Mergers & Acquisitions

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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Changes in the Foreign Investment regime in India

The Reserve Bank of India (‘RBI’) recently issued the Master Directions on Foreign Investment in India (‘Master Directions’) on January 4, 2018, on the heels of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘New FEMA 20’) issued by way ofNotification dated November 7, 2017, which replace the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘Erstwhile FEMA 20’) and the Foreign Exchange Management (Investments in Firms of Proprietary Concerns in India) Regulations, 2000.

The New FEMA 20 and the Master Directions now contain comprehensive rules on foreign investment in India as issued by the RBI. A summary of some of the key changes to the Erstwhile FEMA 20 introduced by the RBI are set out below:

i. Definition of ‘Capital Instruments’: The New FEMA 20 has introduced a definition of ‘Capital Instruments’[1]. While the base definition remains similar to that of ‘Capital’ under the Erstwhile FEMA 20, two clarifications have been provided as follows:-

(a) Non-convertible/ optionally convertible/ partially convertible preference shares issued up to April 30, 2007, as well as optionally convertible/ partially convertible debentures issued up to June 7, 2007 will be considered to be capital instruments till their original maturity; and

(b) Share warrants can be issued to a person resident outside India only in accordance with the regulations issued by the Securities and Exchange Board of India (i.e. the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009), i.e. share warrants can be issued to a person resident outside India only by a listed Indian company.

ii. Definition of ‘Foreign Investment’: ‘Foreign investment’[2] has been defined under the New FEMA 20 to mean any investment by a person resident outside India in the capital instruments of an Indian company or in the capital of a limited liability partnership (‘LLP’), on a repatriable basis; thereby clarifying that investments made on a non-repatriable basis are to be treated as domestic investments and not included in the foreign investment limits.

iii. Definition of ‘Foreign Direct Investment’: The definition of ‘foreign direct investment’[3] (‘FDI’) under the New FEMA 20 distinguishes between investments in unlisted and listed Indian companies. While any investment by a person resident outside India in the capital instruments issued by an unlisted Indian company is to be treated as FDI, in case of listed Indian companies, only investments of 10% or more of the post issue paid-up equity capital of a listed Indian company, computed on a fully diluted basis, is to be treated as FDI.

iv. New Concept – Foreign Portfolio Investment: Under New FEMA 20, RBI has introduced a new concept of an investment being categorized as ‘Foreign Portfolio Investment’ if the investment made by a person resident outside India in a listed Indian company is less than 10% of the post issue paid-up equity share capital (on a fully diluted basis) of such listed Indian company or less than 10% of the paid up value of each series of capital instruments of such listed Indian company.[4] Please note that there a distinction between foreign portfolio investment and investment by an entity registered with SEBI as a foreign portfolio investor (‘FPI’). All investments by each FPI will necessarily be foreign portfolio investment, whereas investment by entities who are not registered as FPI can also be categorized as ‘foreign portfolio investment’ depending upon the percentage of investment made. Purchase / sale of capital instruments of listed Indian company on a stock exchange by FPIs is set out in Schedule 2 of the New FEMA 20.

Foreign portfolio investment by way of a primary subscription is exempt from the reporting requirements prescribed in respect of FDI transactions. In the event foreign portfolio investment exceeds the 10% limit, such investment will stand re-classified as FDI. However, on the other hand, in the event an existing investment by a non resident in a listed Indian company falls to a level below 10% of such company’s post issue paid up equity capital (on a fully diluted basis), such investment will continue to be treated as FDI.

v. Definition of ‘Indian entity’: The tern Indian entity has been defined to mean an Indian company and an LLP.[5]

vi. Definition of ‘Investment Vehicle’: The Master Directions clarify that venture capital funds established in the form of a trust, company or a body corporate and registered under the SEBI (Venture Capital Funds) Regulations, 1996 will not be considered as investment vehicles for the purposes of the New FEMA 20.[6] Prior Government approval would be required for making foreign investments in venture capital funds established as trusts.

vii. Definition of ‘Listed Indian Company’: Listed Indian Company has been defined to mean an Indian company which has any of its capital instruments listed on a recognized stock exchange in India.[7] Accordingly, an Indian company which has only its non-convertible debentures listed on a stock exchange would not be considered as a Listed Indian Company.

viii. Acquisition through a rights or bonus issue: While the conditions relating to acquisition of capital instruments (other than warrants) by way of rights or bonus issue continue to remain the same, it have been clarified that the conditions would also apply to subscription to capital instruments issued as a rights issue that are renounced by the person(s) to whom they were offered.[8]

