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Resolution Regime for Systemic Financial Firms: The IBC Way or the Other Way?

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– Sikha Bansal, Partner and Timothy Lopes, Manager | resolution@vinodkothari.com

Every economy has entities that carry with them systemic risk, which is essentially the risk that failure of such entities could result in financial contagion through a sort of domino/cascading effect on the economy. The contagion effect multiplies manifold if such an entity has cross-border operations and linkages. These entities are considered systemically important and are universally termed as being ‘Too Big To Fail’.

Going by the definitions of ‘corporate debtor’ and ‘corporate person’ a ‘Financial Services Provider (FSP)’ is not a Corporate Debtor. An FSP is one which provides ‘financial services’. ‘Financial services’, in turn, has been defined to include a list of services like accepting deposits, offering various services pertaining to financial products. Hence, the entities which provide such a financial service cannot be ‘resolved’ or ‘liquidated’ under IBC, except in case an entity (or a class of such entities) is notified under section 227 by the Central Government. The Central Government has thus notified non-banking financial companies including Housing Finance Companies having asset size of ₹ 500 crore or more as FSPs (Notified NBFCs). The insolvency resolution and liquidation process of FSPs, as notified separately through rules, is different in certain aspects as it needs regulatory involvement at different stages.

In this article, the authors discuss the need for a specific framework for insolvency resolution of systemic financial firms and study whether the present framework for insolvency resolution and liquidation of FSPs is sufficient. The authors also present a view as to how the construct of the definition of ‘FSP’ is quite specific and is different from the popular meaning assigned to typical financial entities engaged in lending activities. As such, notifying all NBFCs (with or without asset thresholds), without any regard to the function or activity being carried out by the NBFC, may not sync with the design and intent of IBC.
The article also explores a global perspective on the coverage and scope of the resolution framework for financial firms.

The article has been published in the IBBI’s Annual Publication titled ‘IBC: Idea, Impressions and Implementation’ and can be accessed on the link here, from page 157 onwards.

Supreme Court ruling revives the quandary, holds tax authorities to be secured creditors

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Sikha Bansal, Partner, Vinod Kothari & Company

Neha Sinha, Executive, Vinod Kothari & Company

corplaw@vinodkothari.com

Introduction

Lawmakers might have put the best of efforts to frame the law in the clearest possible way, however, there may still be possibilities of diverse readings (and thus, diverse interpretations). Such a scenario is often addressed by the judiciary which, as and when circumstances arise, determines the questions arising out of law. However, there is also a possibility where the judiciary itself would render diverse interpretations on the same subject matter. This would, of course, lead to confusion and chaos.

A similar situation arose in the recent case of State Tax Officer v. Rainbow Papers Limited,[1] wherein the Hon’ble Supreme Court (‘SC’) dealt with the question as to whether the provisions of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), specially section 53, overrides section 48 of the Gujarat Value Added Tax Act, 2003 (‘GVAT’). Section 48 of GVAT is a non-obstante clause and creates a statutory first charge on the property of the dealer in favour of tax authorities against any amount payable by the dealer on account of tax, interest or penalty for which he is liable to pay to the Government.

SC held that if the resolution plan excludes statutory dues payable to government or a government authority, it cannot be said to be in conformity to the provisions of IBC, and as such, not binding on the government. As such, the same must be rejected by the Adjudicating Authority. Further, section 48 of GVAT is not inconsistent with IBC and hence, it was held that IBC does not override GVAT. The SC went on to rule that by virtue of the ‘security interest’ created in favour of the Government under GVAT, the State is a ‘secured creditor’ as per the definition in  IBC. Hence, as workmen’s dues are treated pari passu with secured creditors’ dues, so should the debts owed to the State be put at the same pedestal  as the debts owed to workmen under the scheme of section 53(1)(b)(ii).

In the most humble view of the authors, the conclusions as above may not in consonance with the well-settled jurisprudence around the subject matter of conflict between IBC and tax statutes and the question of priorities between these, and may also not fit well with the construct of the IBC, the intent of the lawmakers and the Bankruptcy Law Reform Committee (‘BLRC’), as well as several judicial precedents set by SC itself, as discussed below. A plethora of rulings, including by SC itself, go on to hold that crown debts would be subordinate to the dues of secured creditors, and none of these rulings ever equated tax dues to secured dues. The authors thus, analyse the SC ruling in light of the construct of the IBC, intent of the lawmakers and policymakers, and various past precedents and offer their views as to how this ruling has actually reopened a can of worms and how it may impact success of ongoing and future resolution processes.

