Dissolution without Resolution- A disguised Strike-off under IBC?

Megha Mittal

(resolution@vinodkothari.com)

In a first of its kind, the Hon’ble National Company Law Tribunal, Bengaluru Bench vide its order dated 16th November, 2020, in the matter of Synew Steel Private Limited[1], has ordered for direct dissolution from CIRP, thereby waiving off the mandatory requirement to undergo the liquidation process.

The said order was inspired by the fact that the corporate debtor had nil assets, which in turn made it certain that the liquidation process would not have been successful. Hence, to save the unfruitful costs that would have been incurred, the corporate debtor was allowed a direct dissolution.

In this article, the author makes a humble attempt to analyse this rather path-breaking order, and the implications it may carry.

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Secured Creditors under Insolvency Code : Searching for Equilibrium

This article has been published in IBBI’s annual publication named Insolvency and Bankruptcy Board of India – A Narrative, (2020). See here

Sale of Legal Entity as an Asset: A step towards value maximization

Megha Mittal 

(resolution@vinodkothari.com)

Maximization of value of assets of the corporate debtor is one of the primary objectives of the Insolvency and Bankruptcy Code, 2016 (“Code”/ “IBC”); and it is towards this objective that the Code requires a mandatory corporate insolvency resolution process to ensue prior to liquidation. The rationale behind such specified order is that under corporate insolvency resolution process, the corporate debtor is taken over as a going concern, which as per settled economic argument attracts a much better value via-a-vis disposal of assets. It is in view of such rationale that the liquidation laws also provide sufficient flexibility to keep the corporate debtor a going-concern even after commencement of liquidation[1].

Having said so, while the Liquidation Regulations allow sale of the corporate debtor as a going-concern, one cannot overlook the fact that the likelihood of the going-concern sale is already rusted by the time the corporate debtor reaches the liquidation stage.

 It is a common economic understanding that sum of parts is better than sum of the parts; and it is by virtue of such principle that going-concern values are generally in excess of value of individual assets. The various assets, stitched together as one, constitute a much greater value than the same assets in isolation.

In this backdrop, what may be considered as a rather unexplored territory is the prospect of sale of the legal entity only, sans the other assets that the corporate debtor may have. In this note, we analyse and put forth a case for saleability of legal entity itself, without other conventional assets, under the Code.

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Desirability of Liquidation Sales at Undisclosed Reserve Price

-Megha Mittal (mittal@vinodkothari.com) As per Regulation 39 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), a liquidator shall endeavour to maximize recovery and realisation from all assets of and dues to the corporate debtor. Realisation from assets of the corporate debtor shall be done by way of sale as […]

Adding Strain to Injury: Amendments impose Additional procedural requirements for insolvency applications

Megha Mittal

(resolution@vinodkothari.com)

On 24th September, 2020, the Ministry of Corporate Affairs notified the Insolvency and Bankruptcy (Application to Adjudicating Authority) (Amendment) Rules, 2020 (“Amendment Rules”)[1] in exercise of its powers under section 239 of the Insolvency and Bankruptcy Code, 2016 (“Code”), thereby requiring an advance copy of all applications filed before under section 7, 9 or 10 of the Code, to be served to the Corporate Debtor and the Insolvency and Bankruptcy Board of India (“IBBI”).

By way of the said Amendment Rules, it is now required that-

  • An application intended to be filed under section 7, 9 or 10, has to be served to the Corporate Debtor and the Board, prior to filing before the Adjudicating Authority (“AA”)
  • The application filed before the AA must contain a proof of service to the Corporate Debtor and the Board;
  • Disclosure by the Insolvency Professional (IP) with respect to the ongoing assignments at the time of filing;
  • The application to be filed by the Operational Creditor must contain a certificate by the bank/ financial institution, where the creditor has its accounts, with respect to the sums which have been received by the Operational Creditor from the Corporate Debtor.

In this Article, we analyse the Amendment Rules, more specifically the requirement of advance notice, and its implications.

Service of the Application- ensuring a fair chance to be heard

NCLT and Principles of Natural Justice

The NCLT is a quasi-judicial body, constituted under section 408 of the Companies Act, 2013, and is subject to powers and duties set out under the National Company Tribunal Rules, 2016, as well as the Companies Act- One such duty is to ensure that the Rules of Natural Justice are abided by[2].

The Rules of Natural Justice, viz, (i) Rules against bias[3]; and (ii) the right to be heard[4] are not derived from any statute or constitution- it is based on common and moral law to ensure there is no contempt of justice. One of the components of the right to be heard is a “proper notice”, which ensures that the person who would be affected upon filing of the application is given notice of such filing to show cause against the proposed action. As such, whenever an application is filed, under any statute, or before any authority, it is a pre-requisite to serve an advance copy to the respondent.

