders and acquirers fret about.

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Major Amendments introduced to the Insolvency and Bankruptcy Code

Major Amendments introduced to the Insolvency and Bankruptcy Code

The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (‘Ordinance’), which has become effective from June 6, 2018. Pursuant to the Ordinance, many of the amendments suggested by the Insolvency Law Committee (‘ILC’), which included our founding partner Mr. Bahram N Vakil, have now been implemented. The major changes introduced by the Ordinance have been summarised below:

  • Homebuyers Upgraded as ‘Financial Creditors’

Prior to the Ordinance, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) did not recognise persons who had paid advances towards completion of real estate projects as either ‘financial creditors’ or ‘operational creditors’. The Ordinance now provides that any amount raised from an allottee under a real estate project shall be considered a financial debt under the IBC. Since the number of such allottees could be numerous and their participation in a committee of creditors (‘CoC’) could be unwieldy, the Ordinance provides that allottees may appoint authorised representatives to attend CoC meetings on their behalf, with prior instructions on voting matters.

  • Amendments to Eligibility Criteria for a Resolution Applicant

Section 29A sets out ineligibility criteria for potential bidders in a corporate insolvency resolution process (“CIRP”). The ambit of Section 29A may have been in some instances too wide and could have unintentionally disqualified some sophisticated bidders on technical grounds. The Ordinance has, therefore, introduced the following amendments to Section 29A :

i.   Section 29A(c): NPA Related disqualification

(a)     Section 29A(c) provides that persons controlling accounts which have remained non-performing assets (‘NPA’) in excess of one year are barred from acting as resolution applicants in an ongoing CIRP. However, no clarification had been provided on whether the one-year period would be determined from: (i) insolvency commencement date of the corporate debtor; or (ii) the time at which the bid was submitted in the ongoing corporate insolvency resolution process (‘CIRP’) of the corporate debtor. The Ordinance has clarified that the relevant date should be the latter.

(b)   The Ordinance provides that the disqualification under Section 29A(c) shall not apply to a ‘financial entity’ (scope of which is discussed under Paragraph iii below).

(c)   Successful resolution applicants acquiring companies under the CIRP end up being in control or management of accounts which have turned NPA. Such acquirers would, as a result, fall foul of Section 29A(c) and would be estopped from making any further bids for any other company undergoing CIRP. In order to rectify this anomaly, the Ordinance provides for a grace period of three years in favour of a resolution applicant, calculated from the date of acquisition of such corporate debtors with NPAs during which the acquirer will not be disqualified from bidding for other companies undergoing CIRP. A similar carve-out has also been granted under Section 29(A)(g) of the IBC, to successful bidders, who have acquired companies in CIRP where certain avoidable transactions may be been undertaken by the previous promoters or officers.

ii.  Section 29A(d): Disqualification on account of Criminal Convictions

(a)     Section 29A(d) of the IBC disqualified a resolution applicant if it or any of its ‘connected persons’ had been convicted for an offence punishable with imprisonment for two years or more. It was argued that there must be a rational nexus between the underlying offence and the ability of the bidder to successfully restructure the corporate debtor.

(b)   This sub-section has been amended to provide that: (i) conviction for two years or more is a bar only if the offence relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC; and (ii) conviction for seven years or more would be a bar irrespective of which statute the offence fell under.

(c)   A list of twenty-five laws is specifically mentioned in the Twelfth Schedule covering areas such as money laundering, foreign exchange, pollution control norms, tax, anti-corruption and securities market regulations. The Twelfth Schedule only covers Indian statutes and an interpretation may be taken that similar violation by the bidder or its connected persons under foreign laws may not attract the disqualification. However, the disqualification relating to conviction for seven years or more would apply under Indian as well as foreign laws.

(d)   The Ordinance provides that the bar under Section 29A(d) will not apply if more than two years have elapsed from the date of release from imprisonment (rather than a bar in perpetuity).

iii.  Explanation to Section 29A(i) : Reducing the Scope of ‘Connected Person’

(a)     Part (iii) of the definition of ‘connected person’ under Section 29A(i) of the IBC, is extremely broad and includes the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. By virtue of their business model, it was inevitable that several pure play financial entities would have connected persons through their investee companies in India or abroad which suffered from the disqualifications (especially relating to NPAs) listed in Section 29A. The IBC was amended late last year to create a carve-out from part (iii) of the definition for scheduled banks, asset reconstruction companies and alternate investment funds registered with the Securities and Exchange Board of India (‘SEBI’) – however this exemption did not benefit foreign private equity players, venture capital and distressed assets funds.

(b)   Pursuant to the Ordinance, relaxation has now been provided to foreign financial investors. The definition of ‘financial entities’ now includes the following additional classes of entities: (i) any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and (ii) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017.

iv.  Section 29A(d): Disqualification on account of Criminal Convictions

(a)     The impact of Section 29A of the IBC was such that in many cases, it would force a change of control of the erstwhile promoter under a resolution plan or in liquidation. There was a concern that there may not be enough interest from third party buyers in companies under IBC, which are of a comparatively smaller size. A ‘one size fits all’ approach could hamper recoveries where there is little scope for turnaround of smaller companies unless the promoters submit a resolution plan. Recognizing this, the Ordinance provides for limited exemptions from the provisions of Section 29A of the IBC for Micro, Small and Medium Sector Enterprises (‘MSMEs’).

(b)   However, the statutory thresholds for recognizing MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) are low. For instance, for companies engaged in manufacturing, the thresholds for classification as MSMEs are investment in plant and machinery ranging from less than INR 25,00,000 (approximately USD 37,000) to INR 10,00,00,000 (approximately USD 1.5 million). The Central Government had approved an amendment to the MSME Act on February 7, 2018 providing that the thresholds in the MSME Act be redefined. The proposal is to re-align the definition of MSMEs on the basis of annual turnover ranging from less than INR 5,00,00,000 (approximately USD 750,000) to INR 250,00,00,000 (approximately USD 37 million). Once the proposed amendment to MSME Act is notified, it will provide significant relief to promoters of a large number of small companies facing financial distress.

  • Withdrawal of an Ongoing CIRP Proceeding

Once an application filed under the IBC is admitted, it can either lead to a successful resolution plan or liquidation. Under the IBC, a company undergoing the CIRP process did not have the power to arrive at a settlement or compromise by which the ongoing CIRP proceedings could be withdrawn. However, in a few cases, the courts had gone beyond the purview of the IBC and allowed settlement of the claims of a creditor, bilaterally leading to withdrawal of the matter.

The Ordinance clarifies that withdrawal of a CIRP proceeding will be permissible if 90% of the CoC approves it. However, such withdrawal will be permissible only prior to the resolution professional formally inviting resolution plans from interested bidders.

  • CoC voting thresholds reduced

The IBC provided that all decisions by the CoC be taken by a vote of 75% of the CoC by value. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as: (i) applying for an extension for the CIRP period from 180 to 270 days; (ii) replacement of an interim resolution professional or resolution professional; and (iii) approving a resolution plan. For other routine decisions, the voting threshold has been reduced to 51%.

  • Role of shareholders of the corporate debtor in approving resolution plans

The consent of shareholders of the corporate debtor is generally required for significant corporate actions. The Ministry of Corporate Affairs (‘MCA’) released a clarification last year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The Ordinance specifically amends the IBC to incorporate the clarification proposed by the MCA.

  • Resolution professional responsible for ongoing legal compliances by the corporate debtor

Under Section 17 of the IBC, on insolvency commencement date, the board of the company is suspended and an insolvency professional takes control over management control. However, several laws including many provisions of the Companies Act, 2013, regulations issued by SEBI, Factories Act, impose obligations on the board of the company. The Ordinance clarifies that insolvency professionals shall be responsible for complying with the requirements under all applicable laws on behalf of the corporate debtor.

  • Participation of ‘related party’ financial creditors in the CoC

The IBC provided that financial creditors which were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions which had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring, were deemed ‘related’ to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The Ordinance provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.

  • Grace period for fulfilling statutory obligations

A critical issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Currently, acquirers tend to draft their resolution plans treating National Company Law Tribunal (‘NCLT’) as a single window clearance for all such approvals. But this approach is susceptible to legal challenge. The Ordinance provides for a one year grace period for the successful resolution applicant to fulfill various statutory obligations required under various laws to implement the resolution plan.

  • Issue of guarantors’ liability resolved

Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, in a few cases, courts had taken the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The Ordinance states that the moratorium under Section 14 will not apply to the enforcement of guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP.

  • Further regulations to govern the bidding process

In most CIRP proceedings, the CoC formulates a process memorandum which governs the timelines for receiving bids, procedure for rebidding, grounds for rejection of bids etc. Such provisions and their application have been subject to several legal challenges at the NCLT by unsuccessful bidders. In a press release accompanying the Ordinance, the government has indicated that the regulations will govern issues such as non entertainment of late bids, bar on negotiations with late bidders and a standardised process for maximization of value of the corporate debtor.

  • Triggering CIRP by a company voluntarily

The IBC provided that a company may initiate its own CIRP and that the persons eligible to initiate a voluntary CIRP were: (i) the corporate debtor itself; (ii) a shareholder of the company specifically authorised to do so under the articles; (iii) director and key employees; and (iv) the chief financial officer. The Ordinance now makes a special resolution of shareholders mandatory for filing for its CIRP. It remains to be seen if a special resolution will be possible in closely held companies where promoters have a dominant stake. But directors and officers will need to be mindful of provisions in the IBC which impose civil and criminal sanctions on erstwhile directors and officers of the company for wrongful trading.

  • Limitation Act to apply to IBC

Lenders have benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although the doctrine of laches might still apply). However this has not been confirmed by the Supreme Court till date, as it had declined to comment on this issue. The Ordinance now provides that the law of limitation will apply to IBC applications.

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Amendment to the IBC : Legislating for Moral Hazard with a Broad Brush

Published In:Inter alia- IBC Client Update- November 2017- 1 [ English ]

AMENDMENT TO THE IBC – LEGISLATING FOR MORAL HAZARD WITH A BROAD BRUSH

Earlier today, the President of India promulgated an ordinance making certain amendments to the Insolvency and Bankruptcy Code, 2016 (‘IBC’). This ordinance had been approved by the Union Cabinet of Ministers yesterday.

The key change is the introduction of eligibility criteria for being a ‘resolution applicant’ which leads to the explicit prohibition of certain persons from submitting a resolution plan (and from such persons purchasing assets of a company in liquidation). It is believed that no other restructuring law in the world has provided such restrictive thresholds. The ordinance brings about these changes with immediate effect and these changes also apply for ongoing corporate insolvency resolution processes where the committee of creditors is yet to approve a resolution plan.

An applicant and any person acting jointly with the applicant who meets the following criteria are disqualified from submitting a resolution plan: (i) an undischarged insolvent; (ii) a willful defaulter as per norms laid down by the Reserve Bank of India, (iii) classified as a non performing assets for over one year unless it makes all overdue payments prior to submitting a resolution plan, (iv) convicted of any offence punishable with imprisonment for two years or more, (v) disqualified to act as a director under the Companies Act, 2013, (vi) prohibited by the Securities and Exchange Board of India (SEBI) from trading or accessing the securities market, (vii) indulged in preferential, undervalued or fraudulent transactions (and an order of the NCLT has been passed in this regard), (viii) has executed an enforceable guarantee in favour of a creditor for a company under IBC proceedings or liquidation, (ix) a person connected to the applicant who meets the criteria set out in (i) to (viii) above and (x) has been the subject of disability as per (i) to (ix) under any law outside India.

And ‘connected persons’ means: (i) any person who is a promoter or in the management or control of the resolution applicant, (ii) any person who is to be a promoter or in the management or control of business of the corporate debtor during the implementation of the resolution plan and (iii) holding company, subsidiary company, associate company or related party of a person referred to in (i) and (ii) above.

Over the last few months, there has been considerable discussion amongst various stakeholders as to whether certain persons (especially promoters or owner managers) are less desirable or potentially inappropriate resolution applicants. The IBC did not previously bar anyone from submitting a resolution plan. The Insolvency and Bankruptcy Board of India (‘IBBI’) amended certain regulations just over a couple of weeks ago requiring resolution plans to contain more information about resolution applicants’ negative markers. Those changes meant that the committee of creditors would need to consider that information closely and be careful before approving a resolution plan despite such negative markers.

The disqualification thresholds brought in by the ordinance however, rely on a longer and wider number of negative markers than the IBBI amendments. This ordinance seeks to end the debate, for now, on whether all promoters of stressed companies should be disqualified from bidding for their companies or those promoters whose companies have suffered due to extraneous reasons should not be punished (indeed, all such promoters are now disqualified not only from bidding for their own companies but also any other companies in an insolvency resolution process and from acquiring assets in any liquidation process). Stakeholders are now querying whether in an attempt to prevent moral hazard, this amendment has now created a potential economic hazard: will the lack of strong promoter bids dilute the competitive process between the remaining resolution applicants and so, lower the recovery for lenders?

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Amendments to FEMA 20

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

RBI has, by way of a series of notifications, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’). The key amendments pursuant to these notifications have been summarized below.

i. Issuance of Convertible Notes by Startups: RBI notification dated January 10, 2017 (‘January Notification’) provides for the issuance of convertible notes by Indian startup companies[1] (‘startups’). A ‘convertible note’ has been defined to mean “an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument”.

The newly introduced Regulation 6D of FEMA 20 sets out the relevant provisions, which provide that:

a. A person resident outside India (other than an individual who is a citizen of, or an entity registered / incorporated in, Pakistan or Bangladesh), may purchase convertible notes issued by startups for an amount of Rs. 2,500,000 (approximately US$ 39,000) or more in a single tranche;

b. Startups engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with Government approval;

c. Issue of shares against convertible notes will be as per Schedule 1 of FEMA 20;

d. Startups issuing convertible notes to a non-resident must receive the consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / escrow account maintained as per the Foreign Exchange Management (Deposit) Regulations, 2016 and closed upon the earlier of the requirements having been completed or within a period of six months;

e. Non-resident Indians may acquire convertible notes on non-repatriation basis as per Schedule 4 of FEMA 20;

f.  A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI; and

g. Startup issuing convertible notes are required to furnish reports as prescribed by RBI.

ii. Foreign Investment in Infrastructure Companies: The January Notification also amends conditions relating to foreign direct investment (‘FDI’) under Schedule 1 of FEMA 20 in commodity exchanges, which have been combined with those relating to infrastructure companies in the securities market (namely stock exchanges, commodity derivative exchanges, depositories and clearing corporations). The key revisions introduced by the January Notification are:

a. FDI, including by foreign portfolio investors (‘FPI’), in commodity exchanges will now be subject to guidelines prescribed by RBI in addition to those issued by the Central Government (‘GoI’) and SEBI;

b. FDI in other infrastructure companies in securities market will now be subject to guidelines by GoI and RBI, in addition to those issued by SEBI;

c. the earlier condition permitting FIIs / FPIs to invest in commodity exchanges or infrastructure companies only through the secondary market has been removed; and

d. the restriction on investment by a non-resident in commodity exchanges to a maximum of 5% of its equity shares has been removed.

