The government has begun fresh insolvency proceedings under Insolvency and Bankruptcy Code (IBC) from March 25 because the current suspension came to an end. Last year, when lockdown was imposed to stop the spread of coronavirus, the government suspended the fresh insolvency proceedings for six months from March 25, 2020. The move is expected to bring new wave of insolvency cases. As per Finance Minister Nirmala Sitharaman, the government is unlikely to extend the suspension as a return to normalcy is needed.
Covid-19 stopped Insolvency and Bankruptcy Code’s run because fillings under the code were suspended from 25th March 2020. Around 19,844 cases were pending before the NCLAT of which 12,438 cases were related to Insolvency and Bankruptcy Code as of 31st July 2020. Around 3,000 cases were undergoing liquidation and resolution and 9,000 cases were pending for admission. Filing was suspended due to Covid-19 in most of the jurisdictions except the United States of America and many insolvency jurisdictions had a tool to find a way for insolvency or had the template to assemble one. For example, countries like Britain had pre-pack, administrations, receiverships and scheme of arrangements under Company Act. The European countries relied on a quick pivot in 2020 which was based on the European Union Directive on Preventive Restructurings. All the insolvency frameworks were geared towards insolvency proceedings and have common elements like debtor-in-possession, pre-insolvency moratorium, cram-down of dissenting class.
The Corporate Affairs Ministry had suspended Section 7, 9 and 10 of the insolvency and bankruptcy code to provide relief to companies which were under the impact of the pandemic. These sections deal with initiation of corporate insolvency resolution process by a financial creditor, operational creditor and corporate debtor, respectively. After the government removed the suspension, the Supreme Court turned down pleas from various trade associations and corporate bodies seeking an extension of 6 months loan moratorium offered by the Reserve Bank of India in the view of the pandemic. The court ruled that there will not be any interest or penal interest on any amount during the moratorium. To understand it better, let us know about Insolvency Bankruptcy Code,2016.
ABOUT INSOLVENCY AND BANKRUPTCY CODE
It is a solution for resolving insolvencies which previously was a long process. The insolvency and bankruptcy code, 2016 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on May 5, 2016 and by Rajya Sabha on May 11, 2016 and received the assent of the President of India on May 28, 2016. It came into force from August 5, 2016.
It outlines separate insolvency resolution processes for partnership firms, companies and individuals. It may be initiated by either the creditors or the debtor. The maximum time limit has been set by individuals and corporates. The resolution process for small companies, start-ups (other than partnership firm) and other companies would be completed within 90 days of initiation of request which may be extended by 45 days. For companies, it will have to be completed within 180 days which may be extended by 90 days if the majority of creditors agree. But after the amendment in 2019, the maximum time limit has increased to 330 days to complete resolution process.
The basic principles of corporate insolvency are:
· To help the debtor company to reinstate itself into a profitable state, if possible.
· To ensure that the creditors get the maximum return possible, in case the company cannot be saved.
· To ensure that a fair and equitable system is adopted through a redistribution of rights so that there is just distribution of assets among the creditors based on the ranking of their claims.
· To find out the causes of failure and to reprimand those guilty of mismanagement.
· To place the assets of the company under external control to prevent their unauthorized transfer.
Moreover, this code shall apply only if minimum amount of the default is Rs.1 lakh, however by placing the notification in Official Gazette, Central Government may specify. And in case of Individuals this code shall apply only if minimum amount of default is Rs.1000.
The Insolvency and Bankruptcy Board of India oversee the insolvency proceedings in the country and regulate the entities registered under it. It is managed by licensed professionals and they will control the assets of the debtor during the insolvency process. It proposes two separate tribunals for the process of insolvency resolution, individuals and companies: (1) the National Company Law tribunal for companies and Limited Liability Partnership firms and (2) the Debt Recovery Tribunal for individuals and partnerships.