Hence, the requirement to serve an advance copy of the application, to the corporate debtor existed prior to the Amendment Rules.

Additional service upon IBBI

The Amendment Rules now provide that an advance copy of the application has to be served on the Board as well, which in the humble view of the Author, seems to be a superfluous requirement.

First, the Central Government (MCA) has failed to provide any stated objectives or purpose behind such a requirement. While it may be argued that the same is for ensuring proper records and data, it must be noted that those applications which are eventually admitted, are anyway required to be informed to Board. The extant reporting requirement under the IBBI (Insolvency Process for Corporate Persons), Regulations, 2016 (“CIRP Regulations”), inter-alia intimation to IBBI in Form A, disclosure requirements forms CIRP-1, already ensure that sufficient information is provided to the Board to execute its functions as such.

However, if the objective behind such additional requirement was merely record keeping, the same could have also been provided for by integration or a simple cross-linking process with the already existing data rooms, from where the regulatory bodies may extract information as and when required. For instance, the e-filing portal of NCLT may make necessary arrangements such that once an application is filed on the portal, the information regarding such filing is simultaneously given to the Board.

Such a set-up would not only fulfil the understandable objective behind the Amendment Rules, but only waive off this additional burden levied upon the applicants. This would also be in concurrence with consistent suggestions of stakeholders towards creation of a common repository of data related to the Code.

It further remains unanswered whether in case of any supplementary filing and/ or rectified filing upon directions of the Bench, such advance service would be required again? In absence of any stated objective behind such Amendments, it would be difficult to comment if at all such re-servicing of a copy of the application would be required.

Readers may recall that a similar requirement of impleading the MCA in all applications filed under the Code was made mandatory by an order of the Hon’ble NCLT, Principal Bench, dated 22.11.2019[5] but later on nullified by an over-ruling order of the Appellate Tribunal[6] as one leading to duplicity of information and records. Similarly, the requirement of advance notice to the Board seems to be of a similar nature, and hence, in view of the Author, should not be added as a mandate.

Other Amendments

In addition to the service requirements as discussed above, the Amendment Rules also introduce further reporting obligations on the IPs and the Operational Creditors- the same has been discussed herein below-

Reporting of ongoing assignments by IPs

The Amendment Regulations, by way of an additional clause in Form 2, now requires that while giving consent to act as an RP, the Insolvency Professional must disclose the number of ongoing assignments that s/he has undertaking as on the day of filing of application.

In view of the Author, while the same is not required as information of similar nature is already required to be provided in Form IP-1. Hence, the same may be removed for the sake of brevity.

Obtaining Certificate by Banks/ Financial Institutions

As per Form 5 under Rule 6, of the NCLT Rules, an application filed by an operational creditor, other than creditors having their account with a foreign bank/ institution, must annex a copy of the relevant accounts from the banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor,if available.

 Hence, the operational creditors could simply self-certify their bank statements and submit the same on affidavit, as being a part of the application.

However, the Amendment Rules have substituted the above requirement with a new form, namely Form 5A, which is a certificate required to be obtained from the bank/ financial institution that the amount for which the application is being filed, has not been received by the creditor.

The Author is of the view that the said requirement would only lead to needless complication and delays. This would not only impose an additional requirement upon the creditors, but would also burden the banks/ financial institutions who may receive requests for such certificate in large volumes. Hence, it is suggested that the earlier modus shall continue, and the requirement of such certificate may be done away with.

Further, it is also pertinent to note that recent amendment in section 4 of the Code, whereby the minimum default amount for filing an application under the Code, was increased from Rs. 1 lakhs to Rs. 1 crore already led to a massive sweep-out of OCs from the purview of IBC. Further procedural burden, for example requirement of a bank certificate, would only make recourse a tougher for the OCs.

Implications

From the discussion above, we can gather that a common element through-out the Amendment Rules is increased disclosure/ reporting/procedural requirements. The Author humbly states that while the consistent efforts of the Government and Board, and the common suggestions from the stakeholders has been directed towards easing the superfluous, more-than-needed reporting and disclosure requirement, the Amendment Rules come as a complete deviation.

While the objectives, purpose of advance service is neither explicitly stated not implied from the text, it must be noted that the same is not a substitution of existing regulations, but an additional requirement for concerns already covered. The Amendments infact lead to elongated procedures, which do not serve any additional purpose.

In this pretext the Author is of the humble view that the Amendment Rules do not provide any ease, clarification and/ or assistance in the filing process. As such, the Central Government may consider a roll-back of the same.


