The year began with some very good news for India’s young insolvency law as the country’s highest court upheld the Insolvency and Bankruptcy Code, 2016 in its entirety.

The Court dismissed, in Swiss Ribbons Private Limited v. Union of India and Others, the argument that the law’s distinction between financial and operational creditors was unconstitutional, noting that there existed an actual difference between the two types of creditors. It held that the requirement that an insolvency petition could only be withdrawn with the approval of 90% of the committee of creditors was not unreasonable, and that the provisions that prevented founders from regaining control of delinquent companies was legally valid.

The Supreme Court also directed the government to set up circuit benches of the NCLAT within six months. This shortfall in NCLT infrastructure had already been identified as a key reason for the backlog of cases.

One can imagine how the Supreme Court’s ruling would have delivered a shot in the arm for interim finance minister Piyush Goyal who said, while delivering the interim budget for 2019, that the Insolvency and Bankruptcy Code had institutionalised a resolution-friendly mechanism that is helping in recovery of non-performing loans.

A managing director at State Bank of India said that India’s largest lender is having an easier time negotiating with founders keen to avoid the bankruptcy law.

Ba ba bad loans? Essar Essar

But the bank’s experience with one of the big-ticket proceedings under the law has been anything but smooth. The SBI has put on sale its 15,431 crore rupee exposure to Essar Steel Ltd, as last-minute litigations continue to delay the recovery of its loans to the steelmaker. The bank has set the aggregate reserve price for the full-cash sale at 9,588 crore rupees.

This move has attracted some criticism. If taxpayer-funded Indian state-run banks don’t wield their voting power on creditor committees to push for better outcomes, the ability of the law to force superior and timely out-of-court settlements would also diminish, Andy Mukherjee wrote.

Another creditor, Standard Chartered Bank, has pleaded before the NCLT that it was being discriminated under Arcelor Mittal’s  bid.

And in what may be a fresh chapter in the story of the Essar Steel insolvency, three directors of the debtor corporation have approached the NCLT claiming  that the decision of the Committee of Creditors to back ArcelorMittal’s bid should be quashed and set aside because they were not consulted before the lenders approved the offer.

Steel for Bhushan climax

The NCLAT has ruled that JSW Steel Ltd.’s revised offer for Bhushan Power & Steel Ltd. is valid under the Insolvency & Bankruptcy Code. The appellate tribunal, which was hearing a petition filed against the revised offer by Tata Steel Ltd., the highest bidder for the asset in the first round of bidding, said that it was up to the committee of creditors of Bhushan Power and Steel to accept a debt resolution plan that could maximise asset value.

Bhushan Power, which along with Essar Steel is part of the first 12 large corporate accounts shortlisted by the Reserve Bank of India for insolvency proceedings in June 2017, owes lenders more than Rs 47,000 crore and operational creditors over Rs 700 crore. The case has seen considerable delays. India’s top two steelmakers Tata Steel and JSW Steel, as well as British metals and industrial firm Liberty House had submitted bids during the insolvency process.

Resolving conflicts of interest in resolution

The NCLT has rejected the resolution professional’s insolvency plan and ordered the liquidation of Bharati Defence. The lead financial creditor, the entity initiating the insolvency process and the successful resolution applicant all happened to be the same entity, Edelweiss Asset Reconstruction Company. The resolution professional, Edelweiss ARC, and the Committee of Creditors were all advised by consulting firm EY. The tribunal held that the resolution professional and CoC had failed to ensure appropriate checks and balances and failed to implement the ‘Chinese wall’ concept during the insolvency process.

New directions for the law

A research paper released by the Society of Insolvency Practitioners of India has noted that the neglect of secured creditors is a key drawback of the liquidation regulations. It recommended the creation of a committee of secured creditors to be involved in liquidation proceedings and the regular sharing of information with this committee.

An associate professor at the National Institute for Public Finance and Policy has in a recent paper explained the need for a personal insolvency law and the aspects of policy that need to be ironed out before such a law can be meaningfully implemented.

Reliance dials ‘I’, Reid & Taylor to be liquidated

Following its failure to sell its assets and repay its debts, including Rs. 550 crores to Ericsson India, Reliance Communications has opted for insolvency proceedings.

