Supreme Court’s status-quo on Essar Steel-How the tables could turn for ArcelorMittal!

– CS Megha Mittal

(mittal@vinodkothari.com)

[This article is intended for academic debate on the law around powers of the Committee of Creditors vis-à-vis the adjudicatory authorities, as it continues to evolve] Read more

Prudential Framework for Resolution of Stressed Assets: New Dispensation for dealing with NPAs

By Vinod Kothari [vinod@vinodkothari.com]; Abhirup Ghosh [abhirup@vinodkothari.com]

With the 12th Feb., 2018 having been struck down by the Supreme Court, the RBI has come with a new framework, in form of Directions[1], with enhanced applicability covering banks, financial institutions, small finance banks, and systematically important NBFCs. The Directions apply with immediate effect, that is, 7th June, 2019.

The revised framework [FRESA – Framework for Resolution of Stressed Accounts] has much larger room for discretion to lenders, and unlike the 12th Feb., 2018 circular, does not mandate referral of the borrowers en masse to insolvency resolution. While the RBI has reserved the rights, under sec.  35AA of the BR Act, to refer specific borrowers to the IBC, the FRESA gives liberty to the members of the joint lenders forum consisting of banks, financial institutions, small finance banks and systemically important NBFCs, to decide the resolution plan. The resolution plan may involve restructuring, sale of the exposures to other entities, change of management or ownership of the borrower, as also reference to the IBC.

Timelines

The resolution timelines have 2 components – a Review Period and Resolution Period.

The first period, of 30 days, starts immediately in case of borrowers having aggregate exposure of Rs 2000 crores or more from the banking system, and in case of borrowers with aggregate exposure of Rs 1500 crores to Rs 2000 crores, it starts from 1st Jan 2020. For borrowers with aggregate borrowings of less than Rs 1500 crores, there is no defined timeline as of now – thereby leaving all small moderate loan sizes out of the scope of the FRESA.

During the review period, the lenders will have presumably agreed on the resolution plan. The plan itself has 6 months of implementation.

The 6 months’ implementation timeline is not a hard timeline. If the timeline is breached, the impact is additional provisioning. If the implementation fails the 6 month deadline, there is an additional provision of 20% for period upto 1 year from the end of the review period, and 35% for period beyond 1 year.

Directions are centered around banks

Though the FRESA has made applicable to scheduled commercial banks, AIFIs, small finance banks and NBFCs, however, the same revolves around banks and financial institutions. For the framework to get triggered, the borrower must be reported as default by either an SCB, AIFI or small finance bank. The provisions under the paragraph shall not get triggered with an NBFC declaring an account as default.

Similarly, for reckoning the amount outstanding credit for determining the reference date for implementation, only the credit exposures of the SCBs, AIFIs and small finance banks have to be considered.

It seems these Directions have been made applicable to NBFCs, only to bind them by the proceedings under FRESA, in case of borrowers having multiple lenders.

Mechanics of the FRESA

On an account being declared as default, the lenders will, within a period of 30 days, have to review the account and decide the course of action on the account. That is, during this period, an RP will have to be prepared. The lenders can either resolve the stress under this framework or take legal actions for resolution and recovery.

If the lenders decide to resolve the stress under this framework, ICA must be signed among them. The ICA must provide for the approving authority of the RP, the rights and duties of the majority lenders, safety and security of the dissenting lenders.

Upon approval of the RP, the same must be implemented within a period of 180 days in the manner prescribed in the Directions. After the implementation, the same must be monitored during the monitoring period and the extended specified period, discussed below.

Implementation conditions for RPs

The implementation of RPs also comes with several conditions. The pre-requisites of implementing an RP are:

  1. Where there are multiple lenders involved, approval of 75% of the lenders by value and 60% of the lender by number must have been obtained.
  2. The RPs must be independently rated – where the aggregate exposure is ₹ 1 billion or above, at least from 1 credit rating agency; and where the aggregate exposure is ₹ 5 billion or above, at least from 2 credit rating agencies. The rating obtained from the CRAs must be RP4 or better[2].
  3. The borrower should not be in default as on 180th day from the end of Review Period.
  4. An RP involving restructuring/ change in ownership, shall be deemed to be implemented only if,
    1. All the legal document have been executed by the lenders in consonance with the RP;
    2. The new capital structure and/ or changes in the terms and conditions of the loans get duly reflected in the books of the borrower;
    3. The borrower is not in default with any of the lenders

Restructuring with several covenants

Restructuring was no brainer earlier and was the device to keep bad loans on the books without any action.