The Consolidated Foreign Direct Investment Policy dated June 7, 2016 (‘FDI Policy’) has also been amended, by way Press Note 1 of 2017 dated February 20, 2017, to align it with the January Notification.

iii. FDI in LLPs: Pursuant to notification dated March 3, 2017, RBI has amended Regulation 5(9) and Schedule 9 of FEMA 20 to further liberalize FDI in Limited Liability Partnerships (‘LLPs’). Companies having FDI can now be converted into LLPs under the automatic route provided that the concerned company is engaged in a sector where: (a) 100% FDI is permitted under the automatic route; and (b) no FDI linked performance conditions exist. Previously, conversion of companies with foreign investment was only permitted under the approval route. The erstwhile ‘Other Conditions’ stipulated under Schedule 9 of FEMA 20 have been completely omitted resulting in the following key changes:

a. Previously, the designated partner of a LLP having FDI had to satisfy the condition of being “a person resident in India”. Also, a body corporate other than a company registered in India under CA 2013 was not permitted to be a designated partner of a LLP with FDI. These conditions have been removed. Consequently, a LLP having FDI will have to comply only with the provisions of the LLP Act, 2008 for appointment of designated partners;

b. Earlier, designated partners were responsible for compliance with FDI conditions for LLPs and liable for all penalties imposed on a LLP for any contraventions. This condition has now been deleted from Schedule 9 but no corresponding provision has been included in the revised Schedule 9; and

c. Express prohibition on LLPs availing External Commercial Borrowings (‘ECB’) has been removed. However, the extant ECB guidelines have not yet been amended to permit LLPs to avail ECBs. Therefore, LLPs will not be able to avail ECBs until the extant ECB guidelines are amended.

iv. FDI in E-commerce: The Department of Industrial Policy and Promotion had, by way of Press Note 3 of 2016 dated March 29, 2016 (‘Press Note 3’), prescribed that no FDI is permitted in an inventory based model of e-commerce and 100% FDI under the automatic route is permitted in the marketplace model of e-commerce subject to compliance with the guidelines prescribed thereunder. A summary of the key changes introduced through Press Note 3 have been captured in the April 2016 edition of Inter Alia. RBI has, by way of a notification dated March 9, 2017, amended FEMA 20 in line with the changes introduced through Press Note 3. However, RBI has introduced a minor change to Press Note 3 by clarifying that the threshold of 25% of sales emanating from one vendor or their group companies will be computed based on the sale value during the relevant financial year.

[1]     Being a private company incorporated under CA 2013 and recognized as such as per Notification G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.

 

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Revisions to the Schemes for Stressed Assets Introduced by the RBI

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

The RBI had launched several schemes over the past few years to strengthen the lenders’ ability to deal with stressed assets, including the scheme for ‘Flexible Structuring of Project Loans’ (‘5-25 Scheme’), the ‘Strategic Debt Restructuring Scheme’ (‘SDR Scheme’), and the ‘Scheme for Sustainable Structuring of Stressed Assets’ (being the scheme permitting extension of date of commencement of commercial operations (‘DCCO’) of a project without change in asset classification). By way of a circular dated November 10, 2016, the RBI has introduced certain amendments to these schemes for harmonizing the asset classification benefits and prescribing provisioning and prudential norms applicable to banks on implementation. A few notable changes include the following:

i. The 5-25 Scheme, which was available to lenders of long term project loans to infrastructure and core industries, has now been extended to new project loans in all sectors and to existing project loans in which the aggregate exposure of all institutional lenders exceeds Rs. 250 crores (approximately US$ 36.89 million) in all sectors. Banks may also apply such flexible structuring to funded exposures to construction companies, provided that the revised amortisation schedule of such funded exposure will be restricted upto the DCCO of the underlying projects and in case of existing exposures, the aggregate exposure of all institutional lenders exceeds Rs. 250 crores (approximately US$ 36.89 million).

ii. In the SDR Scheme, the benefits of asset classification have been subjected to the condition that the new promoter should have acquired at least 26% of the paid up equity capital of the borrower and should have become the single largest shareholder and acquire ‘control’ of the borrower.

iii. The RBI had issued a circular on September 24, 2015 (‘SDR Circular’), providing certain asset classification benefits to lenders upon the lenders effecting a change in control of the borrower outside the SDR Scheme. In the event that a change in ownership of the borrower is effected outside of the SDR Scheme and the lenders propose to avail the asset classification benefits offered by the RBI under the SDR Circular, an over-all stand-still period of 18 months will apply, from the date on which the majority of the lenders of the joint lenders’ forum (comprising a minimum of 75% of creditors by value and 50% of creditors by number) resolve to effect a change in ownership of the borrower, during which, the lenders are required to complete the process of change in ownership. Additionally, such change in ownership is required to be undertaken within 12 months from the date of the borrower/existing promoter and the new promoter entering into a binding agreement. The circular also clarifies that other instructions as applicable to the SDR Scheme will also apply to cases where banks decide to change ownership of borrowing entities (outside the SDR Scheme).

iv. In respect of the scheme for deferment of DCCO of project loans (and consequential shift in repayment schedule) without triggering a downgrade of the asset, the RBI has stated that a project with multiple independent units may be deemed to have commenced commercial operations from the date on which the independent units representing 50% (or higher) of the originally envisaged capacity have commenced commercial operations at the final output as originally envisaged, subject to the following conditions: (a) the units representing the remaining 50% (or lower) of the originally envisaged capacity will commence commercial operations within a maximum period of one year of the deemed DCCO; (b) commercial viability of the project is reassessed beyond doubt; and (c) capitalisation of interest obligation in respect of the project debt attributable to the units of the plant that have commenced commercial operations has ceased and revenue expenditure is booked under revenue account. However, if the remaining units do not commence commercial operations within the stipulated time, the account will attract asset classification norms and accordingly be treated as non-performing assets upon expiry of the one year period set out above. Guidelines relating to project loans that are applicable after the DCCO of a project, including the 5-25 Scheme, will not be applicable to project loans attributable to units that have not commenced commercial operations.

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Amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

SEBI, on August 14, 2017, notified amendments to Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) pursuant to which exemptions from making an open offer have been accorded to certain acquisitions under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and under debt restructuring schemes subject to compliance with the conditions specified therein.

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Liability of Personal Guarantors of a Corporate Debtor during the Corporate Insolvency Resolution Process

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

State Bank of India (‘SBI’) had sanctioned a loan to Lohia Machines Limited (‘LML’) which was guaranteed by the directors of LML. Upon non repayment, SBI approached the Debt Recovery Tribunal, Allahabad (‘DRT’). However, in parallel, LML also filed an application before the National Company Law Tribunal (‘NCLT’), Allahabad Bench, to initiate a corporate insolvency resolution process (‘CIRP’) in respect of itself. In response to the CIRP being admitted, although the DRT stayed the proceedings against LML, it continued to hear the matter in relation to the enforcement of personal guarantees given by the directors of LML. Aggrieved by DRT, the personal guarantors filed a writ petition before the Allahabad High Court. The Allahabad High Court passed an order[1] dated September 6, 2017, staying the DRT proceedings against the personal guarantors and stated: (i) under Section 60(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), NCLT is the adjudicating authority for resolution of insolvency and liquidation of a corporate person (including a personal guarantor); (ii) when liability is co-extensive and proceedings are still in a fluid stage, two split proceedings cannot go on simultaneously before the DRT and the NCLT for the same cause of action; and (iii) the scope of the CIRP order passed by NCLT imposing a moratorium on all legal proceedings, extends beyond the properties of the corporate debtor and suits/proceedings pertaining to the corporate debtor. Accordingly, the Allahabad High Court stayed the DRT proceedings against the personal guarantors till the finalisation of the CIRP or till approval of the resolution plan by NCLT or passing of an order for liquidation of LML by NCLT, as the case may be.

[1]     Sanjeev Shriya v. State Bank of India, Writ–C Nos. 30285 and 30033 of 2017

 

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Ability of a Power of Attorney Holder to Initiate Insolvency Proceedings

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

ICICI Bank Limited (‘ICICI’) filed an application before the NCLT through a representative, holding a power of attorney (‘PoA’), on behalf of ICICI to commence CIRP for Palogix Infrastructure Private Limited (‘Palogix’). Under the PoA in question, ICICI gave a general authority to the representative to appoint pleaders, advocates and solicitors to appear and act on behalf of ICICI before any NCLT bench and/or before other forums and to attend meetings of creditors in insolvency or bankruptcy or winding up matters and to vote at such meetings and to accept composition and to take such proceedings as he may think proper. Palogix objected that the person authorised by ICICI did not have adequate authority under the PoA to initiate bankruptcy proceedings before the NCLT. The National Company Law Appellate Tribunal (‘NCLAT’), in this case, took the view that IBC being a specialized law creating new rights and obligations, requires that a PoA be interpreted strictly so that the powers given to the agents are not abused and the actions are restricted only to the extent the power is indicated or given. It further stated that an authorization, in case of a company, means a specific authorization by the board of directors of the company by way of passing a resolution. Any application under Section 7 of the IBC, if signed and filed by a ‘general PoA holder’ without specific authorization under the IBC, will not be maintainable.

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Limitation Act does not apply to Proceedings under the IBC

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

By its order dated August 11, 2017,[1] NCLAT held that the provisions of the Limitation Act, 1963 (‘Limitation Act’) do not apply to the insolvency and bankruptcy process under the IBC. It stressed on the fact that the IBC was not enacted for the purpose of recovery of money claims, but rather for the initiation of CIRP. Accordingly, NCLAT allowed a debt that was time barred under the Limitation Act to form the basis of an application for the initiation of CIRP.

On August 23, 2017, the Supreme Court (‘SC’) dismissed an appeal from the order of NCLAT and declined to interfere with it. However, it noted that the question of law, viz whether the Limitation Act applies to IBC proceedings, has been kept open.

[1]     Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Limited, Company Appeal (AT) (Insolvency) No. 44 of 2017.

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IBC prevails over the Maharashtra Relief Undertakings (Special Provisions) Act, 1958

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

In its first extensive ruling on the operation and functioning of the IBC, the SC in its order dated August 31, 2017[1] held, inter alia, that the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, being a State legislation, cannot stand in the way of CIRP under the IBC, being a Central enactment, especially in view of the non-obstante clause contained in Section 238 of the IBC.

[1]     M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., Civil Appeal Nos. 8337-8338 of 2017.

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Proceedings under Section 37 of the Arbitration Act would not constitute ‘Dispute’ for IBC

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

Under Section 9 of the IBC, the existence of a dispute could bar an application by a financial or operational creditor. Section 8(2) of the IBC provides that, while pendency of “arbitration proceedings” has been included as “existence of dispute”, pendency of an application under Section 37 of the Arbitration Act has not been included as “existence of dispute”.

By an order dated August 29, 2017,[1] the NCLAT considered the relationship between the IBC and the Arbitration Act. It held that an arbitral award reaches finality upon: (i) expiry of the time within which an application under Section 34 of the Arbitration Act to set aside the arbitral award can be made, or (ii) an application made under Section 34 being rejected. Accordingly, the pendency of an appeal under Section 37 of the Arbitration Act would not constitute an “existence of a dispute” within the meaning of the IBC.

[1]     M/s Annapurna Infrastructure P. Ltd. v. Soril Infra Resources Ltd., Company Appeal (AT) (Insolvency) No. 32 of 2017.

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Scheme for Sustainable Structuring of Stressed Assets

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

RBI has, by its circular dated June 13, 2016, introduced a scheme for resolution of large accounts referred to as the ‘Scheme for Sustainable Structuring of Stressed Assets’, which is an optional framework and involves lenders determining the level of sustainable debt for a stressed borrower, and bifurcating the outstanding debt into sustainable debt (being a level of debt whose principal value can be serviced over the same tenor as that of the existing facilities even if future cash flows of the borrower remain at their current level and including new funding required to be sanctioned in the next six months). The remaining debt which will be converted into equity or quasi-equity instruments issued to the lender (subject to the pricing guidelines and other conditions outlined in the circular).

For an account to be eligible to avail of this scheme: (i) the project must have commenced commercial operations; (ii) the aggregate exposure of all institutional lenders (including foreign currency lenders) in the account must be more than Rs 500 crores (approximately US$ 73 million); and (iii) at least 50% of the current funded liabilities of the borrower should constitute ‘sustainable debt’. The resolution plan will be reviewed by an overseeing committee, set up by the Indian Banks Association, in consultation with RBI and comprising eminent experts. Post-resolution, the borrower’s ownership pattern may reflect a change in control of the borrower with either the lenders or a new promoter acquiring a majority stake in the company; or the existing promoters continuing to hold the majority shareholding/ controlling interest in the company, and in either case additional conditions may be imposed by the lenders on the promoters with respect to manner of dilution of shareholding, issuance of guarantee, etc. The resolution plan and control rights are to be structured to ensure that the promoters are not allowed to sell the shares of the borrower without the prior approval of lenders and without sharing the upside, if any, with the lenders towards loss in residual (converted) debt.

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Reference to BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

SC, in the case of Madras Petrochem Limited v. Board for Industrial and Financial Reconstruction and Ors.[1], dealt with the interaction between SARFAESI and the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) and held that SARFAESI prevails over SICA to the extent that the latter is inconsistent with the former.

The main issue before SC was with regard to Section 22 of SICA which provides that if a company is registered as a sick industrial company with the BIFR, all other legal proceedings against the company will be suspended and cannot be resumed without the BIFR’s permission. Further, proviso 3 to Section 15(1) of SICA provides that a reference pending before the BIFR will abate if secured creditors representing 75% or more of the borrower’s total debts initiate action under SARFAESI to recover their debts. In considering the above, SC held as under:

i. Where a single secured creditor in whose favour an exclusive charge has been created seeks to recover its debt under SARFAESI, such secured creditor may realise such secured debt notwithstanding provisions of SICA;

ii. Where there are more than one secured creditors of a sick industrial company, and at least 60% of such secured creditors in value of the amount outstanding as on a record date decide to proceed against the security charged in their favour, the provisions of SICA will not be applicable; and

iii. Where secured creditors representing not less than 75% in value of the amount outstanding against financial assistance decide to enforce their security under SARFAESI, any reference pending under SICA cannot be proceeded with and the proceedings under SICA will abate. Hence, if such SICA proceedings abate, any party can proceed to recover its dues and all pending proceedings against the industrial undertaking will stand revived.