PROCEDURE OF INSOLVENCY AND BANKRUPTCY CODE
A plea is to be submitted to the adjudication authority by the financial and operational creditor or by corporate debtor itself and the maximum time to accept or reject the plea is 14 days and it is done by the adjudication authority itself. If the plea is accepted, the tribunal appoints an Interim Resolution Professional to draft a resolution plan within 180 days which is extendable by 90 days more and then the process is initiated by the court. In between, the boards of directors of the company stands suspended, and the promoters do not have to say in the management of the company. The professional can seek support of company’s management for day-to-day operations and if the resolution process fails then the liquidation process is started.
Some of the high value cases are as follows-
- Essar steel had a debt of Rs.49,000 crores. The notice for CIRP was sent in the month of June 2017 and the Supreme Court delivered its final verdict and cleared way for Arcelor Steel India and Nippon Steel Japan to form a joint venture to complete the takeover by the end of December 2019. The amount recovered was Rs. 42,000 crores.
- Bhushan steel had a debt of Rs.44,000 crores. The date of referral to NCLT was 26th July, 2017. Tata Steel acquired 72.65% controlling stake in Bhushan Steel for Rs. 36,000 crores and was selected as the highest bidder in March 2018 to buy a controlling stake in Bhushan Steel, as a part of bankruptcy proceedings.
- Bhushan Power and Steel had a debt of Rs.49,200 crores and after four years of litigation involving ED and previous owners, COC has voted in the favour of JSW Steel and deal completed by the end of March 2021.
- Alok Industries had a debt of Rs.29,000 crores. The resolution process started in the month of June 2017. The joint bid by Reliance Industries Limited and JM Financial Asset Reconstruction Co was approved by NCLT Ahmedabad last year and amount recovered was only Rs.5,050 crores.
- Reliance communications had a debt of Rs.33,000 crores and the resolution process initiated in the month of June 2019. It was decided that Reliance Jio will get the tower and fiber assets of Reliance Infratel Ltd for Rs.4,700 crores, UV Asset Reconstruction Co Ltd will get assets of Rcom and Reliance Telecom for Rs. 14,000 crores. The total recovery of amount was Rs.23,000 crores.
- Dewam Housing Finance Ltd had a debt of Rs.1,00,000 crores and the resolution process initiated in the month of November 2019. It was the first financial company to be referred to NCLT under IBC by Reserve Bank of India. COC has approved the bid by Piramal for Rs.38,000 crores.
Are Financial service providers included in the IBC?
Financial service providers like banks are not covered under Insolvency and Bankruptcy Code. FSP means a person engaged in a business of providing financial services in terms of authorisation or registration granted by the financial sector regulator.
For example- If a bank let suppose HDFC bank takes a loan from another financial service provider(bank), if he fails to pay his debts to the bank then the IBC code will not be applicable to the HDFC bank. The RBI will look into the matter with their own regulatory laws. This notifies in consultation with the financial sector regulators, financial service providers (FSP’s) or categories of FSP’s for the purpose of insolvency and liquidation proceedings, in such manner as may be prescribed.
Are personal loans included in the IBC?
Personal insolvency is also not covered in this code. Unlike corporate bankruptcy, personal insolvency is covered under archaic law including the Presidential-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.
For example, 1) If Mr. A has taken car loan from a bank, if he fails to repay the debt then he will not be applicable in the IBC.
2) If Mr. A has taken house loan from a bank, if he fails to repay the debt then he will not be applicable in the IBC.
Are PSE’s (Public Sector Enterprises) included in the IBC?
Under the older laws of insolvency, the High Court played the role of being the main forum for settlement of claims. The High Courts have demonstrated high rates of pendency. For example, the Official Liquidator in the Bombay High Court reported that out of 1464 cases pending before the court, 739 have been pending for more than ten years. The IBC has been formulated as a complete code for insolvency laws with specified tribunals and an administrative machinery for its enforcement. To resolve the insolvent and bankrupt PSEs in a time-bound manner will facilitate and may help expedite the process of disinvestment by the government by using the Insolvency and Bankruptcy Code and can have implications for the policy concerning restructuring and closure of PSEs.
Companies like chit funds or any other funds raising company included in the IBC?
Basically, chit funds are legal majority in the states and Ut’s in India. Since they are covered in the Companies act, they shall be applicable to this code. However, committee system is not yet recognised in India and is illegal and if a person makes a default in the payment of the debt, then he/she will not be applicable in this code.
