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An Insolvency Resolution Process sans Claims – A Defunct Process?

Introduction

Under the provisions of Insolvency and Bankruptcy Code, 2016 (IBC), the determining criteria for insolvency is a definite default, rather than financial sickness or ‘inability to pay’ . While the latter is certainly suggestive of a larger state of insolvency, where the company may be unable to pay its outstanding debts, the former does not necessitate  the same. Hence, the likelihood of an application for initiation of CIRP on the basis  of an isolated event of default/ non-payment, sans a financial stress in the company, cannot be ruled out.

Owing to such uncertainty, it may so happen that an application, initiated on the basis of such an isolated event of default, is admitted before the adjudicating authority without any other cases of defaults by the company. Naturally, there would be no claims to file except that of the applicant. If it were to happen, it forces one to ponder as to how CIRP will proceed, and if at all there is something to resolve.

CIRP without claims?

As per the Code, CIRP commences after an application has been admitted by the AA. Once an application is admitted by the AA, an Interim Resolution Professional is appointed, who is responsible for invitation and collation of claims, and subsequent constitution of the committee of creditors (‘CoC’). All decisions with respect to the corporate debtor’s business are thereafter taken with the approval of CoC, including approval of Resolution Plan or passing of a resolution for liquidation of the Corporate Debtor.  Hence, it can be said that the CoC, constituted on the basis of the claims, drives the CD through the process till revival/ liquidation, as the case may be.

However, in a rather odd situation, when no claims are received after the initiation of CIRP, how will the IRP constitute CoC? In essence, when no claims are received by the Interim Resolution Professional (‘IRP’) after the initiation of CIRP, the questions that would arise are (aside, the broader question as to whether there was at all a need for resolution, will remain) – how is the CIRP likely to proceed, how will IRP constitute CoC, and most importantly, what is it for which the IRP should invite resolution plans? Does non-receipt of any claims by the creditors prove that the Corporate Debtor is, in fact, not a defaulter?

Books of the corporate debtor/public announcement

At the first instance, the books of the corporate debtor will assist in determining whether at all the CD has liabilities (financial/operational, otherwise). It may be the case that the CD does not have any liability at all (besides that pertaining to the creditor who filed the application). In such a case, attempts can be made by the CD and the Creditor to arrive at an agreement among themselves, instead of proceeding with CIRP and having the CD jammed in a situation of Moratorium.

However, there may be cases where the books acknowledge liabilities but there are no claimants. This might pose practical difficulties for the IRP because if no claims are received, the constitution of CoC would become impossible which in turn would lead to the CIRP coming to a complete halt. Occurrence of such a situation might necessitate the following actions to be taken by the IRP-

  • sending of individual mails, requesting claims, to the Financial creditors so that, at least, a CoC can be constituted.
  • ensure that the public announcement, inviting claims of creditors, are made in accordance with the manner laid down in the CIRP Regulations and in newspapers with wide reach.
  • if, in case, no claims are received despite of efforts being made by the IRP, a final attempt should be made by the IRP by way of re-issuance of public announcement

Say, even after these efforts, no one shows up. There is a stage set, but there are no creditors to run the show. In such cases, what can the IRP do? We can explore the following alternatives.

Section 12A of Insolvency and Bankruptcy Code, 2016

Prior to section 12A of the Code, the withdrawal of an admitted insolvency resolution process was not expressly provided for. However, in view of reasons like a post-admission settlement or restructuring, the need to allow such withdrawal was realised – Section 12A of the Code enables withdrawal of the applications filed under Section 7, 9 or 10 of IBC, post its admission, if the committee of creditors (CoC) approves of such withdrawal by a voting share of at least ninety percent.

The very fact that section 12A mandates the approval of CoC as a precondition for withdrawal, there is no occasion to apply the said provisions before the constitution of CoC. A deeper reading of section 12A further indicates that the application for withdrawal must be filed by the very applicant who initiated the process. The reason is simple, the cause initiated by one cannot be withdrawn merely by virtue of a majority of others. Thus, the fact that withdrawal can be done only at the behest of the original applicant and with the consent of at least 90% CoC members maintains the much required trade off.

However, in the given state of affairs, the devil lies in the fact that no claims have been received so as to constitute the CoC. Further, to assume that the applicant who, at the first place, initiated the application, and thereafter chose to remain missing in action would initiate the withdrawal process, seems rather bizarre.

Even if one were to assume the possibility of withdrawal application by such a creditor, would the very filing be construed as a mere pressure tactic for recovery of claims?  If yes, the same would attract penal provisions under the Code, and as such the Applicant would be liable for the consequences.