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Liquidation: Liquidator’s role, functions and distributive justice under section 53

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Distributive justice between workmen’s dues and secured creditors rights, w.r.t sec. 52 and 53 of the Code

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Summary of Supreme Court Judgements on IBC

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Resolution Team | resolution@vinodkothari.com

Our compilation of older SC rulings relating to IBC can be read here

Our compilation of NCLAT rulings relating to IBC part -1 can be read here

Takeaways from Budget 2022-23 – Fast Track Exit for Companies

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By Shaivi Bhamaria – Associate, [shaivi@vinodkothari.com]

Introduction

Over the past few years the Government of India has been increasingly focusing on ‘ease of doing business’ by corporates, and has taken several initiatives towards the same, such as exemption to private companies from the requirement of minimum paid up capital by way of the Companies (Amendment) Act, 2015; establishment to the Central Registration Centre (‘CRC’) under section 396 of the Companies Act, 2013 (‘CA, 2013’) for providing speedy incorporation related services; launch of the integrated web form SPICe+ and integration of the MCA21 system with the CBDT for issue of PAN and TAN to a company incorporated using SPICe+; launch of  web based service R.U.N. (Reserve Unique Name) for reserving a name for a new company, etc..

However, the term ‘ease of doing business’ includes not only a seamless start to a business or making the journey less cumbersome, but also involves the ease of exit. While there are various modes of exit available to corporates,  such as winding up, summary liquidation, mergers and amalgamations etc[1], given that in voluntary modes of exit like striking off or voluntary liquidation under IBC, the company is either solvent enough to meet its liabilities or holds nil assets and liabilities, ideally, the closure processes is expected to be fast and simple, However, it has been observed that these voluntary modes have not been essentially ‘easy’ given the significant delays associated with them.

It is in the backdrop of such delays, the Union Budget, 2022-23[2] has proposed certain reforms, specifically for speeding up the striking off process under section 248 (2) of the Companies Act. Further, the Insolvency and Bankruptcy Board of India (‘IBBI’) has issued a Discussion Paper dated 1st February, 2022[3] proposing amendments in the IBBI (Voluntary Liquidation) Regulations, 2016, for ensuring a faster closure of voluntary liquidation processes.

In this write up, the author discusses the two sets of proposed reforms as mentioned above, and attempts to gauge their effectiveness at present and post implementation of the proposed amendments. Read more →

Comments on proposed changes to the Corporate Insolvency Resolution and Liquidation Framework under Insolvency and Bankruptcy Code, 2016

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– Team Resolution (resolve@vinodkothari.com)

On 23rd December, 2021, the Ministry of Corporate Affairs has issued proposed changes to the Corporate Insolvency Resolution and Liquidation Framework under Insolvency and Bankruptcy Code, 2016[1] and has solicited comments on the same.

While we discuss the proposed amendments in details below, a bird’s eye view of the proposed amendments gives an indication towards a more creditor-friendly approach, wherein the creditors have been bestowed with extended powers such as right to initiate insolvency proceedings, as well as have become less burdened with the the proposed amendment of only producing IU records at the time of application. At the same time, the roles and responsibilities of the RPs/liquidators seem to have been further widened by making RPs and liquidators also responsible for investigation of avoidance proceedings.

Other ancillary amendments like commencement of look-back back period, timeliness in approval of resolutions plans follow the trend of making the resolution process free of loopholes as and when they are identified.

Below we discuss the proposed amendments in detail –

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Minority shareholders under IBC

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-Sikha Bansal

[resolution@vinodkothari.com]

Below we provide a quick snapshot of the extant provisions of the insolvency framework in India vis-a-vis Minority Shareholders, in light of related laws and judicial developments so as to assess their rights and standing in the current insolvency ecosystem –

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Home Buyers under IBC & Case Studies

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Ever since the Jaypee and Amrapali cases, home buyers have been under the scanner. From orders of the Hon’ble Supreme Court to multiple amendments in the Insolvency and Bankruptcy  Code, measures have been taken to protect the interest of the home buyers. While earlier, the home buyers were treated as ‘other creditors’, that is, neither operational nor financial, with the landmark ruling in Chitra Sharma v. Union of India, there status as financial creditors was established – the same also found place in the Code by way of amendments in section 7 of the Code.

In this presentation, we discuss the provisions w.r.t. Home Buyers under the Code and a detailed case study of the Amrapali Case and Jaypee Infratech Case.

Home Buyers under IBC & Case Studies