Forced Contributions to Infructuous Liquidations: Understanding Regulation 2A

-Megha Mittal

(resolution@vinodkothari.com)

Since its inception, the Insolvency and Bankruptcy Code, 2016 (“Code”), along with its regulations, has been subject to many reforms, some aimed at establishing new legal principles and some for removing difficulties faced during the insolvency and/ or resolution process; one such reform was the introduction of Regulation 2A[1] in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), which provides for contribution by financial creditors of the corporate debtor to contribute towards liquidation costs, if so called upon by the liquidator.

In this article, we shall briefly understand the backdrop in which the said provision of introduced, throw light upon the extant provisions and then address the elephant in the room- is it obligatory upon the financial creditors to make such contribution when sought by the liquidator?

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MCA need not be mandatorily impleaded in applications: NCLAT sets-aside directions issued by of Principal Bench

Megha Mittal

(resolution@vinodkothari.com)

The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), vide its order dated 22nd May, 2020[1] set aside the directions issued by the Hon’ble Principal Bench for impleadment of Ministry of Corporate Affairs (‘MCA’) as a respondent-party to all applications filed under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

This comes in light of the order dated 22nd November, 2019 of the Hon’ble National Company Law Tribunal, Principal Bench of New Delhi (‘NCLT’/ ‘Principal Bench’), in the matter of Oriental Bank of Commerce v. Sikka Papers Ltd. & Ors[2], wherein the Hon’ble NCLT directed that “…In all cases of Insolvency and Bankruptcy Code, and Company Petition, the Union of India, Ministry of Corporate Affairs through the Secretary be impleaded as a party respondent so that authentic record is made available by the officers of the Ministry of Corporate Affairs for proper appreciation of the matters..”(‘Impugned Directions’). The said requirement was directed to be made applicable in all benches of NCLT, pan-India.

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Ease of Exit of Businesses in India

‘Doing business’ is not only about seamless starts or how less cumbersome the journey can be – it is also about the certainty of freedom to exit, as and when needed. As such, a sound framework for exit is quintessential for businesses – viable or non-viable. A company might opt to liquidate itself voluntarily, or go for a scheme of merger or amalgamation or even striking off. At the same time, it must be noted that exit may not be always voluntary – sometimes, it may be forced upon the business, for example, in case of insolvent companies, creditors may prefer to liquidate the entity rather than drag it as a going concern. Some of the important considerations in making a choice are – solvency of the company, position of assets and liabilities, extent of judicial involvement, extent of flexibility in the conduct of the process, professional involvement, time involved, and costs. With the judicial authorities being clogged with cases, we may need to reinvent the infrastructural framework and take steps to make the exit process easier. The article discusses the aspects as above.

  1. This Article has been published in the April, 2020 issue of Chartered Secretary, issued by the Institute of Companies Secretaries of India, available at- https://www.icsi.edu/media/webmodules/linksofweeks/ICSI-April_2020.pdf

Recent Reforms in Insolvency and Bankruptcy Code

-Sikha Bansal & Megha Mittal

(resolution@vinodkothari.com

The past year has seen several reforms and amendments in the insolvency framework, be it enforcement of provisions for individual insolvency, or inclusion of FSPs under the insolvency regime. Additionally, Committees have been actively working on two extremely relevant aspects which presently the Code does not provide for- Group Insolvency and Cross Border Insolvency.

In our presentation (link given below) we have tried to collate the recent amendments and the workings of the Committee reports so as to provide a one-stop reference for  reforms as on Mar’20- see here

 

 

COVID and Insolvency Reforms – Trends and Expectations

An entity/individual is amenable to committing a default during the disaster period. Therefore, in such difficult times, it becomes important to save businesses, which can later save the economy. The Indian Government and the judiciary have undertaken several intermittent measures with respect to insolvency regime.

As the authorities try to provide all possible relief amidst the ongoing crisis, what we need is probably a holistic mitigation framework to deal with all possible problem areas – as we can see for other countries as well. Countries across the globe have promulgated relaxations under their respective insolvency laws, both personal and corporate. In general, the insolvency and winding up proceedings have the same trigger event, which is default. A cursory reading of the amendments/propositions with respect to insolvency laws across countries would indicate a certain level of commonness in the measures, e.g.  there is a moratorium on presumption/determination of default, increase in the minimum limit of default, etc.

An important thing to note is that the relaxations do not extend to entities which had been in default before the event of disaster – that is, a disaster cannot be an excuse to cover a default which did not happen because of the disaster. Therefore, a pre-existing default is not saved from the COVID mitigation laws. Country-wise study of reforms with respect to insolvency laws are in the detailed article below.