The FRESA provides that upon restructuring, the account [having an aggregate exposure of more than Rs 100 crores] will be upgraded to standard status only on investment grade by at least one rating agency (two in case of aggregate exposure of Rs 500 crores and above). Also, after restructuring, the account should at least pay off 10% of the aggregate exposure.

Prudential norms in case of restructuring/ change in ownership

  1. In case of restructuring –
    1. Upon restructuring, the account will be immediately be downgraded to sub-standard and the NPAs shall continue to follow the asset classification norms as may be applicable to them.
    2. The substandard restructured accounts can be upgraded only after satisfactory performance during the following period:
      1. Period commencing from the date of implementation of the RP up to the date by which 10% of the outstanding credit facilities have been repaid (monitoring period); or
      2. 1 year from the date of commencement of the first payment of interest or principal, whichever is later.
    3. However, for upgradation, fresh credit ratings, as specified above,  will have to be obtained.
    4. If the borrower fails to perform satisfactorily during this period, an additional provision of 15% will have to be created by all the lenders at the end of this period.
    5. In addition to above, the account will have to be monitored for an extended period upto the date by which 20% of the outstanding credit facilities have been repaid. If the borrower defaults during this period, then a fresh RP will have to be required. However, an additional 15% provision will have to be created at the end of the Review Period.
    6. Any additional finance approved under the RP, shall be booked as “standard asset” in the books of the lender during the monitoring period, provided the account performs satisfactorily. In case, the account fails to perform satisfactorily, the same shall be downgraded to the same category as the restructured debt.
    7. Income in case of restructured standard assets should be booked on accrual basis, in case of sub-standard assets should be booked on cash basis.
    8. Apart from the additional provisioning mentioned above, the lenders shall follow their normal provisioning norms.
  2. In case of change of ownership, the accounts can be retained as standard asset after the change in ownership under FRESA or under IBC. For change in ownerships under this framework, following are the pre-requisites:
    1. The lenders must carry out due diligence of the acquirer and ensure compliance with section 29A of the IBC.
    2. The new promoter must acquire at least 26% of the paid up equity capital of the borrower and must be its single largest shareholder.
    3. The implementation must be carried out within the specified timelines.
    4. The new promoter must be in control of the borrower.
    5. The account must continue to perform satisfactorily during the monitoring period, failing which fresh review period shall get triggered. Also, it is only upon satisfactory performance during this period that excess provisions can be reversed.
  3. Reversal of additional provisions:
    1. In case, the RP involves only payment of overdues, the additional provisions may be reversed only of the borrower remains not in default for a period of 6 months from the date of clearing the overdues with all its lenders.
    2. In case, the RP involves restructuring/ change in ownership outside IBC, the additional provisions created against the exposure will be reversed upon implementation of the RP.
    3. In case, the lenders initiate insolvency provisions against the borrower, then half of the provisions created against the exposure will be reversed upon submission of application and the remaining amount may be reversed upon admission of the application.
    4. In case, the RP involves assignment/ debt recovery, the additional provision may be reversed upon completion of the assignment/ debt recovery.

Exceptions

Project loans where date of commencement of commercial operations (DCCO) has been deferred, will be excluded from the scope of the circular.

Hierarchy of periods

  • Review period – 30 days for preparing the resolution plan
  • Implementation period – 6 months from the end of the review period – for implementing the resolution plan
  • Monitoring period for upgradation – 1 year from date of commencement of first payment of interest or principal or reduction of aggregate exposure by 10%, whichever is later
  • Specified period – until the aggregate exposure is repaid by at least 20% – if there is a default, a fresh resolution plan will be required.