[1]     Madras Petrochem Limited v. Board for Industrial and Financial Reconstruction and Ors., (2016) 4 SCC 1

 

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RBI Circular on Revised Framework for Resolution of Stressed Assets

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

RBI, by its circular dated February 12, 2018 on ‘Resolution of Stressed Assets – Revised Framework’ (‘Revised Framework’), has discontinued all existing RBI schemes on the resolution of stressed assets including the Corporate Debt Restructuring Scheme, Strategic Debt Restructuring Scheme, Scheme for Sustainable Structuring of Stressed Assets and the Framework for Revitalising Distressed Assets (collectively, ‘Extant Stressed Asset Schemes’) as well as the Joint Lenders’ Forum (‘JLF’) as an institutional mechanism for resolution of stressed accounts. The Revised Framework accounts for the changes brought about by the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and creates a streamlined framework for the resolution of non-performing assets (‘NPAs’) and other stressed assets. Some of the salient features are set out below:

i. The Revised Framework applies to all accounts, excluding accounts where any of the Extant Stressed Asset Schemes have been implemented [except where the aggregate exposure of lenders is at least Rs. 20 billion (approx. US$ 300 million)]. It currently does not cover NBFCs, Asset Reconstruction Companies or Regional Rural Banks – applicability is limited to Scheduled Commercial Banks and All-India Financial Institutions (such as Exim Bank, National Bank for Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India).

ii. All lenders are required to prepare board approved policies for resolution of stressed assets (‘Resolution Plan’) and take steps to resolve accounts immediately upon default. Each lender is required to document a Resolution Plan, even if there is no change in the terms between the Resolution Plans prepared by different lenders.

iii. A Resolution Plan is ‘implemented’ if the borrower is no longer in default with any of the lenders. However, if the Resolution Plan involves ‘restructuring’, then implementation requires certain additional steps.

iv. For accounts where the aggregate exposure of lenders, on or after March 1, 2018, is at least Rs. 20 billion (approx. US$ 300 million) (‘Large Accounts’), a Resolution Plan is required to be ‘implemented’ within 180 days from the date of first default, failing which the lenders are required to file a corporate insolvency application under the IBC before the NCLT within 15 days from the expiry of the above timeline.

v. If the Resolution Plan for a Large Account involves restructuring / change in ownership, lenders are mandated to file a corporate insolvency application under the IBC before the NCLT if such Large Account goes into default before the completion of the ‘Specified Period’, which is the later of: (a) one year from the first payment of principal / interest (whichever is later) of the credit facility with the longest period of moratorium under the terms of the Resolution Plan; or (b) repayment of at least 20% of the outstanding debt. Notwithstanding the above, lenders can file an application under IBC any time, even without attempting a Resolution Plan.

vi. The Revised Framework further prescribes requirements for independent credit evaluation of accounts by the Lenders and imposes stricter reporting norms.

vii. Upon a change of ownership of the borrower, the restructured account would be upgraded to ‘standard’, upon satisfaction of certain conditions.

viii. The Revised Framework further states that the RBI would take ‘stringent supervisory / enforcement actions as deemed appropriate’ including monetary penalties and increased provisioning requirements, in the event of (a) actions by lenders with an intent to evergreen stressed accounts / conceal the actual status of accounts; or (b) failure on part of the lenders to meet the prescribed timelines.

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Amendment to the Transfer of Pending Proceedings Rules, 2016

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

The MCA has by way of its notification dated June 29, 2017 amended the Companies (Transfer of Proceedings) Rules, 2016 (‘Transfer Rules’), which specified rules for transfer of pending proceedings under the Companies Act, 1956 (‘CA 1956’) in relation to winding up and voluntary winding up of companies from the High Court to the NCLT. Rules 4 and 5 of the Transfer Rules have been amended as follows:

i. All proceedings related to voluntary winding up, where notice of resolution by advertisement has been given under CA 1956 but such company has not been dissolved before April 1, 2017, will continue to be dealt with under CA 1956 and not under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

ii. The erstwhile Rule 5 of the Transfer Rules provided for winding up proceedings pending before the High Court to be transferred to the NCLT. If the petition was not served on the respondent then such petitions, and the petitioner would, thereafter, be required to provide information as if such petition were an application under the IBC. The time for providing such information has now been extended up to July 15, 2017, failing which, such petition will stand abated and a fresh application under the IBC will have to be filed.

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Clarifications on Framework for Revitalizing Distressed Assets

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

The RBI has, by a notification dated May 5, 2017, issued clarifications on the Framework for Revitalizing Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (‘JLF’) and Corrective Action Plan (‘CAP’) after observing delays in finalizing and implementation of the CAP, leading to delays in resolution of stressed assets in the banking system. These clarifications include:

i. CAP can also include resolution by following the process stipulated under the ‘Flexible Structuring of Project Loans’ (‘5-25 Scheme’) – the change of ownership under the ‘Strategic Debt Restructuring Scheme’ (‘SDR Scheme’) and the ‘Scheme for Sustainable Structuring of Stressed Assets’, (‘S4A Scheme’), etc.

ii. Lenders must adhere to the prescribed timelines for finalizing and implementing the CAP decisions and decisions agreed upon by a minimum of 60% of creditors by value and 50% of creditors by number in the JLF would be considered binding on all lenders.

iii. RBI has additionally noted that the stand of the participating banks while voting on the final proposal before the JLF shall be unambiguous and unconditional. Any bank which does not support the majority decision on the CAP may exit subject to substitution within the stipulated timelines, failing which it shall abide the decision of the JLF (as decided above) and that the bank shall implement the JLF decision without any additional conditions. Non-adherence to the instructions and frameworks under the timeline may attract monetary penalties.

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Scope of the term ‘dispute’ under Section 5 (6) of the IBC

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

In Kirusa Software Private Limited v. Mobilox Innovations Private Limited,[1] the National Company Law Appellate Tribunal (‘NCLAT’) held that the term ‘dispute’ has to be given a wide meaning, for the purpose of Sections 8 and 9 of the IBC, which deal with applications made by an operational creditor. In the instant case, NCLAT held that the term ‘dispute’ has to be given an inclusive meaning and not an exhaustive one, provided it is relatable to the existence of the amount of the debt, quality of good or service or breach of a representation or warranty as provided under Section 5(6) of the IBC. The term should thus cover all disputes on debt, default etc. without being limited to only two ways of disputing a demand made by an operational creditor, i.e. a pending suit or an arbitration.

The NCLAT however also cautioned against an illusory dispute being raised for the first time while replying to the notice under Section 8 of the IBC as a tool to reject an application under Section 9 of the IBC.

[1]     Company Appeal (AT) (Insolvency) 6 of 2017.

 

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IBC Update: Shareholders’ Resolution not required for a resolution plan.

Published In:Inter alia- IBC Client Update- October 2017- 3 [ English ]

The Ministry of Corporate Affairs (‘MCA’) released a circular last evening, clarifying a significant issue under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

If a corporate action is contemplated in a resolution plan approved by the National Law Company Tribunal (‘NCLT’)stakeholders have queried whether the existing shareholders need to approve such corporate action (where required under the Companies Act, 2013 (‘CA 2013’) or any other law). Such corporate actions could include issuance of further shares, a merger/demerger or a slump sale.

Industry participants and stakeholders have considered this issue critical because a resolution plan approved by the committee of creditors and the NCLT could fail to obtain shareholders’ approval. Such failure would raise difficult legal questions. This includes whether the relevant resolution plan can be implemented thereafter, whether the relevant company may fall into liquidation, and what consequences may ensue for the shareholders themselves for failure to approve a plan which is supposed to be binding on them. These unanswered questions caused significant unease for potential investors (who feared that a seemingly completed acquisition may unravel) and the committee of creditors (who feared that a seemingly completed restructuring may fall into liquidation), amongst other stakeholders.

Two provisions of the IBC seemed to be inconsistent and left room for divergent interpretation. Section 31(1) of the IBC provides that once the resolution plan is approved by the NCLT it shall be binding on the company and its shareholders, amongst others. However, Section 30(2)(e) of the IBC states that the resolution plan must not contravene any provisions of law for the time being in force. So does the approved resolution plan bind shareholders and therefore remove the need for their separate consent in a general meeting, or should the resolution plan contemplate the need for a shareholders’ approval to ensure compliance with the CA 2013 and then proceed to obtain it post approval by the NCLT?

The MCA has now clarified that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under the CA 2013 or any other law) is deemed to have been given on its approval by the NCLT. As such, at no stage (whether before approval by the NCLT or indeed after), is shareholders’ approval required for the implementation of an approved resolution plan.

The circular offers significant clarity to market participants and confirms a decisive shift in decision making power away from the shareholders in favour of the committee of creditors. However, this is a clarification and has been offered by way of a circular issued by the MCA and is not a legislative amendment.

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RBI sends 25% of India’s non-performing loans to the Insolvency and Bankruptcy Code, 2016

Published In:IBC Update - June 14, 2017 [ English ]

The Reserve Bank of India (‘RBI’) issued a press release on June 13, 2017 announcing that its Internal Advisory Committee (‘IAC’) has identified 12 Indian companies which qualify for immediate reference under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). These 12 accounts constitute about 25% of the current non-performing loans (‘NPLs’) in India.

The RBI had last month constituted an IAC for the purpose of identifying NPLs that would be recommended for the corporate insolvency resolution process under the IBC.

The IAC had its first meeting on Monday, June 12, 2017 and agreed to focus on large stressed accounts. The IAC reviewed and considered the largest 500 NPLs. In identifying the 12 largest accounts, the IAC recommended that all accounts with outstandings greater than INR 50 billion (approximately USD 800 million) of which 60% or more are classified as non-performing as of March 31, 2016, qualify for reference to the IBC.

Crucially, the IAC also recommended that for NPLs, where the above criteria do not apply, a viable resolution plan must be finalised by banks within six months, failing which banks may be required to push these companied into the corporate insolvency resolution process under the IBC. More details on these other NPLs are expected in the coming days.

The RBI also confirmed that it will be publishing revised provisioning norms for cases admitted under the IBC. This was something which the banking industry had been keenly waiting for and will be relieved to hear is in the pipelines.

On May 4, 2017, an ordinance amended the Banking Regulation Act, 1949 empowering the RBI to direct banks to lead certain NPLs into the IBC process. On May 5, 2017 the Ministry of Finance empowered the RBI to do so. Also on May 5, 2017, the RBI revised and clarified important aspects of its restructuring circular. On May 22, 2017, the RBI announced that that it will form a committee to recommend cases for the IBC process (which is now called the IAC). This committee was formed and had its first meeting within three weeks of that announcement (June 12, 2017). And a day after its first meeting, the above announcement was made. The sense of purpose and impatience in the fight against NPLs is palpable and unprecedented. The next six to nine months are going to be very interesting to watch for stakeholders in the finance, restructuring and M&A space.

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IBC Amendment: Legislating for Moral Hazard with a Broad Brush – Take 2

Published In:IBC Update - January 2, 2018 [ English ]

The President of India promulgated an ordinance on November 23, 2017 amending the Insolvency and Bankruptcy Code, 2016 (‘IBC’) (‘Ordinance’). Please refer to our previous edition of Inter Alia update attached herewith (readers may benefit from a second read of our previous edition before considering this update). A key change brought in by the Ordinance was the introduction of eligibility criteria for resolution applicants with an express prohibition on certain persons from submitting a resolution plan for a corporate debtor in a corporate insolvency resolution process (‘CIRP’) and also preventing such persons from purchasing the corporate debtor’s assets in liquidation.

Some market participants argued that these new eligibility criteria were too restrictive and may disqualify applicants whose participation in the IBC resolution process could be economically and strategically important for all stakeholders.

In this backdrop, a Bill was introduced in the Parliament (“Bill”) on December 29, 2017 by Mr. Arun Jaitley, the Finance Minister, to replace the Ordinance. The Bill has now been passed by the Lok Sabha and the Rajya Sabha (Lower and Upper House of the Parliament respectively). When the Bill is approved and signed by the President of India and then notified, it will amend some of the provisions of the IBC recently introduced by the Ordinance. The key changes proposed are set out below:

1. Who must be eligible?

The eligibility criteria for submitting a resolution plan under the Ordinance applied to the applicant or any person acting jointly with such person. The Bill requires that any person acting in concert with the applicant must also meet the eligibility criteria.

While ‘acting jointly’ may have been interpreted to be restricted to a joint applicant or equivalent, ‘persons acting in concert’ will be interpreted to have a wider import. The interpretation of this phrase as used in other Indian laws will be referred to. Resolution applicants, insolvency professionals and members of committees of creditors will carefully consider this much expanded scope and eagerly await jurisprudence to clarify the reach of this term.

2. Some disqualifications now time bound

The Bill clarifies that ineligibility on account of: (a) being a willful defaulter, (b) being disqualified to act as a director, and (c) prohibition by the Securities and Exchange Board of India from trading in securities or accessing the securities market, will only subsist as long as the person suffers from such ‘deficiency’ and not thereafter.

3. Disqualification for being classified as a non-performing asset (‘NPA’)

The Bill clarifies that in order to ascertain if one year has elapsed from classification of an account as an NPA (resulting in disqualification), the relevant look-back period will be from the date of the commencement of the CIRP of the corporate debtor. The interpretation of the language of the Ordinance was that the look-back period started from the date of submission of a resolution plan. This may help would-be-applicants that are involved with companies that have only recently become stressed.

The Bill clarifies that this ‘disqualification’ also applies to the promoter of the corporate debtor (whose account is so classified) and to anyone in management or control of the corporate debtor. Many stakeholders were already interpreting the language in the Ordinance to mean this. The clarification is, nonetheless, helpful.

The Ordinance indicated that any person affected by such ‘NPA disqualification’ may cure such ineligibility by making payments of all overdue amounts with interest thereon. The Bill clarifies this. There has been some suggestion in the Parliamentary debate on the Bill and speeches of Government officials that payment of overdue interest may be enough to avail of this cure. However, the text of the Bill which refers to “overdue amounts with interest” suggests otherwise and this now remains a matter left for interpretation by the relevant lenders.

The Bill also permits a resolution applicant who is otherwise ineligible due to this disqualification to remain an eligible resolution applicant if such person makes payment of the overdue amounts with interest within 30 days (or such shorter period permitted by the committee of creditors).

4. Preferential, undervalued or fraudulent transactions; and now extortionate credit transactions

The Bill clarifies that this ‘disqualification’ also applies to the promoter of the corporate debtor (in which such transactions took place) and to anyone who has been in management or control of such corporate debtor. Some stakeholders were already interpreting the language in the Ordinance to mean this. The clarification is, nonetheless, helpful. The Bill also adds extortionate credit transactions to the list of disqualifications.

5. Connected persons – now a global check with some exceptions

The Ordinance listed a number of disabilities in the context of Indian law. The Ordinance also listed any ‘corresponding disabilities’ under any foreign law as a relevant disability. This ‘foreign disability’ test did not seem to apply to connected persons under the Ordinance. The Bill will extend this ‘foreign disability’ test to connected persons also.

Under the Ordinance, connected persons included the holding company, subsidiary company, associate company or a related party of the relevant person. As all connected persons also need to pass the eligibility test, this became a challenge for some ‘bona fide’ applicants. The Bill provides that the extension of connected persons to include holding companies, subsidiary companies, associate companies or related parties will not apply to a scheduled bank, a registered asset reconstruction company or a registered alternate investment fund.

6. Disqualifications in respect of Guarantors

The Ordinance disqualified any person who had executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor under CIRP. This provision was recently interpreted by a Court to refer to guarantees which had been invoked but remained unpaid. The Bill seems to narrow the scope of this disqualification – which may assist persons involved with corporate debtors that have become stressed more recently.

