COVID and Insolvency Reforms – Trends and Expectations

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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

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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

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–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

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-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?

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-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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VIDEOCON RULING: SETTING A BENCHMARK FOR GROUP INSOLVENCY

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Richa Saraf

(richa@vinodkothari.com)

It is common business practice for group entities to regularly engage in related party transactions such as cross collateralisation, guarantee comforts, tunnelling or significant influence arrangements. While such structures largely respect the separate legal status of the group companies, practice suggests such inter-linkages in business, operations and management often raise significant challenges when any one or more entity in the group become insolvent[1]. In such cases, for maximisation of value to the stakeholders and to enhance the prospects of resolution, creditors may seek for substantive consolidation.

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The ‘net concentrate’ of ‘preference- Key takeaways from the SC ruling regarding preferential transactions

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-Sikha Bansal

(resolution@vinodkothari.com)

The Hon’ble Supreme Court’s ruling in Jaypee [Civil Appeal Nos. 8512-8527 of 2019] stands as a landmark for two reasons – first, it deals with an otherwise unexplored periphery of vulnerable transactions in the context of insolvency, and secondly, it will have far-reaching impacts on how secured transactions are structured and the manner in which the lenders lend.

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Recent Developments in Corporate Laws

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In its stride to achieve transparency, good governance, and ease of doing business, the Government has time and again introduced amendments, proposed new ideas in the corporate laws. The very recent example of such changes are (a) Changes in RPTs proposed in LODR; (b) Minority Squeeze outs under Companies Act; and (c) introduction of Winding-up Rules, 2020.

In light of the these amendments/ proposed amendments, it becomes important to understand its impact on the already existing set-up. A brief analysis of the aforementioned topics has been discussed here

Limits of the Limitation Law and IBC

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-Megha Mittal

(resolution@vinodkothari.com)

The law of limitation revolves around the basic concept of fixing or prescribing the time period for barring legal actions beyond that period. A concept widely acknowledged, in India, the law of limitation is governed by the Limitation Act, 1963[1]. As stated in its preamble, the Limitation Act, 1963 (“Act”) is an act to consolidate the laws for the limitation of suits and other proceedings and for purposes connected therewith.

As observed in the 89th Report of the Law Commission of India[2], the laws of limitation are ultimately based on justice and convenience. An individual should not live under the threat of possible action for an indefinite period, and at the same time, should be saved from the task of defending a stale cause of action, as it would be unjust. The Report states, “all that has been said on the subject can be summarised by stating that the laws of limitation rest upon three main foundations – justice, convenience and the need to encourage diligence.” 

The very crux of having a limitation law in force is that a person cannot sleep over his rights[3] for an indefinite period and seek such remedy at a later stage. That being the tenet on which the law is based, there are several basic principles which the law states. These principles substantively affect the rights of parties. Recently, there has been a lot of commotion around the manner and the circumstances, in which the limitation law can be invoked in the context of the Insolvency and Bankruptcy Code, 2016 (‘Code’), though it is established now that the limitation law is applicable to the proceedings under the Code by virtue of section 238A.

In this article, we have made a humble attempt to analyse the various principles of the Limitation Act and its impact on the Code.

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