Other provisions of the FRESA

Some common instructions from the earlier directions have been retained in this framework as well, namely:

  1. Identification of an account under various special mention accounts. Where the default in account is between 1-30 days, the same must be treated as SMA-0. Where the default is between 31-60 days, it must be reported as SMA-1. Where the default is between 61-90 days, it must be reported as SMA-2.
  2. Reporting requirements to CRILC for accounts with aggregate exposure of ₹ 50 million will continue.
  3. The framework requires the lenders to adopt a board approved policy in this regard.
  4. For actions by the lenders with an intention to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties. Further, references under IBC can also be made.
  5. Disclosures under notes to accounts have to be made by the lenders with respect to accounts dealt with under these Directions.
  6. The scope of the term “restructuring” has been expanded under the Directions.
  7. Sale and leaseback transaction involving the assets of the borrower shall be treated as restructuring if the following conditions are met:
    1. The seller of the assets is in financial difficulty;
    2. Significant portion, i.e. more than 50 per cent, of the revenues of the buyer from the specific asset is dependent upon the cash flows from the seller; and
    3. 25 per cent or more of the loans availed by the buyer for the purchase of the specific asset is funded by the lenders who already have a credit exposure to the seller.
  8. If borrowings/export advances (denominated in any currency, wherever permitted) for the purpose of repayment/refinancing of loans denominated in same/another currency are obtained:
    1. From lenders who are part of Indian banking system (where permitted); or
    2. with the support (where permitted) from the Indian banking system in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc., such events shall be treated as ‘restructuring’ if the borrower concerned is under financial difficulty.
  9. Exemptions from restrictions on acquisition of non-SLR securities with respect to acquisition of non-SLR securities by way of conversion of debt.
  10. Exemptions from SEBI (ICDR) Regulations with respect to pricing of equity shares.

Withdrawal of earlier instructions

The following instructions, earlier issued by the RBI have been withdrawn with immediate effect:

Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum (JLF) as mandatory institutional mechanism for resolution of stressed accounts.

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

[2] The Directors lay down various categories ratings. RP4 resembles debt facilities carrying moderate risk with respect to timely servicing of financial obligations.

Concerns on Going Concern: Proposed amendments in Liquidation Regulations need relook

–  Vinod Kothari

 

The possibility of going concern sales in liquidations, visualised by Adjudicating Authorities in several early cases, got a regulatory recognition vide IBBI (Liquidation Process) (Second Amendment) Regulations, 2018. Since then, there has been a lot of work on how exactly will going concern sale work in liquidation. Our previous write- ups on going concern sale are Liquidation sale as going concern: The concern is dead, long live the concern! and Enabling Going Concern Sale in Liquidation. IBBI itself has organised several meetings around this; there have been meetings organised by other groups such as Society of Insolvency Practitioners of India (SIPI).

 

Recently, the IBBI released a draft of the amendments to the Liquidation Regulations[1], which includes regulatory amendments pertaining to going concern sale as well.

 

This Note highlights the need to have a relook at these proposed amendments, in context of going concern sale.

Read more

RBI’s 12th February circular: The Last Word Becomes the Lost World

RBI’s 12th February circular:

The Last Word Becomes the Lost World

Abhirup Ghosh (abhirup@vinodkothari.com)

The 12th February 2018 circular of the Reserve Bank of India (RBI)[1] (Circular), arguably one of the sternest of measures requiring banks to stop ever-greening bad loans, and resolve them once for all, with a hard timeline of 6 months, or mandatorily push the matter into insolvency resolution, was aimed at being the last word, overriding several of the previous measures such as CDR, JLF, SSSS-A, etc. However, with the Supreme Court striking it down, in the case of Dharani Sugars and Chemicals Limited vs Union of India and Ors.[2], the mandate of the RBI in directing banks with how to deal with stressed loans has fallen apart. While the SCI has used very technical grounds to quash the 12th Feb circular, the major question for the RBI is whether it should continue to micro-manage banks’ handling of bad loans, and the major question for the banks is when will they grow up into big boys and stop expecting RBI to tell them how to clean up the mess on their balance sheet.