To conclude, the Bill seeks to reduce some of the rigour of the disqualifications contained in the Ordinance while raising the bar and widening the impact in other respects. The eligibility criteria remain restrictive and may end up disqualifying some key players.

Separately, on December 31, 2017 the Insolvency and Bankruptcy Board of India amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (“Amendments”). The Amendments clarify that the term “dissenting financial creditor” will also include financial creditors who abstained from voting for the resolution plan approved by the CoC. Many stakeholders were already interpreting the language in the IBC and the regulations to mean this (including in relation to payment of liquidation value to such creditors). The clarification is, nonetheless, helpful. Additionally, the Amendments (i) omit the requirement to state the liquidation value of the corporate debtor in the information memorandum; (ii) mandates all stakeholders to keep the liquidation value of the corporate debtor confidential; and (iii) provides for submission of resolution plan within the time given in the invitation for the resolution plans. Many members of the CoC were concerned that general publication of liquidation value could depress bids. This amendment attempts to alleviate this concern.

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Public Announcement requesting suggestions for Reforms and Amendments to the Insolvency and Bankruptcy Code

Published In:IBC Update - December 20, 2017 [ ]

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was notified as applicable law in December, 2016. Over the last year, the institutional framework of the IBC has been operationalized and well over 475 companies are undergoing an insolvency resolution process under the IBC.

The Government of India has decided to undertake a comprehensive review of the IBC in light of the experiences of various stakeholders in the past year. The Ministry of Corporate Affairs (‘MCA’) last week made a public announcement requesting suggestions for reforms and amendments to the IBC from all interested parties. The comments are to be uploaded at – http://feedapp.mca.gov.in/ by January 10, 2018.

The MCA constituted an Insolvency Law Committee (‘ILC’) comprising of representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.

AZB & Partners (‘AZB’) will submit its recommendations to the MCA and participate in some of the deliberations. We would be grateful to receive any suggestions you may have for reforms and amendments to the IBC.

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IBBI- Press Release- India wins the GRR Award for the Most Improved Jurisdiction

Insolvency and Bankruptcy Board of India Press Release No. IBBI/PR/2018/20

India won the prestigious GRR Award for the Most Improved Jurisdiction in a glittering ceremony held in Banking Hall, London on 26th June, 2018. This award recognises the jurisdiction which improved its restructuring and insolvency regime the most over the last year. Other jurisdictions shortlisted for this award included the European Union and Switzerland.

The award is given by the Global Restructuring Review (GRR), an online daily news service and magazine on cross-border restructuring and insolvency law. The GRR introduced global awards in nine categories in 2017. One of the nine award categories is the Most Improved Jurisdiction. The winner is selected basis a rigorous global nomination process. Singapore won the award in Most Improved Jurisdiction category in 2017.

Ms. Kyriaki Karadelis, Editor, GRR observed on the occasion, “The award for “most improved jurisdiction” is extremely well-deserved. As you know, India narrowly missed out on the title to Singapore last year, but as the Insolvency and Bankruptcy Law of 2016 has begun to be tested in the new network of National Company Law Tribunals resulting in several key, precedent-setting judgements, we felt it was the right time to celebrate India’s progress in this sector.”

While shortlisting India for this award in 2018, the GRR observed: “It has been all change in India since it enacted its first ever Insolvency and Bankruptcy Code in 2016, bringing in greater empowerment for creditors, registered insolvency professionals and a whole new network of National Company Law Tribunals (NCLTs).

An almost constant stream of improvements and updates has followed in response to feedback and practical experience: for example, in early 2018, new regulator the Insolvency and Bankruptcy Board of India (IBBI) introduced additional rules defining how to calculate the fair value of debtors’ assets requiring registered valuers to do the maths. Case law is now beginning to build up on the interpretation of the new rules too. …..”.

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IBC Update: Approval of Resolution Plans under the IBC

Published In:Inter alia- IBC Client Update- November 2017- 2 [ English ]

Three resolution plans have recently been approved by different benches of the National Company Law Tribunal (‘NCLT’) under the provisions of the Insolvency and Bankruptcy Code, 2016. These three cases are briefly discussed below:

Sree Metaliks Limited

The NCLT, Kolkata Bench on November 7, 2017, approved the resolution plan proposed by the promoters and approved by the Committee of Creditors (‘CoC’) by a 78.5% majority. The plan inter alia provides for:

1.division of financial creditors (‘FC’) into two buckets (Class A and Class B) based on the different levels of charge created by the company;

2. haircut of 25% for Class A FCs and 50% for Class B FCs;

3. and capital infusion by a strategic investor.

Prowess International Private Limited

An operational creditor (‘OC’) had initiated the corporate insolvency resolution process (‘CIRP’) at the NCLT, Kolkata Bench, against a company which was solvent and financially sound. During the CIRP, two OCs which had a major claim against the company settled their dues by way of a compromise. The resolution plan, approved by the NCLT on October 17, 2017, provided for:

1.payment to the sole FC without any haircut; and

2. payment to OCs (other than the two whose claims were settled) without any haircut during normal course of business.

Chhaparia Industries Private Limited

The NCLT, Mumbai Bench on September 29, 2017 approved the resolution plan proposed by the promoters. The order passed by the NCLT does not discuss the commercials in depth. However, the plan provides for reinstatement of the suspended board of directors;

1. Payment of liquidation value to OCs (of which part payment had already been made and the remainder was to be paid within 30 days); and

2. Payment to the sole FC, Asset Care and Reconstruction Enterprises Limited within 25 months from the date of the order. It is not clear if the FC suffered a haircut, if any.

The common theme amongst all of the above cases has been that the plan proposed by the erstwhile promoters has been approved by the CoC and NCLT.

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IBC Update: Shareholders’ approval not required for Resolution Plan

Published In:Inter alia- IBC Client Update- October 2017 [ English ]

The Ministry of Corporate Affairs (‘MCA’) released a circular last evening, clarifying a significant issue under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

If a corporate action is contemplated in a resolution plan approved by the National Law Company Tribunal (‘NCLT’)stakeholders have queried whether the existing shareholders need to approve such corporate action (where required under the Companies Act, 2013 (‘CA 2013’) or any other law). Such corporate actions could include issuance of further shares, a merger/demerger or a slump sale.

Industry participants and stakeholders have considered this issue critical because a resolution plan approved by the committee of creditors and the NCLT could fail to obtain shareholders’ approval. Such failure would raise difficult legal questions. This includes whether the relevant resolution plan can be implemented thereafter, whether the relevant company may fall into liquidation, and what consequences may ensue for the shareholders themselves for failure to approve a plan which is supposed to be binding on them. These unanswered questions caused significant unease for potential investors (who feared that a seemingly completed acquisition may unravel) and the committee of creditors (who feared that a seemingly completed restructuring may fall into liquidation), amongst other stakeholders.

Two provisions of the IBC seemed to be inconsistent and left room for divergent interpretation. Section 31(1) of the IBC provides that once the resolution plan is approved by the NCLT it shall be binding on the company and its shareholders, amongst others. However, Section 30(2)(e) of the IBC states that the resolution plan must not contravene any provisions of law for the time being in force. So does the approved resolution plan bind shareholders and therefore remove the need for their separate consent in a general meeting, or should the resolution plan contemplate the need for a shareholders’ approval to ensure compliance with the CA 2013 and then proceed to obtain it post approval by the NCLT?

The MCA has now clarified that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under the CA 2013 or any other law) is deemed to have been given on its approval by the NCLT. As such, at no stage (whether before approval by the NCLT or indeed after), is shareholders’ approval required for the implementation of an approved resolution plan.

The circular offers significant clarity to market participants and confirms a decisive shift in decision making power away from the shareholders in favour of the committee of creditors. However, this is a clarification and has been offered by way of a circular issued by the MCA and is not a legislative amendment.

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IBC Update: India’s First Interim Finance

Published In:Inter alia- IBC Client Update- October 2017- 2 [ English ]

AZB & Partners represented Edelweiss in the country’s first significant interim finance under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The interim finance was raised by the resolution professional of Alok Industries Limited, Mr. Ajay Joshi (assisted by Grant Thornton).

Alok Industries Limited is one of the 12 accounts where the Reserve Bank of India directed banks to initiate insolvency proceedings under the IBC. The National Company Law Tribunal initiated a corporate insolvency resolution process against Alok Industries Limited on July 18, 2017.

The IBC provides specific provisions for raising interim finance by the resolution professional for the purposes of protecting and preserving the value of the property of the company and managing its operations as a going concern – and consequently achieve a viable resolution plan for the company.
The IBC classifies all interim finance raised as ‘insolvency resolution process costs’ (‘IRPC’). Payment of IRPC gets highest priority in a resolution plan or in liquidation.

The IBC requires that, in a resolution plan, IRPC must be paid out prior to any recoveries being made by any creditor. Such payment includes interim finance (interest and principal) which also gets this priority. Similarly, in liquidation also, the distribution waterfall set out in the IBC provides for highest priority to IRPC (which must be paid out of the liquidation estate).

Interim finance is an important ingredient to resolve and restructure a stressed and potentially insolvent company and in some cases can be critical for the company’s business operations to survive during the corporate insolvency resolution process. A number of companies undergoing the IBC process have sought to raise formal interim finance. There has also been sufficient interest in this space from various financial institutions. We expect that with this first deal underway, many others will be encouraged to follow suit.

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IBC Update: First Information Utility

Published In:Inter alia- IBC Client Update- October 2017- 1 [ English ]

National e-Governance Services Limited (‘NeSL’), a Union Government company that received an in-principle approval for establishing an information utility (‘IU’) in June, 2017, has now received the final approval to become India’s first IU with the initial registration valid till September 24, 2022. Indira Gandhi Institute of Development Research has been appointed as the knowledge partner of NeSL, and Mr. S Ramann has been appointed as the Managing Director and Chief Executive Officer. The framework of NeSL is governed by the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017.

Under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), IUs are envisaged as record keeping entities which assist in providing accurate, secure and the most up-to-date financial information relating to companies which will assist creditors and other stakeholders in the context of insolvency proceedings.

IUs are designed to provide services such as accepting, authenticating and providing access to financial information. Under the IBC, the information stored with an IU can be relied upon by the National Company Law Tribunal (‘NCLT’) at the time of admission of an insolvency application. Such information will assist in determining whether a payment default has occurred or if there is a pre-existing dispute in relation to an IBC application filed by an operational creditor. In addition, IUs are also envisaged to function as a public record of security interests created by companies in favour of creditors and such record can be relied upon by creditors to establish perfection of security in a liquidation scenario.

Persons permitted to access information stored with an IU include the debtor, the subject creditor, the insolvency professional, the NCLT, the Insolvency and Bankruptcy Board of India and other persons who are permitted to access such information by the debtor or the creditor, as the case may be (subject to payment of prescribed fees).

This is an important and much awaited development in the restructuring and banking space, and we are hopeful that the many expected benefits of an IU for various stakeholders will emerge soon.

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Essar vs. RBI: Start to finish in 10 working days!

Published In:Inter alia- IBC Client Update- July 2017 [ English ]

On June 13, 2017, the Reserve Bank of India (‘RBI’) issued a press release stating that the Internal Advisory Committee (‘IAC’) had identified 12 accounts that would qualify for immediate reference under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and thereafter, the RBI issued directions to the relevant lead banks directing them to commence IBC proceedings against these 12 companies.

The State Bank of India (‘SBI’) commenced IBC proceedings against Essar Steel India Limited (‘Essar Steel’) on June 22, 2017 (shortly before this Standard Chartered Bank (‘SCB’) had also commenced IBC proceedings against Essar Steel).

Essar Steel challenged both SBI’s and SCB’s IBC proceedings in the Gujarat High Court on July 4, 2017 and RBI’s identification of Essar Steel as one of the 12 companies directed for immediate IBC proceedings. AZB & Partners was instructed to represent the RBI.

After fully hearing all parties (Essar Steel, RBI, SBI, SCB and the National Company Law Tribunal (‘NCLT’)), on July 17, 2017 the Gujarat High Court dismissed Essar Steel’s petition and declined to grant any of the reliefs requested by Essar Steel. The Gujarat High Court moved in an efficient and speedy fashion and the order was passed within 10 working days of commencement of proceedings by Essar Steel.

This decision is crucial as it will ensure Essar Steel and the other identified debt-laden companies will be referred to the NCLT without further delays. As of this morning, Essar Steel has not filed an appeal against the decision of the Gujarat High Court.

NCLT Ahmedabad has ordered that the Essar Steel IBC proceedings be heard on July 24, 2017 and has given time to Essar Steel to file its reply until July 22, 2017.

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IBC Update Committee of creditors approves first resolution plan

Published In:IBC Update - June 26, 2017 [ ]

In a first, the committee of creditors has passed the first resolution plan in regard to a Hyderabad based company, Synergies Dooray Automative Limited. The resolution plan will be submitted to the NCLT on July 6 2017 and is set to be approved by the NCLT on July 11 2017.

Synergies Dooray was put into the resolution process under IBC on January 25 2017 with Mamta Binani as the resolution professional. This was also the first corporate debtor application to be admitted under the IBC. The IBC envisages a 180 day resolution process period (extendable by 90 days) which in this case, is to expire on July 23 2017.

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Insolvency and Bankruptcy Code, 2016 Update

Published In:IBC Update - April 5, 2017 [ ]

The provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) dealing with (i) voluntary liquidation of corporate persons; and (ii) setting up and regulation of information utilities (“IUs”) were notified by the central government with effect from April 1, 2017. Additionally, the Insolvency and Bankruptcy Board of India (“IBBI”) simultaneously notified:

a. The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“Voluntary Liquidation Regulations”); and

b. The Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (“IU Regulations”).

This update discusses the important provisions of the Voluntary Liquidation Regulations and IU Regulations.

A. VOLUNTARY LIQUIDATION REGULATIONS

Section 59 of the IBC provides a mechanism for the voluntary liquidation of corporate persons which have not committed a payment default. To initiate a voluntary liquidation proceeding, the majority of the directors or designated partners of the corporate person (as the case may be) must make a declaration that:

a. They have made a full enquiry into the affairs of the corporate person;

b. In their opinion, the corporate person has no debt or that it will be able to pay its debt in full, from the proceeds of the assets sold under the proposed liquidation; and

c. The corporate person is not being liquidated to defraud any person.

The Voluntary Liquidation Regulations lay down the conditions and procedural requirements for conducting the voluntary liquidation process, the salient features of which are discussed below.

Who may be appointed as a liquidator in a voluntary liquidation?

The Voluntary Liquidation Regulations lay down the eligibility for insolvency professionals (“IPs”) proposed to be appointed as liquidators. They include that the proposed IP and every director or partner of an insolvency professional entity (“IPE”) that such proposed IP is part of:

a. Must be independent of the corporate person;

b. Must not be under a restraint order of the IBBI; and

c. Must not represent other stakeholders in the same liquidation process.

Other features

The Voluntary Liquidation Regulations further provide for the following:

a. Process of commencement of voluntary liquidation;

b. Manner of appointment and remuneration of liquidators and their powers and functions;

c. Process for submitting proof of claims by creditors;

d. Sale of assets comprising the liquidation estate;

e. Distribution of proceeds to stakeholders; and

f. Dissolution of the corporate person.