[1] https://www.ibbi.gov.in/uploads/legalframwork/27e336abe5b5328297a2ba5b35b39fac.pdf

[2] Sec 424 (1) of the Companies Act, 2013

[3] Nemo judex causa in sua

[4] Audi Alteram Partem

[5] Read our views on this order, in our article- http://vinodkothari.com/2019/11/mandatory-impleadment-of-mca-as-a-respondent/

[6] By an order dated 22.05.2020

Sec 29A in the Post-COVID World- To stay or not to stay

-Megha Mittal

(resolution@vinodkothari.com)

If the Insolvency and Bankruptcy Code, 2016 (‘Code’) is the car driving the ailing companies on road to revival, resolution plans are the wheels- Essentially designed to explore revival opportunities for an ailing entity, the Code invites potential resolution applicants to come forward and submit resolution plans.

Generally perceived as an alluring investment opportunity, resolution plans enable interested parties to acquire businesses at considerably reduced values. An indispensable aspect of these Resolution Plans, however, is the applicability of section 29A, which restricts several classes of entities, including ex-promoters of the corporate debtor, from becoming resolution applicants- for the very simple purpose of preventing re-possession of the corporate debtor at discounted rates. Hence, section 29A is seen as a crucial safeguard in revival of the corporate debtor, in its true sense.

In the present times, however, we cannot overlook the fact that the unprecedented COVID disruption, has compelled regulators around the globe, to reconsider the applicability and continuity of several laws, including those considered as significant; and one such provision is section 29A of the Code.

In a recent paper “Indian Banks: A Time to Reform? dated 21st September,2020, the authors, Viral V Archarya and Raghuram G. Rajan, the former Deputy Governor and Governor of the Reserve Bank of India, have discussed banking sector reforms in view of the COVID disruption, calling for privatisation of Public Sector Banks, setting up of a ‘Bad Bank’[1] amongst other suggested reforms.  In the said Paper, they also suggest that “for post-COVID NCLT cases to allow the original borrower to retain control, with the restructuring agreed with all creditors further blessed by the court. Another alternative might be to allow the original borrower to also bid in the NCLT-run auction”- thereby setting a stage for holding back applicability of section 29A in the post COVID world.

In this article, the author makes a humble attempt to analyse the feasibility and viability of doing-away with section 29A in the post-COVID world.

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ARCs and Insolvency Resolution Plans – The Enigma of Equity vs Debt

– By Sikha Bansal (resolution@vinodkothari.com)

This article has also been published in IndiaCorpLaw Blog, the same can be viewed here

A regulatory framework for asset reconstruction companies (ARCs) was introduced in India through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This intended to put in place a system for clearing up non-performing assets (NPAs) from the books of banks and financial institutions. Over a decade later, the Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the objective of reorganisation and resolution of insolvent entities.

Although the common goal of both these legislation seems to be the cleaning or reconstruction of bad loan portfolios, it is important to understand the difference between the basic premises of these two laws: while the SARFAESI Act deals with ‘recovery’ and is more of a ‘class’ remedy, the IBC is about ‘resolution’ and intended to constitute a collective process. Given a common set of stakeholders involved under both these laws, there remains an obvious possibility of overlaps or inconsistencies. Read more

Liability Acknowledgment & Limitation Period for IBC Applications

This article has also been published in the LawStreetIndia blog – http://www.lawstreetindia.com/experts/column?sid=466 Liability Acknowledgment & Limitation Period for IBC Applications – Deciphering the Enigma -Sikha Bansal (resolution@vinodkothari.com) The applicability of the Limitation Act, 1963 (Limitation Act) to the applications under the Insolvency and Bankruptcy Code, 2016 (Code) has been settled long back, after a series of […]

Comments on Discussion Paper on Corporate Liquidation Process

-Resolution Division 

(resolution@vinodkothari.com)

The Insolvency and Bankruptcy Board of India (‘IBBI’/ ‘Board’) issued Discussion Paper on Corporate Liquidation Process, dated 26th August, 2020 (‘DP’)[1] which envisages the introduction of (a) Assignment of Not Readily Realisable Assets (‘NRRA’) and (b) Assignment of Claims/ Interests.

Herein below we put forth our general and specific comments/ suggestions on the DP-

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IBC and related reforms: Where do MSMEs Stand?

The MSME industry, colloquially referred to as the power engine of the economy has been a focal point of several reforms over the years. The recent reforms w.r.t. MSMEs and the Insolvency and Bankruptcy Code, 2016 (“Code’) has altered the stance of MSMEs, both as creditors and debtors. In this article, we shall discuss some significant reforms/ amendments w.r.t. MSMEs (due to COVID, or otherwise), and those under the Code and analyse the cumulative impact of these reforms on the sector in the prevailing scenario