Further, a person resident outside India exercising any rights in respect of capital instruments issued when he / she was resident in India, can exercise such rights on a non-repatriation basis (i.e. the original status of the holding will not change even in the event the residential status of the holder changes).[9]

Similarly, an individual resident outside India exercising an option granted pursuant to an employee stock option scheme when he / she was resident in India, can hold the shares so acquired on exercising the option on a non-repatriation basis.[10]

ix. Transfer of capital instruments: Transfer by way of sale of capital instruments by a non-resident Indian (‘NRI’) to non-residents other than NRIs no longer requires prior RBI approval, subject to certain conditions.

x. Reporting Requirements: The onus of filing Form FC-TRS for transfers on a recognized stock exchange will now vest with the non-resident party and not the relevant Indian company.[11] The New FEMA 20 has further clarified that in case of transfer of repatriable capital instruments by a non-resident transferor to another non-resident transferee on non-repatriable basis, the onus of such filing would vest with resident transferor / transferee or the non-resident holding capital instruments on a non-repatriable basis, as the case may be. It is also clarified that a transfer of capital instruments between a non- resident transferor holding such instruments on non-repatriable basis and a resident transferee would not attract such a reporting requirement.[12]

Further, Form FC-TRS is now required to be filed with the authorised dealer bank with 60 days of transfer of capital instruments or receipt / remittance of funds, whichever is earlier.[13]

xi. Downstream investments: While the definition of ‘downstream investments’ under the Erstwhile FEMA 20 only considered indirect foreign investments by one Indian company into another Indian company, the definition has now been revised to include investments by Indian companies, LLPs or investment vehicles (each, an Indian entity), in the capital instruments or the capital (as the case may be), of another Indian company or LLP.[14] Further, downstream investments are now required to be reported by way of a Form DI within 30 days of such investment to the Secretariat for Industrial Assistance, Department of Industrial Promotion. However, the format of this Form DI is yet to be specified by the RBI.[15]

xii. Clarifications regarding reporting and pricing guidelines: In addition to the above, the New FEMA 20 has further clarified that capital instruments of any Indian company held by another Indian company which is not owned and not controlled by resident Indians or is owned and controlled by persons resident outside India (‘FOCC’), can be transferred to:[16]

(a) a person resident outside India without any requirement to adhere to pricing guidelines, provided however such transfer is reported by way of Form FC-TRS;

(b) a person resident in India, subject to adherence with pricing guidelines only; and

(c) another FOCC, without any requirement to adhere to pricing guidelines or to the reporting requirements.

xiii. Rate of dividend on preference shares: Under the New FEMA 20, the ceiling limit of 300 basis points over the prime lending rate of State Bank of India on the rate of dividend on preference shares or convertible preference shares issued under the said regulations has been done away with.

xiv. Alignment with the provisions of Companies Act, 2013: In addition to the above, the New FEMA 20 has attempted to align several provisions with those of the Companies Act, 2013, in order to address ambiguities that existed under the Erstwhile FEMA 20. A few of such alignments include:

(a) the definitions of ‘employees’ stock option’ and ‘sweat equity shares’ have been aligned with the corresponding definitions under the Companies Act, 2013; and

(b) timeframe for allotment of capital instruments has been reduced from 180 days to 60 days.

xv. Late submission fee for delayed filings: The New FEMA 20 states that delay in complying with reporting requirements (including Forms FC-GPR and FC-TRS) will now attract late submission fee (‘LSF’) of such amount as may be determined by the RBI in consultation with the Central Government. Paragraph 12 of Part IV of the Master Direction on Reporting under Foreign Exchange Management Act, 1999 provides for the quantum of LSF for regularizing reporting delays without undergoing the compounding procedure as under:

Amount involved in reporting
LSF as a % of amount involved*

Maximum amount of LSF applicable
Up to 10 million

0.05%
Rs.1 million or 300% of amount involved, whichever is lower.

More than 10 million

0.15%
Rs.10 million or 300% of amount involved, whichever is lower.