Applicability of other provisions of IBC

Other provisions dealing with the liquidation of a corporate debtor (which has made a payment default) contained in sections 35-53 of the IBC continue to be relevant even in a voluntary liquidation conducted under section 59 of the IBC. For instance, preferential transactions, undervalued transactions, transactions defrauding creditors and extortionate credit transactions must be reviewed by the liquidator and may be set aside by the National Company Law Tribunal (“NCLT”).

Takeaway

The Voluntary Liquidation Regulations are a significant departure from the process of voluntary liquidation under the Companies Act, 1956. They introduce a streamlined and more efficient regime in which the liquidation is conducted by independent IPs in a timely manner. This will prove to be of great value particularly to sponsors of special purpose vehicles which have served their limited purpose and foreign investors with commercially unviable subsidiaries which are otherwise solvent and need to be wound up.

B. IU REGULATIONS, 2017

What is an IU?

IUs are intended to be electronic databases which store financial information about borrowing entities submitted by interested parties. The scheme of the IBC provides that details of both financial as well as operational debt may be filed with IUs. In addition, information relating to security interests created under debt documents, notice of any dispute raised by a corporate debtor in relation to the existence of an operational debt and record of assets and liabilities of corporate debtors may also be submitted to an IU.

Who can be registered as an IU?

The IU Regulations set out the following eligibility criteria for a person to register as an IU:

a. It must be a public limited company with minimum net worth of INR 50 crores;

b. It must not be controlled by person(s) resident outside India;

c. A person resident outside India must not (directly or indirectly) hold more than 49% of the equity shares of the IU;

d. The IU, its promoters, directors, key managerial personnel and persons holding more than 5% of its equity shares must be ‘fit and proper persons’;

e. The maximum shareholding of the IU by a single person should not be more than 10% of equity share capital of the IU; and

f. Any government company, public financial institution, stock exchange, depository, bank or insurance company may (by itself or collectively) hold up to 25% of the equity share capital of the IU.

The IBC does not contemplate the existence of a single state sponsored IU. The IBBI will license and regulate multiple IUs which can be privately owned and compete with each other on the basis of services offered and fee charged.

Other features

The IU Regulations also provide for:

a. A framework for registration and regulation of IUs;

b. Guidelines on shareholding and governance of IUs;

c. Specifications on technical standards and bye laws to be adopted by the IU for performance of its core services;

d. Duties and services to be performed by an IU; and

e. Grievance redressal policy in order to safeguard the interests of the user.

Takeaway

IUs will play a vital role in the CIRP and liquidation processes. A readily accessible record of debt and the dates of default will aid the NCLT in reviewing an application to commence a CIRP more expeditiously.

The notification of the IU Regulations is a major milestone in implementation of the IBC. However, it remains to be seen how quickly market participants are able to set up IUs, how the IBBI will ensure fair competition between multiple IUs and how easily accessible and secure the stored data will be.

C. NOTABLE PARTS OF THE IBC THAT HAVE NOT BEEN NOTIFIED YET

Pursuant to section 55 of the IBC, a fast track process (“Fast Track CIRP”) is available for corporate debtors with relatively low levels of assets and income; and such class of creditors or such amount of debt as may be notified by the central government.

Fast Track CIRP provides for the insolvency resolution to take place in a more condensed period of 90 days (extendable by a maximum of another 45 days). Fast Track CIRP will be of use for smaller companies with uncomplicated balance sheets which are capable of being resolved within more strict timelines.

Chapter IV (of Part II) of the IBC dealing with Fast Track CIRP has not been notified yet.professionals.

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Bankruptcy code on its way

Published In:Inter alia- IBC Client Alert- December 2016 [ ]

Ever since the Insolvency and Bankruptcy Code, 2016 (“IBC”) was passed by Parliament, the Ministry of Corporate Affairs (“MCA”) has been notifying portions of the IBC selectively as and when supporting infrastructure was created.

Set out below are some of the major provisions of the IBC, the related Central Government Rules and the Insolvency and Bankruptcy Board of India (“IBBI”) Regulations, which have been notified.

A. Insolvency Professionals and Insolvency Professional Agencies

The IBBI notified three regulations this month:

(1) IBBI (Insolvency Professionals) Regulations, 2016 (“IP Regulations”), which took effect on November 29, 2016.

The IP Regulations set out the categories of persons who are eligible to become insolvency professionals (“IPs”):

(a) Advocates, chartered accountants, company secretaries and cost accountants (“Regulated Professionals”) who have been in practice for more than 15 years will be automatically grandfathered to qualify as IPs on registering with an Insolvency Professional Agency (“IPA”). However, their registration will be provisional and valid for only six months, after which they will have to clear the ‘Limited Insolvency Exam’ to be held by the IBBI.

(b) Regulated Professionals with 10 years of experience in practice must first clear the Limited Insolvency Exam.

(c) Graduates other than Regulated Professionals with more than 15 years of experience in management must first clear the Limited Insolvency Exam.

(d) Any person who is an Indian resident and is ‘fit and proper’ must first clear the ‘National Insolvency Exam’, which is intended to be more rigorous than the Limited Insolvency Exam.

(2) IBBI (Insolvency Professional Agencies) Regulations, 2016 (“IPA Regulations”), which took effect on November 21, 2016.

IPAs operate as self-regulatory organisations whose objective is the enrollment of IPs, regulation of IPs and the enforcement of a code of conduct for their member IPs. The IPA Regulations provide that:

(a) Only companies registered under Section 8 of the Companies Act, 2013 may be registered as IPAs;

(b) IPAs must have a minimum net worth of INR 100,000,000 (approximately USD 1,500,000) and a paid-up share capital of INR 50,000,000 (approximately USD 700,000);

(c) At least 51% of the share capital of the IPA must be held by persons resident in India.

The Institute of Chartered Accountants of India and Institute of Company Secretaries of India have obtained registration from the IBBI to function as IPAs.

(3) IBBI (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (“Model Bye-Law Regulations”), which took effect on November 21, 2016.

These regulations mandate that the bye-laws of IPAs must be in conformity with the Model Bye-Law Regulations. These regulations provide for the internal governance of the IPA; registration of member IPs; instituting a disciplinary procedure; and grievance redressal mechanism in respect of member IPs.

B. Corporate Insolvency Resolution Process (“CIRP”) (Chapter II, Part II of IBC) most likely to be notified on December 1, 2016

Sections 6 to 32 of the IBC deal with the operation of the CIRP. These sections entitle foreign and domestic creditors (both financial and operational) as well as corporate debtors to initiate a CIRP on the occurrence of a payment default of more than INR 100,000 (approximately USD 1,500).

Notably, this part deals with the triggering of CIRP, taking over of the management by the IP, creation of the committee of creditors and the submission and consideration of resolution plans for revival of the corporate debtor as a going concern. The IBBI is also notifying IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), most likely with effect from December 1, 2016. The CIRP Regulations elaborate in greater detail how an IP is appointed and how the CIRP process is conducted.

C. Notable parts that have not been notified

(1) Liquidation Process (Chapter III, Part II of IBC): This part deals with the provisions relating to the conduct of liquidation proceedings in respect of the corporate debtor. We understand the MCA intends to notify these parts within the next two to three weeks. The IBBI is in the process of finalizing the IBBI (Liquidation of Insolvent Corporate Persons) Regulations, 2016, which will contain the specific details of how liquidators will be appointed, their duties and remuneration.

(2) Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms (Part III of IBC): This part deals with the provisions relating to the conduct of the bankruptcy process for individuals and partnership firms.

Voluntary Liquidation of Corporate Persons (Chapter V, Part II of IBC): This part deals with provisions relating to voluntary liquidation of corporate persons i.e. instances where the corporate debtor intends to initiate a liquidation proceeding without the occurrence of a payment default.

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A Guaranteed Mess?

Published In:IBC Update - January 31, 2018 [ ]

Recent news reports indicate that State Bank of India, India’s largest corporate lender has decided to invoke all outstanding personal and corporate guarantees in relation to companies undergoing Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code 2016 (‘IBC’).

The treatment of guarantees issued by and in favour of companies undergoing CIRP should be relatively straightforward under the IBC. But jurisprudence over the last few months in this context has introduced complexity. This note briefly sets out the key themes that have evolved so far.

Invocation of Guarantee issued by a corporate debtor after Insolvency Commencement Date (‘ICD’)
.

Courts (in the Edu Smart case and MBL case)[i] have held that invoking a guarantee issued by a corporate debtor after its ICD is analogous to foreclosing, recovering or enforcing any security interest in respect of the property of the corporate debtor, which is prohibited on account of the moratorium imposed under Section 14 of the IBC.

Submission of proof of claim for guarantees yet to be invoked

Courts (in the Edu Smart case and the Binani case)[ii] have held that a proof of claim can only be submitted for claims that have crystallized “i.e.,” are due and payable by the corporate debtor on the ICD. A guarantee claim will be considered due and payable only after due invocation under the terms of the contract. So effectively, if a guarantee issued by a corporate debtor has not been invoked before ICD, no proof of claim can be filed. As a result, the rights of such beneficiary post-resolution plan remains uncertain (for the beneficiary and the resolution applicant).

Guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP not hit by moratorium

Some judgements (the Alpha & Omega case and the Schweitzer case)[iii] have indicated that enforcement of any security interest granted by a third party for the debts of the corporate debtor is not prohibited by the moratorium under Section 14 of the IBC, since the moratorium only applies to the security created in respect of the assets of the corporate debtor appearing on its balance sheet. Though these cases don’t explicitly deal with third party guarantees, the principal enunciated could easily be extended to guarantees as well inferring that invoking a third party guarantee after ICD would not be prohibited.

On second thoughts, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium

Somewhat contrary to the above, the Allahabad High Court (in the Sanjeev Shriya case)[iv] held that in an ongoing CIRP, the obligations of the corporate debtor are in a fluid state and have not been conclusively determined; and that therefore, till such time as the CIRP continues any guarantee given by the promoters of the corporate debtor cannot be enforced since the guarantor’s obligations cannot be established while the company’s obligations are in flux. For the record, the guarantee was invoked before ICD of the corporate debtor.

On further reflection, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium and cannot be used to start IBC proceedings against the issuer

In the recent Vista Steel case[v], a group company of a borrower had provided a guarantee to a financial creditor. This financial creditor also benefited from security provided by the borrower. There was an ongoing CIRP against the borrower/principal debtor. The financial creditor of the principal debtor (in CIRP) invoked the guarantee granted by the group company before the ICD of the principal debtor. The guarantor did not make payment under the invoked guarantee and so the creditor sought to invoke IBC proceedings against the guarantor (for crystallised debt). The court held that doing so would cause the guarantor to be subrogated to the rights of the secured financial creditor causing creation of a security interest over the assets of the borrower/principal debtor, violating the moratorium under Section 14 of the IBC. On this basis, the court denied the financial creditor from proceeding with the IBC application against the guarantor.

Where do we stand?

The principle set out by the Alpha & Omega case and the Schweitzer case was, in our view, the right way to approach the matter. Subsequent decisions have made it difficult for lenders to proceed simultaneously against guarantors and borrowers. This dilutes the usefulness of a guarantee for a lender and currently provides one of the few silver linings for promoters whose companies are in CIRP/IBC.

 

[i] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and RBL Bank Limited v. MBL Infrastructures, NCLT Kolkata, December 18, 2017.
[ii] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and Bank of Baroda v. Binani Cements Ltd., NCLT Kolkata, November 17, 2017.
[iii] Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd & Ors, NCLAT, New Delhi July 31, 2017 and Shweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors, NCLAT, New Delhi, August 9, 2017.
[iv] Sanjeev Shriya v. State Bank of India, Allahabad High Court, September 6, 2017.
[v] ICICI Bank Limited v. Vista Steel Private Limited, NCLT Kolkata Bench, December 15, 2017

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IBC Exemptions introduced under the Delisting Regulations and Takeover Regulations

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

SEBI has, as on May 31, 2018, notified the amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’) and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to provide that, with respect to a listed entity, the Delisting Regulations and the Takeover Regulations will not be applicable to a transaction proposed to be undertaken pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code (‘IBC’). The key amendments have been set out below:

i. The Delisting Regulations will not be applicable to delisting of equity shares of a listed entity made pursuant to a resolution plan, if such a plan: (i) lays down a specific procedure to complete the delisting of such shares; or (ii) provides an exit option to the existing public shareholders at a price specified in the resolution plan. However, the exit to shareholders should be at a price which is not less than the liquidation value as determined in accordance with the Section 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, after paying off dues in the order of priority as set out in the IBC. If the existing promoters or any other shareholders are proposed to be provided an opportunity to exit under the resolution plan at a price, then the delisting should be at a price which is not less than the price at which such promoters or other shareholders, directly or indirectly, are provided exit.

ii. The prohibition set out under the proviso to Regulation 3(2) of the Takeover Regulations, which restricts an acquirer from acquiring shares or voting rights in a target company, which would result in the aggregate shareholding of the acquirer, along with persons acting in concert with it, exceeding the maximum permissible non public shareholding i.e. 75%, will not be applicable to an acquirer proposing to acquire shares pursuant to a resolution plan approved under the IBC.

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NCLAT Ruling on Maintainability of Application under the IBC after Winding Up Proceeding is Initiated

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

In Indiabulls Housing Finance Limited v. Shree Ram Urban Infrastructure Limited, the National Company Law Appellate Tribunal (‘NCLAT’) was faced with the issue of whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) is maintainable when winding up proceedings against the ‘Corporate Debtor’ have been already initiated. The impugned order, passed by the National Company Law Tribunal, Mumbai (‘NCLT Mumbai’) had dismissed the application as not maintainable as the winding up proceeding against the ‘Corporate Debtor’ had already been initiated by the High Court of Bombay. The NCLAT upheld the NCLT decision and held that once the second stage i.e., the initiation of liquidation process, is initiated, then there is no question of reverting to the first stage i.e., initiation of corporate insolvency resolution process (‘CIRP’).

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NCLAT stays admission of an Insolvency Petition against Reliance entities based on an Out-of-court Settlement

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

By orders dated May 15, 2018 and May 18, 2018, the NCLT Mumbai had admitted a petition filed under Section 9 of the IBC by Ericsson India Private Limited (‘Ericsson’) against Reliance Communications Limited (‘RCom’), Reliance Infratel Limited (‘RIL’) and Reliance Telecom Limited (‘RTL’). RCom, RIL and RTL, along with certain financial creditors / the Joint Lenders’ Forum, had approached the NCLAT, seeking a stay on the ground that the CIRP would prejudice recovery. On May 30, 2018, the NCLAT passed an order staying the CIRP till September 30, 2018, to enable RCom to pay Ericsson Rs. 550 crore (approx. US$ 80 million) (out of the Rs. 1150 crore (approx. US$ 167 million) due) and settle the matter (‘NCLAT Order’).