The judgment has received mixed reactions from various parts of the economy. This write-up will take you through how it started, and how it ended and what the way forward is.

How it started?

The inception of the entire trail dates back to 5th May, 2017 when the Banking Regulation (Amendment) Ordinance, 2017 was notified. The Ordinance was passed with the intention to empower the Central Government (CG) to authorise the RBI to issue directions to banking companies to initiate insolvency resolution process (IRP) under the provisions of Insolvency and Bankruptcy Code, 2017 (IBC). Two new sections were introduced in the Banking Regulation Act, 1949, namely, sections 35AA and 35AB. While section 35AA empowered the CG to authorise RBI to direct banks to initiate IRP proceedings, section 35AB empowered the RBI to issue directions to the banking companies for resolution of stressed assets.

Soon after the Ordinance was notified, the Ministry of Finance empowered the RBI to issue directions under section 35AA on 5th May, 2017[3].

The Ordinance was replaced by the Banking Regulation (Amendment) Act, 2017 on 25th August, 2017[4]. However, before the Ordinance could turn into an Act, the RBI issued a press release[5] conveying the following:

  1. That it has constituted an Internal Advisory Committee that will help identifying accounts for which IRP must be launched;
  2. That it is laying down criterion for referring accounts for resolution under IBC among top 500 exposures in the banking system which are either wholly or partially NPA; and that 12 accounts satisfy the conditions;
  3. That for the accounts which do not satisfy the criterion laid down by IAC, the banks must prepare a resolution plan within six months and where a valid resolution plan is not agreed upon IRP must be launched after the expiry of six months;
  4. That the RBI will issue directions, based on the recommendations of the IAC, to banks to initiate insolvency proceedings under IBC;
  5. That the RBI will subsequently issue framework for dealing with other NPAs.

Subsequently, the RBI came out with a framework for dealing with other NPAs on 12th February, 2018. The framework was notified by RBI, purportedly, deriving powers from four sections – sections 35A, 35AA and 35AB of the BR Act and section 45L of the RBI Act.

The central theme of this framework revolved around identification of stress in large ticket sized accounts, implementing a resolution plan within 180 days from the date of default and in case of failure to implement, IRP action must be initiated against the borrower under IBC, within 15 days from the date of expiry of the timeline. Large accounts for this purpose means accounts where the aggregate exposure of the lenders exceed ₹ 2,000 crores.

The salient features of the framework are as follows:

  • Identification of early signs of stress in accounts with outstanding of Rs. 5 crores or above, through SMA account classifications and filing of relevant information with the Central Repository of Information on Large Credits (CRILC).
  • Resolution plans must be worked upon for all cases of default and must be implemented within a period of 180 days from the date of default or from the reference date, that is 1st March, 2019, in case the default was subsisting as on the date of reference date. This timeline is however applicable for accounts with outstanding debt of Rs. 2000 crores. However, the reference date was accounts with outstanding of debt of less than the specified amount but more than Rs. 100 crores, for the purpose of debt resolution, has not been notified yet.
  • Independent credit rating to be obtained before implementing the RP.
  • In case of failure to implement the RP within the specified timeline, the account must be dragged into IRP under the IBC within a period of 15 days from the expiry of the time period. The reference under IBC can be made by the banks either singly or jointly.
  • In case of timely implementation of RP, if the account faces any default during the specified period, then the same must be referred for IRP under IBC by the lenders singly or jointly, within 15 days from the date of default. Specified period, in this regard means period within which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is supposed to be repaid.
  • Sale and leaseback transactions of any asset of the borrower will be treated as a case of restructuring for the purpose of the framework and be subject to asset classification norms applicable to restructured accounts.
  • The framework repealed all the other frameworks for dealing with stressed assets, issued earlier by the RBI, namely, Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, Scheme for Sustainable Structuring of Stressed Assets (S4A), and Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts.

How it ended?