Are NBFC included in the IBC?
The code has refrained from using the term ‘Non-Banking Financial Companies’ (hereafter referred to as NBFC’s) and as such it is imperative to identify whether NBFC’s fall within the purview of financial service provider. Although, the new rules have introduced a regulator driven framework as against the creditor driven framework introduced for the CIRP of other companies. An insolvency application can only be initiated against NBFCs on an application by the Reserve Bank of India (RBI) before the NCLT. The large database of credit information held by the RBI on different NBFCs reduces the possibility of frivolous applications being made. The CIRP will be initiated following an informed decision taken by a regulatory authority. Moreover, the RBI will be conscious of the various forms of public money and securitized assets and will therefore be in a position to determine financial and legal implications. The applicability of the IBC to NBFCs is a welcome effort from the legislature, and the new rules have increased the role and responsibilities of the RBI in conducting a CIRP of an NBFC. However, if clarifications are not forthcoming as to the procedures that will govern the insolvency process for NBFCs, the probability of a successful implementation of this structure will be low. The new rules are an interim measure only and a detailed specialized framework dealing with financial resolution of FSPs is awaited. The framework is unclear, leading to the possibility of a fragmented, biased and unsatisfactory outcome.
IMPACT OF SUSPENSION OF IBC
It has caused an overall slowdown in the process of resolution. The creditors may realise Rs 60,000 crore in the current fiscal through successful resolution plans under the IBC. If we compare this figure with the year 2019-20(Rs. 1,00,000 crores), resulting in the decline of around 40 per cent. Because of the increased number of fresh insolvency proceedings, the number of benches should be increased and vacancies should be filled as soon as possible so that there should not be any problem in solving insolvencies.
It has proved to be a shield and support for businesses finding themselves in liquidity crisis which is a positive impact while the negative impact has been to slow down the growth of Insolvency and Bankruptcy Code. Moreover, some staff members of the appellate tribunal were tested positive so the judicial functioning was disrupted several times. The Supreme Court asked the NCLAT to find a way on how to resume online hearing while its functioning remains suspended. More than 1,050 judgements were passed by the NCLAT in matters related to IBC, Companies Act and Competition Act.
The corporate debtor will be more vulnerable against the creditors in the absence of a moratorium who will look into initiating other legal recourse to claim their debt. There will be no immunity for such a company if a business is heavily relied on global demand and will face consequences after the lockdown. Creditors can use different methods and means to recover dues or prosecute the defaulting companies like Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) or other legal proceedings or initiation of arbitration.
Banks make enough provisions against defaulted loans and under the IBC the lenders have a coverage ration of 60% for borrowers in the short term for more profits. Lenders should be compensated with profits which is possible through recoveries. How much the banks recovers from defaulters gives the future earnings and rise in recoveries in past couple of years was done under IBC. Since the IBC was suspended, recoveries will have a huge impact and fall in the shares of the banks reflects this worry.
The suspension of Insolvency and Bankruptcy Code has led to situations like locked up capital. Earlier, it has been a tool in releasing capital locked up in a company which no longer existed. There was a free flow of capital which created an environment for investment. Since the earnings of the lenders goes into providing for loans, they are struggling to get capital for growth. The code has improved recoveries and helped banks to lend money to the borrowers but the suspension has an impact on freeing up the capital.
The main reason for this suspension taken by the government was to prevent the creditors for misusing the Insolvency and Bankruptcy Code for settling small claims because the operational creditor has been responsible for most referrals under this code. The conclusion is not rigid as the firm may be successful to be pushed into insolvency because of an operational creditor. For those borrowers who have slipped to default during the pandemic, this was a win-win situation for them because Section 10A provides that no application shall ever be filed for the initiation for corporate insolvency resolution of a corporate debtor for the said default occurring during the pandemic. Defaulters who were having default of less than Rs.1,00,00,000 and more than Rs.1,00,000 are at benefit as there is no pressure of insolvency proceedings but can be sued under the other applicable provisions of the law, but here the ultimate effect of Insolvency and Bankruptcy Code which says that the defaulters do not have to exit from their businesses.
Author: Arjun Goyal