In view of the worldwide reforms and the imminent necessity, we are of the view that certain basic amendments in law can help, for instance, the definition of ‘default’ under s. 3(12) may be amended as to exclude default occurring during the disaster period. Alternatively, a proviso can be inserted under s. 4(1) and s. 78 to provide that a default occurring during such period as the Central Government may, by notification, specify, being period associated with a national disaster, shall not be treated as a default for the purpose of the said sections. “Disaster” shall have the meaning as ascribed thereto in section 2 (d) of the Disaster Management Act, 2005.

Incidental amendments may also be necessary in the SARFAESI Act. The definition of default under s. 2(1)(j) of the said Act can be defined so as to provide that a default occurring during such period as the Central Government may, by notification, specify, being period associated with a national disaster, shall not be treated as a default for the purposes the above clause.

The aspects as above have been discussed in detail in the article below.

Washout of Prior-period Claims in Resolution Plans: Rajasthan HC closes the door for pre-CIRP claims after revival of Corporate Debtor

Megha Mittal & Shreya Jain

resolution@vinodkothari.com

Colloquially referred to as a ‘rebirth’, a resolution plan is the revival route for the corporate debtor, free of its past liabilities and dues, paid in accordance with the approved plan. Having said so, it might be noted that resolution plans assume the status of a statutory binding contract once approved by the adjudicating authority. Recently, the Hon’ble Rajasthan High Court, in Ultra Tech Nathdwara Cement Ltd., (formerly known as Binani Cements Ltd.) vs. Commissioner, Central Goods And Service Tax and Central Excise Commissionerate and Ors.[1], held that no demands can be raised by any statutory body, for a period prior to the approval and finalization of resolution plan, after the resolution plan is successfully implemented.

The details of the case have been discussed below.

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IBC threshold raised in Coronatic Disruption: Analysis and Implications

Megha Mittal & Shreya Jain

(resolution@vinodkothari.com)

Frivolous initiation of insolvency process, merely for recovery of dues has been a persistent concern- catalyst being the seemingly low threshold of Rs.1,00,000/-.While murmurs about  raising the threshold limit for initiating insolvency process have long been in the picture, the notification comes in the wake of recent outbreak of the novel COVID – 19 – the minimum default requirement now stands increased hundred times; from Rs. 1,00,000/- to Rs. 1,00,00,000.

Applicable from 24.03.2020, the Government, in exercise of its powers under section 4 of the Insolvency and Bankruptcy Code, 2016 (“Code”)[1] has specified Rs. 1,00,00,000 (Rupees One Crore) as the minimum amount of default for the purposes of triggering insolvency. Note that Rs. 1 Crore is the maximum threshold which the Central Government can prescribe under section 4.

The step has been widely touted as a relief for MSMEs in this time of crisis, however, this might have multiple implications. The authors have made a humble attempt to analyse its implications from a broader perspective, and if at such increase would be welcomed in absence of the ongoing crisis.

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Companies under IBC-quarantine, get GST-rebirth

-Vinod Kothari 

[vinod@vinodkothari.com]

Resolution is not a re-birth of an entity – it is simply like nursing a sick entity back to health. It is almost akin to putting the company under a quarantine – immune from onslaught of creditor actions, while the debtor and/or the creditors prepare a revival plan. The objective is that the entity revives – in which case, it is out of the isolation, and is back as a healthy entity once again.

This process is not unknown in insolvency laws world-over. However, in India, revival under insolvency framework has taken a completely unique trajectory. First was section 29A, cutting the company from its promoter-lineage for all time to come. The next was section 32A – redeeming the company from the past burden of civil as well as criminal wrongs, thereby giving it a new avatar, with a new management.

Now, the initiation of a CIRP proceeding will be akin to a new birth to the company, at least for GST purposes. Therefore, irrespective of whether the revival process succeeds or not, at least for GST purposes, the entity becomes clean-slate entity. This is the result of the new GST rule announced on 21st March, 2020. However, the new rules do not seem to have envisaged several eventualities, and we opine the intent of giving an immunity from past liabilities might have better been carried out by appropriate administrative instructions, rather than the new registration process.

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RESOLUTION VALUE MAY BE LOWER THAN LIQUIDATION VALUE?

-Richa Saraf

(richa@vinodkothari.com)

The Apex Court, vide its order dated 22.01.2020, in the matter of Maharasthra Seamless Limited vs. Padmanabhan Venkatesh & Ors.[1] held that there is no requirement that the resolution plan should match the maximized asset value of the corporate debtors. Reiterating the principle laid down in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta[2], the Hon’ble Supreme Court held that once a resolution plan is approved by the committee of creditors (CoC), the Adjudicating Authority has limited power of judicial review.

The judgment of the Supreme Court boldly brings out the object of the Insolvency and Bankruptcy Code, 2016 (“Code”), i.e. “resolution before liquidation”. However, it will be pertinent to understand whether this ruling should be considered as a benchmark? Further, what will be the situation in case of liquidation? Whether sale under liquidation can be done for a value lower than the reserve price?

Below we analyse the ruling, seeking to answer the aforementioned questions.

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