Knocking the Doors of NCLT

From the above discussion, we understand that a situation as such would indeed put the IRP/ RP in a pickle. Another probable way out could be an application being filed by the IRP/ RP under section 60 (5) of the Code thereby praying for annulling the process or directing the original applicant to file an application under section 12A.

Further, in Swiss Ribbons (P) Ltd. v. Union of India (Supra)[1],  the Hon’ble Supreme Court made it clear that “at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement…….”

Thus, on the strength of the aforesaid order and the power and jurisdiction in section 60 (5), the IRP/ RP may take necessary steps before the Hon’ble Bench.

Such entanglement would leave the IPR/ RP in the middle of the sea, so to say that he can neither continue the CIRP in absence of the CoC, nor proceed for withdrawal as per section 12A.

Corporate Debtor – a Defaulter or no

Another line of thought that arises in the given facts  could be whether the Corporate Debtor can be construed as a ‘defaulter’. In the given case, since no claims are received after the initiation of CIRP, can it be assumed that the Corporate Debtor has not defaulted in the payment of dues of any other creditor except for that of the applicant. Based on this assumption, can it be said that the CD is not a defaulter?

The above straight jacket assumption would not hold good as it is important to note that another probable situation that could arise is that the default of other creditors is apparent from the books of accounts of the Corporate Debtor. In such cases, if no claims are received by the IRP, the IRP may, in furtherance to the mandatory public announcement, send a mail to the banks/ financial creditors, inviting claims from them so that at least the CoC can be constituted and the CIRP can proceed.

While the above situation is a rather odd one, it would indeed be an interesting situation to understand the possible course of action that the IPs could resort to, and the role of the Adjudicating Authorities in such cases.

[1] Swiss Ribbons (P) Ltd. v. Union of India (Supra)

Revising minimum public holding requirements for large issuers and companies under CIRP

Securities Contract (Regulations) Amendment Rules, 2021 notified

Payal Agarwal, Executive ( corplaw@vinodkothari.com )

Background

SEBI had released a consultation paper on 20th November, 2020 order to review the requirements of minimum public offer for large issuers. The Consultation Paper proposed to reduce the requirements of minimum public offer for large issuers while also reducing the time period to meet the minimum public shareholding requirement (“MPS”). Further, SEBI had released another consultation paper on 19th August, 2020 for review of minimum public shareholding requirements for companies undergoing CIRP under IBC, wherein the Consultation Paper suggested three different modes of recalibrating the requirement for MPS upon approval of resolution plan.

Consequently, the Ministry of Finance has notified the Securities Contract (Regulations) Amendments Rules, 2021 (“the Amended Rules”) on 18th June, 2021 to amend Rule 19 and 19A of the Securities Contract (Regulations) Rules, 1957 (“the Rules”) giving effect to the above-mentioned proposals.

Reduction in minimum public shareholding requirement for large issuers

Who are large issuers?

Large issuers are issuers with post issue market capitalisation (‘MCap’) equal to or above Rs. 4000 crores. Currently all issuers with an MCap of Rs. 4000 crores are required to dilute 10% of an IPO to public shareholding. Large issuers have now been bifurcated into large issuers (MCap of Rs. 4000 crores and above) and very large issuers (MCap of Rs.  1 lakh crores).

New minimum public offer requirements for large issuers as per the Amended Rules

The post issue MCAP requirement for large and very large issuers has now been amended as below –

Accordingly, a flat rate of 10% has been set for large issuers while an incremental rate has been set for very large issuers with a post issue MCap of Rs. 1 lakh crores and above. For issuers below these thresholds, the existing requirements continue.

New MPS requirement

Currently, companies are required to meet the MPS within 3 years from the date of listing. However, in case of large issuers, the MPS is to be met as follows –

Rationale as proposed in the Consultation Paper

The reduction in the minimum public offer requirements for large issuers was proposed due to the following reasons –

  • The compliance of such minimum public shareholding requirements is cumbersome for the large issuers.
  • The large issuers already have investments from strategic investors who are classified as “public shareholders” post listing. Therefore, the requirement of minimum public offer results in unnecessary dilution of control of promoters thereby imposing constraints on issuers.

Minimum public shareholding requirement for companies under Resolution Plan

Further, amendments have been made in Rule 19A of the Rules, with respect to the minimum public shareholding requirements for a company under CIRP under Insolvency and Bankruptcy Code, 2016 (‘IBC’).The Amended Rules provide a strict-er timeline for post-CIRP companies to comply with the MPS requirements upon implementation of resolution plans

Change in the requirements as per the Amended Rules are as follows –

Particulars Requirement before amendment Requirement as per Amended Rules
Public shareholding falls below 25% Bring to 25% within 3 years of such fall No change
Public shareholding falls below 10% Bring to 10% within maximum 18 months of such fall Bring to 10% within maximum 12 months from such fall
Minimum public shareholding to be maintained No such requirement Shall not fall below 5%

Rationale as proposed in the Consultation Paper

The relaxations with respect to the strict enforcement of Rule 19 of the Rules have been given in order to ensure revival of a Corporate Debtor pursuant to a resolution plan. However, while the same seems to be in favour of Corporate Debtors, specifying no MPS requirement may result in cases where the public shareholding will become extremely low, leading to less float, thereby hampering the market integrity and price discovery in secondary market.