The NCLAT has granted a stay on the orders dated May 15, 2018 and May 18, 2018 passed by the NCLT Mumbai, taking into consideration the stand of the parties that if the CIRP was allowed to continue, financial and operational creditors may suffer more loss. The NCLAT Order mandates the resolution professionals to allow the managements of RCom, RIL and RTL to function and has stayed the CIRP until further orders.

This is arguably a precedent on the proposition that even after an operational creditor’s petition is admitted by the NCLT and the CIRP commences, the process can be reversed / stayed if the dues of the operational creditors are settled.

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2018 crucial for insolvency code, says AZB’s Bahram Vakil

Published In:livemint [ ]

Mumbai: The two lists of bad loan accounts referred by the Reserve Bank of India (RBI) for quick insolvency resolution account for over 40% of all non-performing assets (NPAs) in India’s banks. According to Bahram Vakil, co-founder of law firm AZB & Partners and one of the architects of the Insolvency and Bankruptcy Code (IBC), once these cases are resolved by the end of the year, it would be a “terrific achievement”, accomplished in record speed. In an interview, Vakil spoke of protecting homebuyers, status of resolution professionals and the involvement of regulators. Edited excerpts:

How do you see the recent amendments in IBC including putting homebuyers on par with financial creditors and dilution of lenders’ voting percentage from 75% to 66% for approval of the resolution process?

The ordinance has clarified several issues raised in the past 18 months and has made changes to effect a more efficient and fast resolution. The issue of homebuyers which needed clarity has now been equated with financial creditors to ensure their rights are protected.

Also, in many cases, the banks could not reach the required 75% threshold but were falling short by just a few percent. Therefore, they urged the committee to consider a lower threshold, such as other countries, including the US, have adopted and this threshold is now reduced to 66%.

Recently, Tata Steel was the successful bidder (resolution applicant) for the acquisition of Bhushan Steel Ltd. This is by far the biggest resolution plan getting materialized after the implementation of the code. What implications do you see from the lenders’ perspective?

The Bhushan Steel case was the largest and first of the ‘Big 12’ to be resolved whereby the banks have recovered approximate 70% of their dues, which amounts to a whopping ₹35,000 crore. I think this has been a big win, especially given the time within which this was achieved by Tata Steel and do hope this is just the first of many.

There have been several amendments to IBC since it was enacted a year-and-a-half ago. How do you compare the current Act with the older bankruptcy laws of the US and Europe?

It is a very new law, just 18 months old, compared to bankruptcy laws of developed markets such as the US and the UK. But I feel that this is a very crucial year for the law. The reason behind this is that the first 12 cases which were referred to by RBI will either get resolved or go into liquidation. Also, the majority of the second lot of about 25 cases should also get decided by year-end. Together, these cases constitute over 40% of the total number of NPAs, so if we achieve success in these cases, that would be a terrific achievement. I believe no other country has ever seen such a dramatic clean-up so quickly.

Currently, companies like Videocon Industries and BILT Graphic Paper have approached the high courts to stall the insolvency proceedings against them. Also, companies including UltraTech Cement and Liberty House have approached the National Company Law Tribunal (NCLT) seeking various reliefs as an intervener to the ongoing process. What kind of measures do you think tribunals, as well as resolution professionals, can take to deliver time-bound resolution as it was envisaged in the code in situations like these?

These are two separate sets of cases. Videocon is similar to the Essar case filed against RBI, where their argument was that the company should not have been pushed into the IBC process and once again, the court rejected their argument and the petition has been admitted. The second set of cases relates to the conduct of the bidding process and challenges by unsuccessful bidders. Any new law inevitably has to face such challenges; the key is to achieve beneficial jurisprudence in a timely manner. Also to enhance this process, Insolvency and Bankruptcy Board of India (IBBI) will be coming out with detailed regulations shortly.

The government has given lots of powers as well as responsibilities to the resolution professionals. Do you think while dealing with huge companies including in power, infrastructure and steel sectors, an individual will be competent over an institution?

In the large cases, most of the heavy lifting has been done by the six major accounting firms and Alvarez & Marsal. All these firms have been experts in the administration and restructuring space for decades in other common law jurisdictions. They, therefore, have substantial experience and bandwidth. Of course, there are also over 1,800 qualified resolution professionals who are (working) and will continue to work on the mid/small ticket cases. IBBI is on top of this issue, as it should be, especially in the first few years.

How do you see the role of Competition Commission of India (CCI) in the transactions where the potential bidder’s plan has been approved by the committee of creditors (CoC) and timeline of 270 days to finish the process is sacrosanct? What role do you force //FORCE? CHECK// from the regulators such as Sebi going forward to make the bankruptcy code more robust?

The CCI has been very timely in granting approvals. There is active communication between all regulators including Securities and Exchange Board of India (Sebi), with a unified goal to make the IBC a success. Of course, the ministry of corporate affairs (MCA) is leading and coordinating this process.

How do you see the move by the authorities to bar promoters from taking part in the resolution process as bidders?

There is no bar on promoters from taking part in the resolution process as bidders in general; the bar is only on defaulting promoters.

Do you think NCLT has enough infrastructure to deal with the humongous amount of cases? What can be done to improve the infrastructure?

As we need the decisions to be taken within a strict timeline, there is no doubt that both the number of NCLT members and benches (including National Company Law Appellate Tribunal (NCLAT) benches) need to be increased periodically. In fact, three new benches have just been announced. Failing this, there will be a huge backlog of cases and delay, which will defeat the entire purpose of the IBC.

Recently, the government has put homebuyers on par with unsecured creditors in the case of realty companies. Do you think this may lead to many more cases by such homebuyers against developers?

The government and courts have taken an understandable view that the homebuyers have to be protected. Once again, as the cases are sub-judice, I cannot say too much except that this issue is getting the attention it merits.

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The Black Hole of Interim Finance under Insolvency and Restructuring Regime

Published In:The Black Hole of Interim Finance under Insolvency and Restructuring Regime_Feb 2018 [ English ]

Companies undergoing corporate insolvency resolution process tend to be in dire need of funds to meet their working capital expenses. Interim finance can be an important tool for effective reorganization so as to prevent liquidation.
The Insolvency and Bankruptcy Code, 2016 (“Code”) creates several opportunities for lenders looking to invest in distressed assets. One such area pertains to the provision of ‘interim finance’. Interim finance essentially refers to short-term loans required to keep a company under the corporate insolvency resolution process running as a going concern. The Code defines interim finance to mean any financial debt raised by an interim resolution professional (“IRP”)/resolution professional (“RP”) during the corporate insolvency resolution process.
The Code allows an IRP/RP to raise interim finance in order to protect and preserve the value of the property of a corporate debtor and to manage its operations as a going concern. An IRP as well as an RP have unfettered rights to raise interim finance provided that – (a) the finance raised is below the monetary threshold set by the Committee of Creditors (“CoC”), if any; and
(b) the conditions mentioned in point no. 2 below are met.
In the Code, the term ‘insolvency resolution process cost’ includes any interim finance raised for a corporate debtor along with the cost of raising such interim finance. The payment towards such costs gets the highest priority in a resolution plan or during liquidation and is paid out prior to any recoveries being made by any creditor. This payment includes interim finance,
including principal and interest, which also gets this priority. However, since interim finance forms part of such costs, its payment is pari passu to other such costs like fees due to an RP.
Similarly, during liquidation, the distribution waterfall provides for the highest priority to be given to insolvency resolution process costs, which need to be paid out of the liquidation estate.
The article seeks to set out the legal provisions governing interim finance in the sphere of insolvency and restructuring and sheds light on the practical considerations which govern the decisions of lenders in providing interim finance.

1. Consents / Authority to raise interim finance

Although an IRP is permitted to raise interim finance without the approval of the CoC, there are restrictions on the IRP with respect to creating security. An RP is permitted to raise interim finance after taking charge of a corporate debtor from the IRP under the Code. However, in the event that the CoC has placed a limit on the amount of interim finance that may be used during
the corporate insolvency resolution process, this right of the RP is subject to their approval.

2. Creation of security
IRPs and RPs are permitted to create security while raising interim finance in limited circumstances which are: (i) on unencumbered assets of a corporate debtor, or (ii) on encumbered assets of a corporate debtor after taking approval of the requisite lender who has a prior security interest over those assets (provided that no prior consent of such secured creditor
is required where the value of such encumbered assets is not less than the amount equivalent to twice the amount of the debt).

3. Accrual of interest
In the event that a liquidation order is passed against a corporate debtor, a lender of interim finance may only be able to claim interest as accrued and unpaid up to the liquidation commencement date, i.e., the date of the order. This is a factor that lenders should necessarily keep in mind while negotiating a commercially viable interest rate. Although there are different views in the market to achieve a viable commercial structure, including redemption premium and other such structures, there is no judicial precedent which could shed light on whether such structures are valid.

4. Priority in payment
As mentioned above, the distribution waterfall provides for the highest priority to be given to interim finance. However, once a liquidation order is passed against a corporate debtor, the moratorium that is in place during the insolvency process is lifted. Thus, secured creditors are free to enforce their security interest outside of this process.
Typically, in distressed companies, almost all assets of a corporate debtor are encumbered. In such situations, if all secured creditors, individually or separately, enforce their security after the moratorium is lifted, there may not be much left to distribute from the liquidation estate.
Although interim finance has the highest priority as per the Code, lenders risk not being fully paid out as the liquidation estate does not comprise many estates in such situations. The Code
attempts to remedy this by providing that the amount of insolvency resolution process costs due from secured creditors who realize their security interests would be deducted from the proceeds of any realization by the creditors. Such amounts need to be transferred to a liquidator to be included within the liquidation estate. This seeks to alleviate the difficulty but does not
clarify what can be considered ‘due’ from the secured creditors.
The intent of the Code is that to the extent that there is no asset left in the liquidation estate to pay out insolvency resolution process costs, secured creditors enforcing their security outside the liquidation process are obligated to pay out these costs.
While jurisprudence on this point is yet to develop, certain concerns still remain, such as: the manner in which the share that each secured creditor must pay back to the liquidation estate should be determined, the timing of payouts by such secured creditors to the liquidation estate, the amount of time taken by interim finance lenders or a liquidator to persuade recalcitrant
secured creditors to make these payouts and legal costs incurred by the interim finance lenders to persuade recalcitrant secured creditors.

5. Payouts
In a resolution plan and during liquidation, all lenders who have provided interim finance will rank pari passu to other insolvency resolution process costs. However, during the corporate insolvency resolution process, a lender may be able to negotiate priority payments over other interim financiers. In the event that the whole facility is not paid out during the corporate insolvency resolution process and there are any outstanding amounts at the time that the resolution plan is approved or the corporate debtor is in the process of being liquidated, such outstanding amounts will rank pari passu with other insolvency resolution process costs. Thus, lenders may negotiate a higher priority in repayment during the corporate insolvency resolution process but have no such right during the formulation of a resolution plan or in
liquidation.

6. Trust and retention accounts
There are many instances in which existing lenders of a corporate debtor set up trust and retention accounts in order to ensure that all cash flows of the corporate debtor are only operated through such accounts. In such situations, all cash flows of the corporate debtor are blocked and may not even be treated as the property of the corporate debtor but may be treated
as the property of the trust. However, there is a difference of opinion regarding whether an IRP or an RP would be able to control such property. Although more jurisprudence is required to have a definitive view on this issue, it is advisable that lenders providing interim finance be aware of this issue while lending.

7. Representations and warranties
Since interim finance is provided to companies that are financially distressed, it is important that lenders be aware that such companies will not be able to provide strong or reliable representations and warranties, which are seen in a usual financing transaction.
Since interim finance tends to be last-mile financing for cash-strapped companies, lenders can charge higher-than-normal rates of interest and earn handsome returns. However, at the same time, those providing interim finance should be aware of some of the legal and practical issues
discussed above.

Authors:

1. Bahram N. Vakil, Founding Partner
2. Shruti Sethi, Associate
3. Prithvi Bhaskar, Associate

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CCI Approves the Acquisition by Tata Steel Limited of Bhushan Power and Steel Limited

Published In:Inter Alia Special Edition Competition Law Third Quarter 2018 [ English ]

On August 6, 2018, CCI approved the acquisition of up to 100% of the total issued and paid up share capital of Bhushan Power and Steel Limited (‘BPSL’) by Tata Steel Limited. (‘TSL’). [1] The combination was proposed pursuant to proceedings under Insolvency and Bankruptcy Code, 2017 (‘IBC’) that BPSL had been subject to (‘Proposed Combination’). TSL and BPSL are collectively referred to as ‘Parties’.

TSL is a public limited company engaged in integral steel manufacturing operations, ranging from mining to steel-making and further downstream processing. Similarly, BPSL is also engaged in steel manufacturing operations, including downstream processing of flat carbon steel products as cold rolled sheets and coils, surface coated products, tubes and pipes and alloy based long steel products, etc. CCI observed that TSL’s annual crude steel capacity across India is nearly 18.6 million ton per annum (‘MTPA’) and that of BPSL is 2.30 MTPA.

In consideration of the fact that steel making process involves various steps and the finished products obtained pursuant to each step could also be sold in the market, CCI identified the following overlapping product segments between TSL and BPSL:

i.     Hat rolled coils (‘HR-CS’) and plates (‘HR-P’) (together ‘HR-CSP’);

ii.   Cold rolled coils and sheets (‘CR-CS’);

iii.  Surface coated products (‘SCP’) (including galvanized products (‘GP’) and colour coated products (‘CCP’)); and

iv.  Flat steel tubes and pipes (‘T&P’) (including precision and non-precision T&Ps).

(collectively ‘Identified Overlaps’)

In identifying the abovementioned product segments as distinct from each other, CCI relied on the fact that HR-CSP, CR-CS, SCP and T&P differ on the basis of technical characteristics, intended use, price levels, etc. However, CCI did not define the exact relevant market in consideration of the fact that the Proposed Combination was not likely to give rise to AAEC regardless of how the relevant market was defined.

For its assessment of the competitive effects of the combination, CCI considered market share data in terms of installed production capacity, gross production, production for sale, and domestic sales. CCI noted that the combination was not likely to cause AAEC in any of the Identified Overlaps since the post combination market shares of TSL and BPSL in each of the Identified Overlaps would be in a range of 20% – 30% with an insignificant increment of 0-5% Even in certain Identified Overlaps such as CR-CS, GP and CCP, where the increment in market share was 5-10%, CCI noted that the combined market share was in the range of 20% – 30% and that the parties would continue to compete with several large and significant competitors such as JSW, Essar and SAIL etc. CCI also took into consideration the fact that the Parties’ competitors in the Identified Overlaps had significant unutilized production capacity, and such competitors could increase their production, if required, thereby impeding any attempts of the Parties at capturing the market. In the GP segment, CCI also observed that imports constituted 15% – 20% of the total domestic sales and therefore exerted considerable competitive constraint on the Parties. CCI also observed that Parties were also present in the markets for pig iron, sponge iron and alloy billets although the Parties either had limited presence in the domestic market, or produced qualitatively distinguishable products, such as basic pig iron (BPSL) and foundry pig iron (TSL). Accordingly, as per CCI, it was unlikely that the Proposed Combination would have adversely impacted the market.

