India’s insolvency and bankruptcy law recently turned three, and the occasion prompted much commentary and analysis on its performance.

Among the most significant was a report by the analytics company Crisil and industry body Assocham titled ‘Strengthening the Code’. The report said that it has not been smooth sailing for the IBC. It highlighted that the average resolution timeline for the resolved 94 cases was 324 days vis-à-vis the stipulated 270 days. Also, there were a few big-ticket accounts for which resolution has not been finalised for over 400 days.

There were 1,143 ongoing cases under CIRP at the end of March 2019, and resolution in 32 percent of them had been pending for more than 270 days.

The report, however, termed the recovery rate of 43% “respectable“. Had the 94 cases undergone the liquidation process, the recovery rate for financial creditors would have been 22%, even lower than the recovery rate through normal resolution process, it noted.

Another review of the three years noted that inadequate infrastructure has been a significant factor causing delays. The government’s recent approval for the appointment of 32 new members to the NCLT more than doubled its strength.

The IBC’s record has been rather mixed, another comment said. From vested interests and protracted litigation to periodic reinterpretations of the law, the IBC mechanism has been slow in extricating cash stuck in unviable projects.

The insolvency regime has saved nearly four lakh jobs in India, said on the comment, striking a positive note.

In a comprehensive interview where he reviewed several aspects of the law such as delays, the Supreme Court’s judgment striking down the February 12, 2018 circular, governance failures, and the role of auditors, corporate affairs secretary Injeti Srinivas expressed optimism that timelines would be adhered to in the next three to four months.

Resolution plans under IBC have yielded 200 per cent of liquidation value for creditors in addition to rescuing viable firms, IBBI Chairperson M S Sahoo said.

Rating agency ICRA has said that it expects financial creditors to realise more than 80,000 crore rupees in FY20 from the IBC process, against the ₹66,000 crore realised in FY19. The optimism stems from the expected conclusion of the CIRPs of two large accounts — Essar Steel and Bhushan Steel and Power Ltd.

Sucheta Dalal sounded a note of warning. Because of promoters and bankers who have gamed it, the bankruptcy law may rapidly go the way of all previous laws and debt recovery mechanisms that failed to help lenders recover bad loans. It’s future depends on the composition and leadership of the new government that will soon take power at the centre.

Of the over two dozen companies named by the RBI in its second list of large non-performing assets (NPAs), only three have come close to being resolved successfully through the corporate insolvency resolution process since when the list is known to have been sent to banks.

Tinkering with the Code

The proposed individual insolvency regime will offer a quick resolution for those micro, small and medium enterprises, mostly incorporated as partnerships or proprietorships, that become insolvent.

Small borrowers with annual income up to ₹60,000 are likely to get automatic relief for any unsecured loans they are unable to repay, according to a new scheme for personal insolvency resolution that the government has prepared.

According to the latest proposal from the IBBI, secured institutional financial creditors may have to bear liquidation expenses upfront if the debtor company has no liquid assets available to defray the costs. This amounts to a rejection of a previous proposal that the cost of liquidation be borne by all the financial creditors upfront, and later recovered from the sale of assets. The IBBI felt that this may prove to be too harsh a burden on retail individual creditors.

After the Supreme Court took a similar view, the IBBI has advocated for an amendment to the IBC to permit the withdrawal of an insolvency application on an application made by the applicant at any stage: before constitution of CoC, after constitution of CoC but before invitation of EoI, or after invitation of EoI in exceptional cases.

The Economic Times has reported that MS Sahoo led a 10-member team to Hong Kong to individually meet over a dozen investors with dedicated focus on stressed assets.

NBCC (India) Ltd. decided against diluting some conditions, including exemption from tax liability, in its revised offer for debt-laden Jaypee Infratech even as lenders flagged serious concerns about the state-owned firm’s conditional bid.

In the last edition of this newsletter, we had seen how the Supreme Court’s decision to strike down the RBI circular would have come as a blow to the central bank’s plans regarding stressed assets. Now, the media has reported that to counter the effects of that decision and incentivise lenders to take errant borrowers to bankruptcy court, the RBI is considering a proposal to assign a ‘lower risk weight’ on loans to companies against which action has been initiated under the Insolvency & Bankruptcy Code.

The Parliamentaty Committee on Subordinate Legislation met with the Deputy Governor of the Reserve Bank of India and the heads of public sector banks to discuss non-performing assets and the impact of the Supreme Court’s decision.

The principal bench of the NCLT has dismissed a petition by ICICI Bank to begin insolvency proceedings against Era Infrastructure India Ltd (EIIL), on the grounds that the bank was already claiming its dues in insolvency proceedings against EIIL’s parent and corporate guarantor Era Infra Engineering Pvt. Ltd.

Bankers could have stemmed the bleeding of value from Jet Airways if they had resorted to the IBC earlier, another commentator argued.

From the docket

In JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills, the Supreme Court held that a trade union was a “person” under the Insolvency and Bankruptcy Code and can maintain a petition as an operational creditor on behalf of its members. Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognises the fact that claims may be made not only in an individual capacity but also conjointly.

An agency of the corporate debtor has to act on the directions of the corporate debtor and not to give advice. In Aasaan Global Trade v. Vasudevan and Others, the NCLAT held that the related party of a corporate debtor was any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act.

In Varrsana Ispat Limited  v. Deputy Director, Directorate of Enforcement, the Supreme Court held that Section 14 of the Code was not applicable to proceedings under Prevention of Money Laundering Act, 2002.

In Cooperative Rabobank U. A. v. Shailendra Ajmera, the NCLAT held that and if an ‘operational creditor’ has assigned or legally transferred any ‘operational debt’ to a ‘financial creditor’, then the assignee or transferee shall be considered an ‘operational creditor’ to the extent of such assignment or legal transfer.

In Sunil Jain v. Punjab National Bank, the NCLAT ordered the modification of a resolution plan. It held that a ‘resolution professional’ must include the cost of goods supplied to the corporate debtor during a CIRP to keep it running as a going concern in the ‘Resolution Process Cost’. If not, a ‘Resolution Plan’ may be in violation of Section 30(2)(a) of the Code.

In Anju Aggarwal, Resolution Professional for Shree Bhawani Paper Mills Ltd.v. Bombay Stock Exchange, the NCLAT held that since Section 28A of the SEBI Act, 1992 including sub-section (3), was inconsistent with Section 14 of the IBC, the latter would prevail. SEBI cannot recover any amount including the penalty from the corporate debtor. For the same reason, the Bombay Stock Exchange cannot take any coercive steps against the debtor nor threaten it with a suspension of trading.

In Harkirat S. Bedi v. Oriental  Bank of Commerce, the NCLAT held that the mere pendency of a case before the Debt Recovery Tribunal for adjudicating a disputed amount cannot be a ground to reject the application under Section 7 of the Code if the adjudicating authority is satisfied that there is a ‘debt’ and ‘default’. On the other hand, in view of Section 14, all such proceedings in respect of any debt will remain stayed and cannot proceed during the period of moratorium.

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.

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