The framework raised several eyebrows as some felt that the RBI had categorised all defaulted accounts into one single bucket, irrespective of the kind of stress they are facing. Other felt that the framework becoming applicable even on a single day default is an unreasonable measure. However, the most important issue of contention that dragged the matter to the court was questioning the authority of RBI to issue the framework on the first place.

The ruling passed by the SCI is result of this contention and the SCI has ruled it against the RBI. The SCI declared that the issuance of the framework ultra vires the powers granted to the RBI under various statutes and that the framework shall be of no effect in law.

While building up this ruling the SCI considered the following:

  • Sections 35A, 35AA and 35AB of the BR Act – The SCI stated that the stressed assets can be resolved through the provisions of IBC or otherwise. When the measure intended is IBC, section 35AA is the only resort. However, if the RBI wishes to resolved stressed accounts other than through IBC, then it can use general powers under section 35A and 35AB. While section 35A grants wide powers to RBI to give directions when it comes to the matters specified therein, section 35AA calls for an additional requirement of “authorisation” from CG to give directions to banks to proceed under IBC.

Therefore, for exercising powers under the 35AA, the RBI requires specific authorisation from the Central Government, however, for enforcing powers granted under sections 35A and 35AB, no specific authorisation is required. Had there been no section 35AA, RBI would have needed no authorisation to give such directions, as such power could be derived from the existing section 35A, which is wide and expansive enough.

To quote SCI –

“30. The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA.

  1. The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed. . .”

The court pointed out that if the RBI had the power under sections 35A or 35AB of the BR Act to direct the banks to initiate proceedings under the IBC, it would obviate the necessity of the Central Government authorisation under section 35AA to do so. It noted the following:

“40. Stressed assets can be resolved either through the Insolvency Code or otherwise. When resolution through the Code is to be effected, the specific power granted by Section 35AA can alone be availed by the RBI. When resolution de hors the Code is to be effected, the general powers under Sections 35A and 35AB are to be used. Any other interpretation would make Section 35AA otiose. In fact, Shri Dwivedi’s argument that the RBI can issue directions to a banking company in respect of initiating insolvency resolution process under the Insolvency Code under Sections 21, 35A, and 35AB of the Banking Regulation Act, would obviate the necessity of a Central Government authorisation to do so. Absent the Central Government authorisation under Section 35AA, it is clear that the RBI would have no such power.”

Therefore, it becomes important to understand if the RBI acted well within its powers under section 35AA while issuing the circular. Section 35AA states the following:

‘35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation.—For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

As noted above, section 35AA allows the RBI to issue directions to banks to initiate IRP in respect of “a default”. The meaning of term default has been drawn from the IBC, as per which a default is non-payment of a debt when it has become due and payable by the corporate debtor. All this indicates that the default in the present context refers to a specific default and not defaults in general.

Further, the SCI also took note of the press note of the Ordinance of 5th May, 2017 which indicated that the intention of deal with resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The same was also the understanding of the Central Government when it issued the notification on 5th May, 2017 to authorise the RBI to issue directions to the banks to act against “a default” under IBC. Therefore, this made it conclusive that directions issued in relation to debtors in general, is ultra vires the powers under section 35AA.

  • Section 45L of the RBI Act – The RBI stated in the framework that it drew one of its powers from section 45L of the RBI Act. The section grants power to direct non-banking financial institutions. However, section 45(3) of the RBI Act states the following:

XX

(3) In issuing directions to any financial institution under clause (b) of sub-section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets.

XX

It was emphasised that in order to issue any direction under this section, the RBI must have due regard to the conditions in which, and the objects for which, the institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets. However, the framework did not discuss anything as such. Further, since, the very intention of bringing in NBIs under this framework was to deal with cases which had joint lending arrangements between banks and NBIs, the SCI found it difficult to separate banks and NBIs and make the circular applicable on NBIs even though ultra vires for the banks.

Therefore, the entire circular was declared ultra vires as a whole.

What is the way forward?