The NCLT has ordered the liquidation of textile maker Reid & Taylor India Ltd after investors put up by the employees association and other bidders failed to come up with a viable revival plan.

Emaar MGF Land will appeal against an NCLT order to start insolvency proceedings against the company after two homebuyers filed a petition over huge delay in delivery of their housing units. The NCLT had appointed an interim resolution professional and directed him to make a public announcement about the bankruptcy proceedings.

After defaults by the infrastructure operator-financier IL&FS Group last September, India’s mortage lenders are being scrutinized for exposure to struggling developers.

Now raise money from overseas markets to repay target company loans

The Reserve Bank of India has relaxed the end-use restrictions for resolution applicants under a CIRP and allowed them to raise ECBs from recognised lenders, except the branches or overseas subsidiaries of Indian banks, for repayment of rupee term loans of the target company under the approval route. Accordingly, the resolution applicants, who are otherwise eligible borrowers, can forward such proposals to raise ECBs, through their AD bank, to Foreign Exchange Department, Central Office, Mumbai of the Reserve Bank for approval.

From the docket

In Vijay Kumar Jain v. Standard Chartered Bank, the Supreme Court held that the members of the erstwhile or suspended Board of Directors of a corporate debtor must be given copies of an insolvency resolution plan that may be discussed at meetings of the committee of creditors. Such members, who are often guarantors, are vitally interested in a resolution plan as it then binds them and may affect their debt exposure or security interest.

In Brilliant Alloys Private Limited v. S. Rajagopal, the Supreme Court held that the corporate insolvency resolution process can be withdrawn after the invitation for expression of interest has been issued. It observed that Regulation 30A has to be read along with Section 12A, which contains no such stipulation and such stipulation can only be construed as directory depending on the facts of each case.

The pendency of a winding up petition does not bar the continuance of a proceeding under the Insolvency and Bankruptcy Code. In Forech India v. Edelweiss Asset Reconstruction Company, the Court approved the judgment of the Bombay High Court in Ashok Commercial Enterprises v. Parekh Aluminex to hold that the notice referred to in Rule 26 of the Companies (Court) Rules, 1958 is a pre-admission notice. It also approved of the judgment in PSL Limited v. Jotun India Private Limited, where the Bombay High Court had similarly refused to stay proceedings under IBC due to the pendency of a winding up petition.

The NCLAT has ruled in Vishnu Kumar Agarwal v. Piramal Enterprises Limitedthat it is not essential to initiate the CIRP process against the “principal borrower” in order to initiate corporate insolvency resolution process against a corporate guarantor. It took the view that the financial creditor is also a financial creditor qua the guarantor in light of the definition of “financial debt” under the IBC. However, in this case, the Appellate Tribunal has set aside the later order of the Adjudicating Authority admitting the insolvency petition filed by Piramal against the second corporate guarantor stating that once an insolvency petition under Section 7 was admitted, there could not be a second application of insolvency against another corporate guarantor vis-a-vis the same debt arising from the same claim.

In TJSB Sahakari Bank v. Unimetal Castings, the Mumbai Bench of the NCLAT held that a debt that is barred by limitation can be proceeded against by creditors under the provisions of the IBC, if the debt continued to be recorded in the books of the corporate debtor.

Neither the adjudicating authority (NCLT) nor the appellate authority (NCLAT) have the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors, the Supreme Court said in K. Shashidhar v. Indian Overseas Bank. The legislature has not endowed the NCLT with   the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. Upon receipt of a “rejected” resolution plan, the NCLT is obligated to initiate liquidation process under Section 33(1).

The Mumbai Bench of the NCLT has held that “the resolution professional is not an adjudicating authority and is not required to enquire into the factual scenario between parties and determine their rights and liabilities. The task of the RP is to limit itself to confirm that the claims received by him are true and correct”. The scope of a resolution professional is limited to verifying the claims received in the light of regulation Section 13 and 14 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, it observed.

That’s all we have for you this month. We hope that this update on India’s insolvency laws has been useful and that you will be reading again next month.

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