The most eye-catching news from the last month was the RBI’s revised framework for the resolution of stressed assets. Our regular readers will recall that the Supreme Court had struck down the original framework, known as the February 12, 2018 circular.
Banks now have up to 30 days after a default to consider the future path of action. The original circular required banks to begin a resolution process for stressed assets following even a day’s default and then mandatorily report the defaulter to the insolvency courts if the resolution process remained infructuous after 180 days. Compared to that, the new circular, titled “Prudential Framework for Resolution of Stressed Assets” gives banks more latitude in taking defaulters to insolvency courts.
However, the central bank has sought to achieve a balance between giving banks enough room to manoeuvre and sticking to a timeframe for achieving resolution. Lenders effectively get 30 days to negotiate with defaulters before putting in motion a 180-day resolution plan with other lenders. The process of kicking off a resolution plan has also been eased with assent required from only 75% of lenders by debt value, and 60% by number, unlike earlier where all lenders had to agree to the resolution plan.
State of play
As of March this year, about a third of India’s bankruptcy cases had exceeded the 270-day deadline stipulated by law, according to government data.
Two years after the Reserve Bank of India first identified 12 large cases for resolution under the then newly introduced Insolvency and Bankruptcy Code (IBC), only three have found resolution: Bhushan Steel, with a debt of over Rs 47,000 crore, found a buyer in Tata Steel, Electrosteel Steels with Rs 10,700 crore-odd debt has been sold to Vedanta Group, and Monnet Ispat with Rs 9,500 crore of debt was bought by a consortium of Aion Capital and JSW Steel.
Two cases, after failing to find resolutions under IBC, are now headed into liquidation: Lanco Infrastructure and ABG Shipyard.
The remaining seven large cases, including Essar Steel, Bhushan Power and Steel, Alok Industries, Jaypee Infratech, Amtek Auto, Era Infra and Jyoti Structures, are still awaiting resolutions.
The law develops
The government is considering amendments to the Insolvency and Bankruptcy Code to introduce a resolution framework for individual insolvency and cross border insolvency.
Provisions for cross border insolvency would enable Indian firms to claim their dues from foreign companies, while allowing foreign creditors, including Indian branches of foreign banks, to recover loans from Indian companies.
Last year, a committee set by Ministry of Corporate Affairs had recommended adoption of the UNCITRAL model laws on cross-border insolvency.
The Centre is mulling a law that will soon regulate valuation professionals. An institute for valuers will also be set up along the lines of the Institution of Chartered Accountants of India.
The Insolvency Law Committee (ILC) set up by the Central government willwork on amendments to the IBC to finalise them ahead of the next Budget session of the Parliament.
Asserting that the insolvency law’s objectives are reorganisation and resolution of a defaulting company, IBBI Chairperson MS Sahoo said that while the IBC does not rule out recovery, it must be incidental to reorganisation. “If creditors recover their dues one after another or simultaneously, the company would bleed to death.”
Chief Economic Adviser K. Subramanian and B. Sriram, the former MD and CEO of IDBI Bank, were appointed part-time members of the Insolvency and Bankruptcy Board of India (IBBI).
To ease the pressure on the NCLT, India should take a leaf out of Singapore’s book and introduce mediation for some types of insolvency disputes – a former Supreme Court judge has written.
Debt-ridden dairy firm Kwality Ltd. said the National Company Law Tribunal at New Delhi has given it time till September 7 to complete the corporate insolvency resolution process.
Two suppliers to Jet Airways have approached the NCLT to initiate insolvency proceedings against it.
From the docket
In Industrial Services v. Burn Standard Company and Burn Standard Ex-Officers Welfare Association v. Burn Standard Company, the NCLAT has held that a resolution plan that provides for closure of the business was against the provisions of Section 30(2)(e) of the IBC and such resolution plan could not be approved. Relying on the judgment in Swiss Ribbons v. Union of India, the Bench held that the “primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting it from its own management and from its death by liquidation”. Referring to its own judgment in Y. Shivram Prasad v. S. Dhanapal, it held that the resolution professional and liquidator have to ensure that the company remains a going concern.
In Encore Asset Reconstruction Company v. Charu Sandeep Desai, the NCLAT held that since Section 18 of the IBC will prevail over Section 13(4) of the SARFAESI, it was the duty of the interim insolvency professional or resolution professional to take control and custody of any asset over which the corporate debtor has ‘ownership rights’ as recorded in the balance sheet of the corporate debtor even if it is not in possession of the corporate debtor. Moreover, a person who is in possession of those assets, including a bank that took possession under SARFAESI, is bound to hand them over to the resolution professional.
The NCLAT in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited has upheld the order of the NCLT, which had held that the provisions of IBC would prevail over the provisions of the Electricity Act.
The NCLAT in R.M.S. Employees Welfare Trust v. Anil Goel, has held that since the dues to the central and state government under existing law are ‘operational debt’, in a resolution plan, the amount paid on such dues should not be less than the amount payable to the operational creditor in the event of a liquidation of the corporate debtor under Section 53.
In International Finance Corporation v. Punj Llyod Upstream Limited, the Principal Bench of the NCLT has held that once a claim has been filed by a financial creditor in the CIRP of a corporate debtor, the same claim based on same set of documents cannot be the basis for initiating CIRP under Section 7 of the IBC against the principal borrower.
The Allahabad bench of the NCLT, in Delhi Control Devices v. Fedders Electric and Engineering has held that “unpaid installment under a settlement agreement cannot be treated as operational debt under Section 5(21) of the IBC. The failure or breach of a settlement agreement cannot be a ground to trigger a CIRP and remedy may lie elsewhere. The settlement agreement had been entered into pursuant to a demand notice raised by an operational creditor, who then withdrew it following the settlement agreement. We believe this order may have unintended consequences as many operational creditors who withdraw their insolvency applications after entering into settlements, may be vary of withdrawing their applications in the fear that they may be denied the right to initiate insolvency proceedings later.
In Sai Regency Power Corporation Services Private Limited v. Oil and Natural Gas Corporation Limited and Punjab National Bank, the Chennai bench of the NCLT has held that “to file an application u/s 60(5) of the Code before Adjudicating Authority or under any provision of law before any court of law, the person filing application shall be aggrieved. For a person to be aggrieved, aggrieved party can be any person whose financial, personal, or property rights or interests are adversely affected by an act of another or order, judgment or statute. An aggrieved party is entitled to challenge the adverse decisions.” It also held that Section 14 of the IBC has to be read in a restrictive manner considering that it restricts the rights and interests of other persons who are otherwise entitled to take action against the corporate debtor.
In IDBI Bank Limited v. Jaypee Infratech Limited, the NCLT has dismissed a plea by a group of homebuyers to treat them as a separate sub-class of creditors at Committee of Creditors meetings for the insolvency resolution of Jaypee Infratech. The plea sought this classification so that absentee homebuyers’ votes can be factored in as ‘yes’ votes.
That’s all we have for you this month.
We hope that this update on India’s insolvency laws will prove useful for you and that you will be watching out for these again next month.