The ruling has created an awkward situation, as the banks have already acted upon the directions issued by the RBI. They have either implemented an RP or dragged the borrower to NCLT to proceed under IBC. Now that the circular is gone, following are the probable outcomes:

  1. For cases where RPs have been implemented – the lenders may decide to go ahead as per the RP and treat the same as restructured account.
  2. For cases where the corporate debtor has been taken to the NCLT – now that the very basis for taking the account to NCLT is gone, the lenders will have to take a call whether they want to pursue the proceedings under the Code without making references to RBI Circular.

Another apparent question that arises here is what will happen to the various frameworks which were withdrawn vide the 12th February circular. As stated by the SCI, the Circular will have no effect in law, therefore, the “withdrawal” clause too has been nullified. Therefore, the old restructuring frameworks can be said to be existing as on date.

Nevertheless, the Circular played the role of a game-changer by inducing a certain degree of credit discipline or at least the fear of being dragged into IBC. Now, as the Circular goes away, RBI may have to think of new restructuring frameworks – if that is through IBC, it would surely need CG’s authorisation.

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11218&Mode=0

[2] https://www.sci.gov.in/supremecourt/2018/42591/42591_2018_Judgement_02-Apr-2019.pdf

[3] http://egazette.nic.in/WriteReadData/2017/175797.pdf

[4]https://www.prsindia.org/sites/default/files/Banking%20Regulation%20%28Amendment%29%20Act%2C%202017.pdf

[5] https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40743

ROLE OF ADJUDICATING AUTHORITY IN APPROVING/ REJECTING A RESOLUTION PLAN

By Richa Saraf and Ananya Raghavendra (resolution@vinodkothari.com)

The insolvency resolution process of Binani Cements have been through various ups- and downs. On 19.11.2018, the Hon’ble Supreme Court in the case of Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors. dismissed Dalmia Bharat’s plea to seek stay on Ultratech’s bid for Binani Cement, upholding the UltraTech Cement’s bid for Binani Cement sale. Previously, on 14.11.2018, the NCLAT had also held UltraTech’s offer for Binani Cement as valid, stating that Dalmia Bharat’s offer was discriminatory against some creditors[1]. Read more

Financial Creditors & Committee of Creditors: What, Why and How?

By Megha Mittal (resolution@vinodkothari.com)

IBBI issues clarification w.r.t. voting powers of CoC

Brief Background:

Pursuant to the Insolvency and Bankruptcy (Amendment) Code, 2018, the crucial reduction of voting threshold from 75% to 66% for critical matters like approval of Resolution Plan, Extension of CIRP, and all matters of section 28 of the Insolvency and Bankruptcy Code, 2016 (Code), came into effect.

However, there still prevailed ambiguity as to how to determine this threshold of 66%. What shall be the fate of those financial creditors who abstained from voting?

In this background, the Insolvency and Bankruptcy Board of India (IBBI/ Board) has issued a clarification w.r.t. voting in the Committee of Creditors.

Constitution of Committee of Creditors- What, why and how?

Committee of Creditors” (Committee) is a committee consisting of the financial creditors of the Corporate Debtor. This Committee eventually forms the decision making body of the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the CIRP.

A major chunk of the dues of the Corporate Debtor is that of Financial Creditors and thus, to recognize their substantial interest, the Committee is formed. The power to ratify the managerial decisions taken by the RP vests upon the Committee; It is this Committee that approves/ rejects the Resolution Plan, extension of CIRP, decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP etc. In short, all decisions having an impact on the Corporate Debtor shall first be approved by the Committee.

As per section 18 of the Code, it is the duty of the Interim Resolution Profession to constitute the Committee upon collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. It shall consist all those financial creditors whose claims have been received within the time period stipulated in the public announcement.

Voting power of the Members

In the event of passing any resolution by the Committee, a minimum threshold of assent is required to be obtained. However, in light of these facts, the following questions arise w.r.t. fate of creditors who submit delayed claims or the determining the voting power of the members of the Committee

  • What happens when a financial creditor submits claims after the stipulated date as per public announcement?

Where a financial creditor submits its claim after expiry of the last date for submission, it shall form a part of the Committee for purposes after such submission. No decision taken prior to its inclusion in the Committee can be questioned later on.