* The LSF would be doubled every 12 months.
The LSF shall be applicable for the transactions undertaken on or after November 7, 2017.

xvi. New forms to be filed:

(a) A Indian company issuing employee stock option to, inter-alia, persons resident outside India who are its employees / directors, is required to submit Form –ESOP within 30 days of such issuance.[17]

(b) An LLP receiving amount of consideration for capital consideration and acquisition of profits shall submit Form LLP (I) within 30 days of receipt of amount of consideration.[18]

(c) The divestment of capital contribution between a resident and non-resident in case of an LLP shall be reported in Form LLP (II) to the authorised dealer within 60 days from the date of receipt of funds.[19]

(d) An Indian start-up company issuing Convertible Notes to a person resident outside India shall report such inflows to authorised dealer bank in Form CN within 30 days of such issue.[20]

[1] Regulation 2(v) of New FEMA 20 read with Paragraph 2.2 of the Master Directions.
[2] Regulation 2(xviii) of New FEMA 20 read with Paragraph 2.9 of the Master Directions.
[3] Regulation 2(xvii) of New FEMA 20 read with Paragraph 2.6 of the Master Directions.
[4] Regulation 2(ix) of New FEMA 20 read with Paragraph 2.7 of the Master Directions.
[5] Regulation 2(xxv) of New FEMA 20 read with Paragraph 2.11 of the Master Directions.
[6] Paragraph 2.14 of the Master Directions.
[7] Regulation 2(xxxi) of New FEMA 20 read with Paragraph 2.16 of the Master Directions.
[8] Explanation to Regulation 6 of New FEMA 20 read with Paragraph 6.11.4 of the Master Directions.
[9] Proviso to Regulation 6 of New FEMA 20 read with Paragraph 6.11.2 of the Master Directions.
[10] Proviso to Regulation 7 of New FEMA 20 read with Paragraph 6.12.2 of the Master Directions.
[11] Regulation 13.1(4)(b) of New FEMA 20.
[12] Regulation 13.1(4) of New FEMA 20.
[13] Regulation 13.1(4) of New FEMA 20.
[14] Regulation 4 of New FEMA 20 read with Paragraph 9 of the Master Directions.
[15] Regulation 13.1(11) of New FEMA 20.
[16] Regulation 14(5)(c) of New FEMA 20 read with Paragraph 9.6 of the Master Directions.
[17] Regulation 13.1(5) of New FEMA 20.
[18] Regulation 13.1(7) of New FEMA 20.
[19] Regulation 13.1(8) of New FEMA 20.
[20] Regulation 13.1(12) of New FEMA 20.

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Ministry of Corporate Affairs does away with the 30 day deadline for notifying combinations

In a welcome development, on 29 June 2017 the Ministry of Corporate Affairs (MCA) issued a Notification (Notification) that does away with the requirement to necessarily notify a combination within 30 calendar days of the trigger event. The measure has been taken to alleviate the concerns of stakeholders who felt constrained by the deadline stipulated under the Competition Act, 2002 (“Act”). Please find attached a copy of the Notification. We set out key takeaways from the Notification below.

Prior to the Notification, the merger notification requirement under the Act contained the following aspects:

i. Mandatory 30-day filing requirement: Section 6(2) of the Competition Act required that any proposed transaction that qualifies as a combination on the basis of the asset/turnover thresholds under Section 5 of the Competition Act should be mandatorily notified to the CCI within 30 days of the execution of definitive documents or a public announcement or the final board resolution approving a merger or amalgamation between parties;

ii. Suspensory requirement: Section 6(2A) required that a transaction could not be closed until the CCI has approved the transaction or until 210 days have passed from the date of filing the notification with the CCI; and

iii. Penalties for belated filing: Section 43A of the Competition Act penalizes enterprises for not filing a notice under Section 6(2) of the Competition Act and such penalty could extend upto 1 percent of the total turnover or the assets, whichever is higher, of such combination.

The Notification does away with the 30-day filing requirement and provides parties the flexibility to file combinations when they are ready to file a notice with the CCI. Importantly, the Notification puts an end to the possibility of penalties for delayed filing. Transaction parties will no longer be constrained to decide on the strategy, collect information and make the filing within the short window of 30 calendar days. Parties to global transactions requiring notification in multiple jurisdictions can now make the filing in India contemporaneous with other jurisdictions. The notification will not only help the parties align their strategy but also help the CCI align its review timelines with other jurisdictions.

Notably, the requirement to file a notice with the CCI is still mandatory and the suspensory regime (i.e., requirement to receive CCI approval prior to closing) still applies. Accordingly, any breach of these requirements will still lead to penalties under Section 43A of the Act (set out above). However, removal of a 30-day deadline makes it significantly easier for businesses to comply with the merger notification requirement in India and is in line with international best practices in merger control.

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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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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 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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