[1] Combination Registration No. C-2018/07/582

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SC upholds Ultratech’s Bid for Binani Cement

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated November 19, 2018, upheld the bid of UltraTech Cement (‘Ultratech’) for Binani Cement Limited (‘BCL’). A review petition filed by Rajputana Properties Private Limited (‘RPPL’) challenging the aforesaid order of the SC, was rejected on January 8, 2019.

RPPL and Ultratech, an entity belonging to the Aditya Birla group, had both submitted bids in the corporate insolvency resolution process (‘CIRP’) of BCL under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). RPPL’s bid was declared the highest bidder (‘H1’) (on the basis of the points obtained as per the evaluation criteria) while Ultratech’s bid was declared the second highest (‘H2’). Subsequently, Ultratech raised its bid amount significantly and agreed to deliver a higher payout to all financial and operational creditors. However, by this time the deadline for submission of bids, as set out in the request for resolution plan (‘RFRP’) formulated by the committee of creditors (‘CoC’), had already lapsed. The CoC refused to entertain the bid submitted by Ultratech on the ground of late submission and approved the bid submitted by RPPL. Ultratech challenged the CoC’s decision to select RPPL as the successful bidder, relying on the provision contained in the RFRP, which permitted the CoC to consider bids from any party, till such time that a resolution plan submitted for BCL was approved by the NCLT.

The National Company Appellate Tribunal (‘NCLAT’) referred to the aforementioned provision in the RFRP and approved the resolution plan submitted by Ultratech on the ground that it was offering a higher amount, thereby ensuring compliance with the primary objective of IBC, i.e. ensuring maximization of the value of the assets of the corporate debtor. The NCLAT also noted that the bid submitted by RPPL was discriminatory on the ground that it differentiated between financial creditors who are equally situated (i.e. financial creditors to whom the corporate debtor owed a debt in its capacity as the primary borrower and financial creditors to whom the corporate debtor owed a debt in its capacity as a guarantor for third party debt) and did not balance the interests of the other stakeholders, such as operational creditors. Finally, the NCLAT also observed that any resolution plan, which is shown to be discriminatory against one or other financial creditor or operational creditor, can be held to be violative of the IBC. RPPL appealed the NCLAT’s decision before the SC. However, the SC refused to set aside the NCLAT’s judgement, while observing that there was no infirmity in the order.

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SC confirms Applicability of Limitation Act to Applications made under Section 7 and 9 of IBC

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated October 11, 2018, in B. K. Educational Services Private Limited v. Parag Gupta and Associates[1], addressed the issue of the applicability of the recently amended Section 238A (which came into effect on June 6, 2018) of the IBC, which deals with applicability of the Limitation Act, 1963 (‘Limitation Act’) to all applications made under the IBC. SC held that the Limitation Act applies to all applications filed under the IBC from the inception of the IBC, i.e. December 1, 2016 since Section 238A was a clarification of the existing position under the IBC and the law of limitation is procedural in nature and, therefore, can be applied retrospectively.

[1] Civil Appeal No. 23988 of 2017.

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Supreme Court Upholds the Constitutionality of the IBC

The constitutional validity of the Insolvency & Bankruptcy Code, 2016 (“IBC”) had been challenged in the Supreme Court on various grounds. In its Order today, the Supreme Court has upheld the constitutional validity of the IBC in its entirety, and has made certain observations to narrow the ambit of Section 29A of the IBC. The Order of the Supreme Court has been recently published, and we will circulate our detailed analysis of the Order shortly.

Mr. Bahram N. Vakil, one of the founding partners of AZB & Partners was a member of the Indian Government’s Bankruptcy Law Reform Committee which was instrumental in drafting the policy and legislative framework of the IBC. He is now a member of the Indian Government’s Insolvency Law Committee, constituted to conduct an ongoing review of the IBC and recommend amendments/clarifications.

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Supreme Court Upholds Constitutionality of the Insolvency and Bankruptcy Code, 2016

On January 25, 2019, in the matter of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India, the Supreme Court (‘SC’) delivered a landmark verdict upholding the constitutionality of various provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’). While declaring the Code to be a beneficial legislation with a primary focus on revival and continuation of the corporate debtor, and not being a mere recovery legislation for the creditors, the SC has, inter-alia, dealt with the following issues:

1.  Classification of Operational and Financial Creditors is not Unconstitutional

One of the key challenges to the Code was on account of differential treatment between operational and financial creditors, and such differentiation being violative of the principle of equality enshrined under Article 14 of the Constitution of India. Keeping in mind that the primary objective of the Code is resolution and not liquidation, the classification was alleged to be arbitrary and unreasonable. The SC upheld the classification / differential treatment between “financial creditors” and “operational creditors” and held that such distinction is neither unreasonable nor discriminatory and hence, is not violative of Article 14.

Following are some of the various differences in the nature of the two classes of creditors outlined and examined by the SC:

(i)   Role of financial and operational creditors

Financial creditors, unlike operational creditors, are involved in assessing the viability of the corporate debtor from the very beginning and are also involved in the restructuring / reorganization of the borrower in the event there is financial stress. Further, the difference also lies in the nature of agreements with the two kinds of creditors (in terms of secured / unsecured, long term / short term, dispute resolution process and so on). Therefore, there is an intelligible differentia between the two which has a direct relation to the object of the Code, i.e. maximum recovery while preserving the corporate debtor as a going concern.

(ii)  No Voting Rights

When dealing with the issue of operational creditors not having voting rights in the Committee of Creditors (‘CoC’), the SC referred to the Report of the Bankruptcy Law Reforms Committee and the Report of the Insolvency Law Committee and observed that financial creditors, i.e., banks and financial institutions, are best equipped to assess the viability and feasibility of the business of the corporate debtor; whereas operational creditors are only involved in the recovery of amounts and are typically unable to assess the viability and feasibility of the business.

(iii)  Notice and Hearing

On the issue of notice and hearing, the SC referred to various provisions of the Code and its judgement in Innoventive Industries Ltd. v. ICICI Bank[1]. The SC observed that a corporate debtor is served with a copy of the application with the adjudicating authority and has the opportunity to file a reply and be heard. The Code prescribes penalties for furnishing false information and for fraudulent or malicious initiation of proceedings. Further, a financial creditor has to prove ‘default’ as opposed to an operational creditor who has to merely ‘claim’ a right to payment of liability or obligation in respect to the debt which may be due.

Upon bearing this aspect in mind, the difference between triggering an insolvency resolution process by financial creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code becomes clearer.

(iv)  Safeguards for Operational Creditors

The SC further noted that while looking into the viability and feasibility of resolution plans that are approved by the CoC, tribunals always examine whether or not the operational creditors were given roughly the same treatment as the financial creditors and whether plans have been modified such that the rights of the operational creditors are safeguarded. Further, the operational creditors are required to be paid liquidation value at the minimum. The amended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 further strengthens the rights of operational creditors by providing priority in payment over financial creditors.

2.    Constitutional Validity of Settlement Post Admission [Section 12A]

On settlement of proceedings under the Code post initiation of corporate insolvency resolution process under Section 12A, the SC observed that the proceedings under the Code are a collective proceeding and therefore, the body which is to oversee the resolution process should be consulted before any corporate debtor is permitted to settle its debt. As a result, the SC deferred to legislative intent on the requirement of 90% voting share of the CoC for approval or withdrawal of application. It was further clarified that between the initiation of the insolvency resolution process and the constitution of the CoC, applications for withdrawal or settlement are to be made to the NCLT under Rule 11 of the National Company Law Tribunal Rules, 2016. It further clarified that if the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the National Company Law Tribunal (‘NCLT’), and thereafter, the National Company Law Appellate Tribunal (‘NCLAT’) can set aside such decision under Section 60 of the Code.

3.    Persons not Eligible to be Resolution Applicant [Section 29A and Section 35(1)(f)]

Section 29A of the Code declares certain persons as not eligible to be resolution applicants and the liquidator is also barred from selling property or actionable claims of the corporate debtor to such persons[2]. The constitutionality of the provision was challenged on the ground that Section 29A(c) is not restricted to malfeasance and is retrospective and, therefore, arbitrary.

The SC clarified that categories of persons who are held ineligible from submitting a resolution plan under the section is not restricted to people who are malfeasant (such as an undischarged insolvent). Following the observations made by the SC in Arcelor Mittal India Private Limited v. Satish Kumar Gupta[3], the SC held that a promoter or any resolution applicant has no vested right to apply for being considered as a resolution applicant.

It is settled law that a statute is not retrospective merely because it affects existing rights; nor is it retrospective merely because a part of the requisites for its action is drawn from a time antecedent to its passing. On the issue of time period of one year provided in Section 29A(c), the SC observed that the primary basis for Section 29A lies in the fact that a person who is unable to service its own debts for such a long period of time is unfit to be a resolution applicant. It referred to circulars issued by the Reserve Bank of India which grant a long grace period to persons unable to pay debts, before an asset is classified as a non-performing asset.

Related Party and Relatives

While dealing with the concept of ‘related parties’ and ‘relatives’ under the Code, the SC has, however, read down this Section to provide that in relation to ‘connected persons’ it should only be persons who are connected with the business activity of the resolution applicant who are disqualified under Section 29A, rather than the original scope, which covered all ‘connected persons’.

4.    Distribution of Assets in Liquidation [Section 53]

The challenge to Section 53 on the ground that operational creditors are subordinate to all other creditors, including other unsecured financial creditors, in the liquidation process was rejected. The SC observed that the reason for differentiating between secured financial debts and unsecured operational debts is the relative importance of the two types of debts when it comes to the object sought to be achieved by the Code. Repayment of financial debt infuses capital in the economy.

With reference to workmen dues, which are also unsecured, it was observed that they have traditionally been placed above most other debts. Unsecured debts are of various kinds, and as long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infringed.

5.    Other Key Observations

  • The exemption granted to micro, small and medium enterprises under section 29A is valid. The rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because in the case of MSME industries, other resolution applicants may not be forthcoming, which may inevitably lead to liquidation and not resolution.
  • The resolution professional is a facilitator of resolution plans whose administrative functions are overseen by the CoC and the NCLT. Therefore, it only has administrative and no quasi-judicial powers. On the other hand, when the liquidator ‘determines’ the value of claims admitted under Section 40, such determination is a ‘decision’, which is quasi-judicial in nature.
  • Circuit benches of the NCLAT are to be established by the Union of India within 6 months from the date of the order.
  • The NCLT and NCLAT must function under the Ministry of Law and Justice and not the Ministry of Corporate Affairs and the executive should follow the earlier judgements of the Court in this regard.
  • The constitutional challenge to the Code based on information utilities being private bodies and use of their records as conclusive evidence of default was rejected by the Court. It was noted that such evidence is only prima facie evidence of default, which is rebuttable by the corporate debtor and further referred to the requirements of authentication and verification by the corporate debtors.

[1] (2018) 1 SCC 407
[2] Section 35(1)(f) of the Code.
[3] Civil Appeal Nos. 9401-9405/2018, decided on October 4, 2018.

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New External Commercial Borrowings (ECB) framework

With the aim of further liberalising the foreign currency loan regime in India, the Reserve Bank of India (‘RBI’) has, pursuant to the circular dated January 16, 2019 (‘Circular’), introduced sweeping changes and rationalised the extant framework for external commercial borrowings (‘ECBs’) and Rupee denominated bonds.

The RBI notification dated December 17, 2018 had consolidated and streamlined the provisions of the principal regulations relating to borrowing and lending in foreign currency and Indian Rupees under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘B&L Regulations’), which superseded the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000. The framework/guidelines which were expected to be notified by the Government / RBI in furtherance of the B&L Regulations have been notified by RBI by issuance of the Circular. The Master Direction on ECBs, Trade Credit, Borrowing and Lending in Foreign Currency dated January 1, 2016 (‘ECB Master Directions’), and the associated FAQs, is still to be updated to reflect the changes made pursuant to the Circular, and provide further clarity (including on operational aspects). However, the amended ECB policy has come into force with effect from January 16, 2019.

Some of the key changes introduced by the Circular are set out below.

1.         Merging of Tracks: Earlier, the foreign currency (‘FCY’) denominated ECB could be availed under Track I (short-term foreign currency ECB) and Track II (long-term foreign currency ECB) respectively. The RBI has now merged the FCY denominated ECB into a single track. Further, the RBI has also merged Track III (Rupee denominated ECB) and the framework on Rupee denominated bonds (i.e., Masala Bonds) as ‘Rupee denominated ECB’. Earlier, the framework for ECBs and Masala Bonds were separate.

2.      ECB Limits: ECB upto USD 750 million (approx. INR 5,250 crores) or its equivalent per financial year (irrespective of specified activities/sector), which otherwise is in compliance with the parameters set out in the ECB Regulations, can be raised under the automatic route. Earlier, the ECB Regulations set out different limits for ECBs which could be raised by ‘eligible’ entities/ borrowers engaged in specified activities/sectors under the automatic route (such as upto USD 200 million (approx. INR 1,400 crores) for the software sector, USD 100 million (approx. 700 crores) for micro finance activities etc.), which have now been aggregated. Pursuant to the Circular, there are no sector specific limits.

3.       Form of ECB: As was the case previously, both FCY ECB and INR ECB can be availed by way of loans including bank loans, securitised instruments (e.g., floating / fixed rate notes, bonds, non-convertible, optionally convertible or partially convertible debentures), trade credits beyond three years or financial lease. In addition, INR ECB can also be availed in the form of preference shares. Foreign Currency Convertible Bonds (‘FCCBs’) as well as Foreign Currency Exchangeable Bonds (‘FCEBs’) continue to be a mode for availing FCY ECB.

4.       Eligible Borrowers: The list of ‘eligible borrowers’ has been expanded to include all entities eligible to receive foreign direct investment (‘FDI’). Additionally, port trusts, units in special economic zones, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-Government organisations can now avail ECB. Some of such companies which can now avail ECB are companies in sectors such as animal husbandry, agriculture, petroleum and natural gas, broadcasting, insurance etc.

5.       Recognised Lender: The RBI had specified certain categories of entities which could provide ECB to eligible Indian borrowers. As per the Circular, any resident of Financial Action Task Force or International Organization of Securities Commission compliant country can provide ECB to eligible Indian borrowers.

Additionally, note that:

(i)      Multilateral and regional financial institutions, where India is a member country, will be recognized lenders under the ECB Regulations;

(ii)     Individuals as lenders can only be permitted if they are foreign equity holders or subscribers to bonds / debentures listed abroad; and

(iii)    Foreign branches / subsidiaries of Indian banks continue to be recognized lenders for FCY ECB (except FCCBs and FCEBs).

6.       Minimum Average Maturity Period (‘MAMP’): Earlier, Track I and Track III ECBs were required to have a MAMP of three / five years whereas Track II ECB was required to have a MAMP of 10 years except in certain cases wherein specific MAMP was prescribed by RBI. The MAMP for all ECBs is now prescribed as three years. However, for ECBs raised from foreign equity holders and utilised for working capital purposes, general corporate purposes or repayment of rupee loans (in negative list in respect of other lenders), the MAMP will be five years. The MAMP for ECB up to USD 50 million per financial year raised by companies in the manufacturing sector will continue to be 1 year.