  • How is it to be determined whether the requisite threshold is met?

While determining the percentage of votes received in favour, only those creditors then forming part of the Committee shall be considered as the total value of creditors and the votes of those creditors who abstain from voting shall be deemed to be dissenting votes.

These provisions can be better understood with the help of an illustration:

Illustration:

A corporate debtor, X Ltd. has 6 financial creditors having dues to the tune of Rs. 600 crores. By the time the last day for submission of claim expires, the claims of only 3 financial creditors being A, B and C having dues of Rs. 50 Crores, Rs. 75 crores and Rs. 125 crores, respectively have been submitted.

Thus, the IRP constitutes a committee of these 3 creditors.

After the last day for submission of claims expires, another financial creditor, D, having dues of Rs. 100 crores submits its claims. After the claim is verified, such financial creditor shall also form part of the Committee.

D, opposes a certain decision taken by the Committee prior to its inclusion. Such contention placed by D is non-maintainable as the previous resolutions passed by the Committee shall be held good because they were duly passed with requisite majority.

After D is admitted as a member of the Committee, there are a total of 4 members having total dues of Rs. 350 crores. Now, for a resolution requiring minimum 66% of the votes to be passed, members of the Committee having dues of atleast Rs. 231 crores must vote in favour of such resolution.

Assuming a situation where out of the 4 creditors, A chose to abstain from voting, A shall be deemed to be a dissenting creditor. Thus, even on such abstention, votes in favour of minimum 66% of Rs. 350 crores i.e. Rs. 231 crores shall be required and not that of Rs. 300 Crores.

Another point to be noticed is that dues of creditors not forming part of the Committee shall not be taken into account while determining the requisite percentage. In the illustration above, the remaining creditors of Rs. 250 crores shall not be taken into consideration while passing of resolutions.

Conclusion:

Considering the above, the following can be concluded:

  1. Financial creditors not forming part of the Committee shall not have any voting power w.r.t. decisions taken by the Committee unless they become a part of the Committee.
  2. Creditors abstaining from voting shall be deemed to be dissenting shareholders.

IBBI lays down procedure for Resolution Plans -Third set of amendment in IRP-CP Regulations

By Shreya Routh (resolution@vinodkothari.com)

“Tough times do not define you, they rather refine you”- is perhaps the quote which the Insolvency and Bankruptcy Code, 2016 seeks to achieve. The Insolvency and Bankruptcy Code, 2016 (“Code”) tries to refine the tough times which the corporate debtor goes though during the corporate insolvency resolution process. With an objective of bringing more clarity in the process of resolution, IBBI has come out with yet another amendment in the form of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018, (“Amended Regulations”).

Following major amendments have been brought:

  1. Report certifying constitution of the committee of creditors
  2. Notice and voting at the meeting of the committee of creditors
  3. Invitation of Resolution Plan and Request for Resolution Plan
  4. Withdrawal of the CIRP Applications
  5. Regulations with respect to class of creditors
  6. Regulations with respect to authorised representatives of resl-estate buyers

This write up deals with the points 1 to 3.

To read about the other topics covered under the Amendment Regulations, please refer to the article,” CIRP Amendment lays focus on Class of Creditors” by my colleague Ms. Megha Mittal. Read more

Overview of Insolvency and Bankruptcy (Amendment) Ordinance, 2018

By Sikha Bansal,(sikha@vinodkothari.com) (resolution@vinodkothari.com)

 

Post the Insolvency Law Committee’s Report recommending an overhaul in the Insolvency and Bankruptcy Code, 2016, the Government has passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, vide Notification dated 6th June, 2018, in an attempt to set things right. No doubt, IBC has triggered positive vibes in the lending market, yet being an evolving law, it has its own drawbacks.

The Ordinanceis the second ordinance in respect of this legislation; which, among several other amendments, seeks to provide first-aid for the burns given by the first ordinance passed 6 months ago in November, 2017 [later enacted as IBC (Amendment) Act, 2018, with modifications] in the form of section 29A. Read more