7.       End-Uses: There has been no change to the negative list of end-uses prescribed by the RBI (especially as the FCY borrowing tracks have been merged) except the clarification on negative end use of ‘real estate activities’. Earlier, the ECB Regulations specified that ECB could not be availed for investment in real estate or purchase of land. While real estate activities continue to be a prohibited end-use for availing ECBs, the Circular now defines ‘real estate activities’ to mean any real estate activity involving owned or leased property for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this does not include construction / development of industrial parks/integrated township / SEZ, purchase / long term leasing of industrial land as part of new project / modernisation of expansion of existing units or any activity under ‘infrastructure sector’ definition.

8.       All-in-Cost (‘AIC’): The RBI has provided few clarifications in relation to AIC, which are as follows:

(i)      It has been clarified that Export Credit Agency charges and guarantee fees, whether paid in Rupees or foreign currency, will be included in AIC; and

(ii)     Various components of AIC have to be paid by the borrower without taking recourse to the drawdown of ECB i.e. ECB proceeds cannot be used for payment of interest/charges.

9.       Late Submission Fee (‘LSF’) for Delay in Reporting: Any borrower, who is otherwise in compliance with ECB Regulations, can regularize delay in reporting / form submissions by payment of LSF as prescribed in the Circular.

10.       Form 83: Earlier, Indian borrowers were required to obtain a Loan Registration Number (‘LRN’) by submission of Form 83 to the AD Bank. However, Form 83 has now been done away with and has been replaced with Form ECB. Accordingly: (i) to obtain an LRN, borrowers are now required to submit duly certified Form ECB; and (ii) changes in ECB parameters, including reduced repayment by mutual agreement between the lender and borrower, should be now reported to RBI through revised Form ECB.

11.      Raising of ECB by Start-ups: Any entity recognized by the Central Government as a ‘start-up’ is allowed to raise ECB up to USD 3 million (approx. INR 21 crores) or equivalent per financial year. The AIC can be mutually agreeable between the borrower and the lender. This is in line with the earlier ECB framework. It has been clarified that start ups under the special dispensation or other start ups which are eligible to receive FDI, can also raise ECB under the general ECB Framework.

Raising of ECB by Entities under Restructuring: Any entity which is under restructuring scheme/ corporate insolvency resolution process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) can raise ECB only if specifically permitted under the resolution plan. Further, pursuant to a circular dated February 7, 2019, RBI has relaxed end-use restrictions for resolution applicants under CIRP and has allowed raising ECBs from recognised lenders (except branches / overseas subsidiaries of Indian banks) under the approval route for repayment of Rupee term loans of such entities.

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NCLT dismisses Efforts from Erstwhile Promoters to Once Again Drag Bhushan Steel into Insolvency, Post Approval of Tata Steel’s Resolution Plan

Background

The Hon’ble National Company Law Tribunal, Principal Bench (‘Adjudicating Authority’) has, by way of its judgment dated February 26, 2019, dismissed a petition filed by Vistrat Real Estates Private Limited (‘Vistrat’) against Bhushan Steel Limited (now known as Tata Steel BSL Limited) (‘BSL’) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The judgment also imposes a cost of ₹ 50,000 (approx. US$ 700) on Vistrat. Vistrat has been found to be a related party to the erstwhile promoters of BSL, including Mr. Neeraj Singal and Mr. Brijbhushan Singal (‘Singals’).

Earlier, in the largest resolution under the IBC, the Adjudicating Authority had, by way of its judgment dated May 15, 2018 (‘Approval Order’), approved the resolution plan (‘Plan’) submitted by Tata Steel Limited (‘TSL’) in the corporate insolvency resolution process (‘CIRP’) of BSL, which had been initiated on July 26, 2017. The order of the Adjudicating Authority was also subsequently confirmed by the Hon’ble National Company Law Appellate Tribunal. This had resulted in successful resolution of accumulated debt of BSL amounting to approximately ₹ 58,000 crores (approx. US$ 8 billion) and realization by banks of approximately ₹ 36,000 crores (approx. US$ 5 billion). This has also resulted in the revival of BSL in the control of TSL (through its subsidiary Bamnipal Steel Limited).

Brief Facts

Shortly after the Approval Order, Vistrat filed a petition under Section 9 of the IBC seeking initiation of CIRP against BSL. The following facts are noteworthy:

(a)    Vistrat is a private limited company registered in India. The erstwhile promoters of BSL, the Singals, were the signatories to the Memorandum of Association of Vistrat. There are various other connections between Vistrat and the erstwhile promoter group of BSL.

(b)      Vistrat owns premises in New Delhi, which was leased to BSL pursuant to a memorandum of lease (‘MoL’) dated May 1, 2015. The MoL acted as a lease discounting facility for a loan availed by Vistrat from IndusInd Bank (‘IndusInd’). The MoL provided Vistrat an option of termination with the prior approval of IndusInd. However, no express right of termination was provided to BSL.

(c)      During the CIRP of BSL, the Resolution Professional (‘RP’) had, pursuant to an independent valuer’s report, found the terms of the MoL to be onerous and leading to value leakage. Since the lease rental under the MoL was above the market rate, during the CIRP of BSL the RP had paid a reduced amount to Vistrat towards lease rental for the premises.

(d)      The Plan approved by the Adjudicating Authority recognized the MoL as a value leakage transaction and provided for its termination. The Plan also provided for no liabilities to related parties, associates and joint venture of the erstwhile promoters of BSL. Pursuant to the change in control of BSL upon the successful completion of the CIRP, TSL immediately terminated the MoL and handed over possession of the premises to Vistrat on September 10, 2018.

(e)       The petition claimed a default in payment of lease rental by the RP of BSL for the period during the CIRP, for which a reduced lease rental amount was paid to Vistrat.

Highlights of the Judgment

Some of the key highlights of the judgment are:

(a)      The Adjudicating Authority recognized the independent valuer’s report submitted by the RP and accepted the decision of the RP to pay a reduced lease rental during the CIRP period basis the same. The Adjudicating Authority also accepted that the MoL was described as a value leakage and an onerous transaction in the Plan, and the Plan provided for no liability to related parties, associates and joint ventures of BSL.

(b)      Based on facts before it, the NCLT accepted that Vistrat was a related party to BSL (prior to commencement of CIRP) and its erstwhile promoters and, thus, liabilities of BSL to Vistrat stood excluded in terms of the Plan.

(c)      The relationship between Vistrat and the erstwhile promoter group of BSL has been noted through: (i) the presence of Neeraj Singal and Brijbhushan Singal as the signatories to the Memorandum of Association of Vistrat and its initial shareholders; (ii) the authorisation in favour of the Singals to act on behalf of Vistrat, including in connection with the loan from IndusInd, and operate the loan facility, even though they were not directors of Vistrat at that time; and (iii) the transfer of shares of Vistrat to Ritu Singal (wife of Neeraj Singal) taking place less than two years prior to the commencement of CIRP of BSL. The Adjudicating Authority has held that given the fact that the Singals exercised control and were persons on whose advice / directions / instructions the directors of Vistrat were accustomed to act, coupled with Neeraj Singal’s wife being a director of Vistrat, BSL (prior to commencement of CIRP) had substantive control over Vistrat. Further, given the nature of the transaction and the timing of the transfer of shares of Vistrat being within the look-back period in respect of BSL’s CIRP, the transactions are capable of being examined during the CIRP and deemed to be preferential transactions.

(d)      Whilst there is no bar under Section 11 of the IBC from a fresh petition being filed post the Approval Order, the only course open to Vistrat was to file its claim before the RP during the CIRP. The remedy of filing of claim has been exhausted and has resulted in acceptance of Vistrat’s claim partially by the RP. The rejected claim cannot find basis for a new petition, more particularly, when (i) the Plan has even specifically excluded the claim of related parties, and (ii) BSL has terminated the MoL and handed over possession of the premises after the Approval Order.

In dismissing the petition, the judgment has taken note of various actions of the RP during the CIRP of BSL and accepted the same. Further, the Adjudicating Authority has also implemented terms of the Plan, including for termination of value leakage agreements and no liability for related party transactions, in order to hold that no amount was due to Vistrat. Finally, the Adjudicating Authority has also held that absence of a bar under Section 11 of the IBC from filing a fresh petition post the Approval Order does not permit a party to file fresh proceedings for initiating insolvency for claims which arose prior to the Approval Order. The Adjudicating Authority has recognized that in such cases, the remedy is filing of claim before the RP during the CIRP.

The judgment shows that the Adjudicating Authority is accepting the decision of the successful resolution applicant and the committee of creditors in identifying and terminating value leakage agreements. It also shows that the Adjudicating Authority is dismissing efforts from erstwhile promoters to, directly or indirectly, stall or disrupt the actions to effectively resolve a distressed company.

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CCI approves acquisition of EPC Constructions India Limited by Royale Partners

Published In:Inter Alia Special Edition- Competition Law - March 2019 [ English ]

On January 31, 2019, CCI approved the acquisition of 100% of the equity shares of EPC Constructions India Limited (‘EPCC’) by Royale Partners. The said transaction is subject to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.[1]

Royale Partners is engaged in the business of investing in companies. EPCC is engaged in the supply of EPC services as covered above.

In its competitive assessment, CCI noted that there were no horizontal or vertical overlaps between EPCC and Royale Partners. In light of the above, CCI approved the combination since it was not likely to have any AAEC in India in any of the markets.

[1] Combination Registration No. C- 2019/01/632

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NCLAT holds that it is not necessary to Initiate IBC Proceedings against the Principal Borrower before Initiating CIRP against the Corporate Guarantors

Published In:Inter Alia - Quarterly Edition - March 2019 [ English ]

The National Company Law Appellate Tribunal (‘NCLAT’), in its decision dated January 8, 2019, in Ferro Alloys Corporation Limited v. Rural Electrification Limited[1], has reasoned that the Insolvency and Bankruptcy Code, 2016 (‘IBC’) does not exclusively prescribe any inter-se rights, obligations and liabilities of a guarantor qua a financial creditor. Thus, the NCLAT has held that, in the absence of any express provisions to this effect, the same will have to be noticed from the provisions of the Indian Contract Act, 1872 and therefore it is not necessary to initiate Corporate Insolvency Resolution Process (‘CIRP’) under the IBC against the ‘Principal Borrower’ before initiating it against the ‘Corporate Guarantors’. Without initiating any CIRP against the ‘Principal Borrower’, it is open to the financial creditor to initiate CIRP against the ‘Corporate Guarantors’, as such financial creditor is also the ‘Financial Creditor’ qua the ‘Corporate Guarantor’ under Section 7 of the IBC.

[1] Ferro Alloys Corporation Limited v. Rural Electrification Limited, Company Appeal (AT) (Insolvency) No. 92 of 2017.

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SC Strikes Down RBI Circular dated February 12, 2018

Published In:Inter Alia - Quarterly Edition - March 2019 [ English ]

In Dharani Sugars and Chemicals Limited v. Union Of India[1], the SC dealt with various petitions challenging the constitutional validity of RBI circular dated February 12, 2018 (‘RBI Circular’). The SC struck down the RBI Circular and declared it as ultra-vires.

With respect to the scope of RBI’s power to issue the RBI Circular under Section 35AA of the Banking Regulation Act, 1949 (‘BR Act’), the SC held that RBI can direct banking institutions to initiate insolvency proceedings if two conditions are fulfilled, namely if: (i) there is a Central Government authorization to do so, and (ii) the direction is in respect of specific defaults. Section 35AA, by necessary implication, prohibits RBI to exercise the power in any manner other than as set out in Section 35AA. Whilst prior to the enactment of Section 35AA of the BR Act, RBI could have issued directions under Section 21 and Section 35A of the BR Act to initiate an insolvency resolution process under the IBC; after the enactment of Section 35AA, this can be done only within the four corners of Section 35AA.

With respect to the scope of Section 35AB of the BR Act, the SC interpreted the words “without prejudice” appearing in Section 35AB to be only illustrative of a general power which does not restrict such general power. Therefore, the power to issue directions under Section 35AB is in addition to the power under Section 35A. Additionally, Section 35AB is not without prejudice to the provisions contained in Section 35AA and, therefore, the power under Section 35AB (read with Section 35A) is to be exercised separately from the power conferred by Section 35AA. The SC held that the scheme of Sections 35A, 35AA, and 35AB of the BR Act is as follows:

i.         Section 35AA is the only source of power to issue directions to initiate the insolvency resolution process under IBC;

ii.     When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving the problem of stressed assets under IBC, such power falls within Section 35AB (read with Section 35A).

The SC was of the view that all actions taken under the RBI Circular, including actions by which IBC has been triggered, falls along with this RBI Circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of IBC, only because of the operation of the RBI Circular, have been declared to be non-est.

[1] Dharani Sugars and Chemicals Limited v. Union Of India, Transferred Case (Civil) No. 66 of 2018 in Transfer Petition (Civil) No. 1399 of 2018.

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NCLAT Dismisses Tata Steel’s Appeal Against Liberty in the Matter of Bhushan Power & Steel

Published In:Inter Alia - Quarterly Edition - March 2019 [ English ]

The NCLAT, in its judgment dated February 4, 2019, has dismissed the appeal filed by Tata Steel Limited (‘TSL’) against Liberty House Pte. Ltd. (‘Liberty’). TSL had challenged the order of the National Company Law Tribunal, Principal Bench (‘NCLT’) dated April 23, 2018 whereby the Committee of Creditors (‘CoC’) of Bhushan Power & Steel Limited (‘BPSL’) was directed to consider the resolution plan submitted by Liberty after expiry of the last date for submission of the same. During the CIRP of BPSL, TSL and JSW Steel Limited (‘JSW’) had submitted their respective bids within the timelines provided by the resolution professional. Whilst TSL’s appeal against the NCLT’s order dated April 23, 2018 was pending before the NCLAT, JSW revised its earlier bid and, thereafter, continued to revise its bid, which was also challenged by TSL before the NCLAT (along with actions of the CoC in connection with the same).

The issues for consideration before the NCLAT were whether the NCLT/CoC could provide multiple opportunities to resolution applicants to revise their respective resolution plans and if the CoC was authorized to entertain fresh or revised resolution plans without exhausting available bids. The NCLAT relied upon the judgment in the Binani Industries case and confirmed that prior to the voting on resolution plans placed before the CoC, the CoC can call for and consider the ‘improved financial offer(s)’ in order to ensure value maximization and within the IBC timelines it was open for the CoC to grant multiple opportunities to the resolution applications to revise their respective financial offers.

The NCLAT also held that the appeal filed by TSL was premature in absence of any final decision taken by the NCLT as to the approval of the resolution plan. The NCLAT took note of the approval of the resolution plan of JSW by the CoC during the pendency of the appeal and directed that proceedings could be initiated before the NCLT for approval of the same. Subsequently, the resolution professional has filed an application before the NCLT for approval of the resolution plan of JSW, which is currently pending.

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