The Consultation Paper suggested three different alternatives out of which the second one has been preferred since the MPS of 5% being a lower threshold will incentivise the companies to stay listed post-CIRP whereas higher thresholds may cause total delisting

The said requirement shall have significant ramifications for resolution applicants who otherwise are more focused on operational aspects over regulatory requirements. While resolution plans relaxes several requirements like an open offer under SAST regulations, it is significant to note that requirements w.r.t. MPS were never completely waived off. The present step of giving more stringent timelines is introduced with the objective of protecting the investors’ interest and shielding them from the possible loss of value due to delayed MPS adherence. The loss of value can be on account of delisting of such corporate debtors under CIRP, whereas the shareholders may recover potential value from the shares of such corporate debtor if it continues to remain listed post implementation of resolution plan.

Retrospective Operation of S. 29A & OTS under IBC – Analysing Prospects

– Megha Mittal

[resolution@vinodkothari.com]

The Hon’ble NCLAT vide its order Martin SK Golla v. Wig Associates, 2019[1] has set aside the order of the Adjudicating Authority which had accepted a one-time settlement-cum-resolution plan submitted by a connected person of Corporate Debtor, who later on, after the implementation of section 29A became ineligible to submit a plan. Hence, the question before the Hon’ble Tribunal was whether sec 29A of IBC will be applicable with retrospective effect in section 10 proceedings which were initiated prior to sec 29A came into force?

The Hon’ble NCLAT held that the reason that once CIRP is commenced, provisions as existing on the day of the petition would continue to apply even in the face of amendment brought about by way of 29A- cannot be maintained, and as such the one time settlement-cum-resolution plan, offered by the connected person of the Corporate Debtor cannot be considered good under law.

In this article, along with the issue of retrospective applicability of section 29A and its likely impact on the stakeholders, the Author also delves into the question whether a one-time settlement scheme could tantamount to a resolution plan under the Code.

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Bringing pre-packs to India: a discussion on the way forward

“Pre-packs”, though yet to be born, have raised the expectations high. Reasons are obvious – the package is supposed to offer a lucrative combination of all the benefits of a ‘reorganisation/resolution plan’ as otherwise available only under formal insolvency proceedings with the added benefit of ‘speed’.

Pre-pack framework, as studies show, is not always contained in the statutory machinery. One of the close examples is UK. There the pre-pack arrangement is guided by insolvency practice statement, rather than a legislative framework.

In the Indian context, with some unique features, our insolvency regime stands differently from other jurisdictions – say, section 29A, and more importantly, section 32A.

Also, we already have certain debt restructuring tools in vogue – schemes of arrangement, and the apex bank’s framework for resolution of stressed framework. So, how do we welcome pre-packs, such that it serves the intended purpose? Surely enough, the pre-pack framework has to imbibe all the ‘good things’ which a formal insolvency framework has, and also offer something ‘over and above’ the existing options of debt restructuring.

The article sees these aspects and proposes what can be the optimal way of adopting pre-packs in India.

 

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

-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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Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 Quick review of Proposed Amendments

Megha Mittal

(resolution@vinodkothari.com)

Amidst the lingering need to fill in certain critical gaps to ensure streamlining of corporate insolvency resolution process (“CIRP”), the Cabinet on 10.12.2019 approved the Insolvency and Bankruptcy (Second Amendment) Bill, 2019 (“Amendment Bill”)[1] further to amend the Insolvency and Bankruptcy Code, 2016 (“Code”), which is now pending approval by the Houses.

The objective of the amendment being to remove difficulties, while it is expected that the amendments will have a retrospective impact to the extent possible, the Amendment Bill hints that the different provisions of the Amendment Bill shall be effective from different dates; and where the effect is retrospective in nature, it shall be deemed to be effective from the date the particular section originally came into force.

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Ablution by Resolution

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 seeks to wash out liability of corporate debtors resolved under IBC

-Sikha Bansal (resolution@vinodkothari.com)

 

Resolution under the Insolvency and Bankruptcy Code, 2016 (‘Code’) is a harbinger of fresh start of the corporate debtor, which passes into the control of a new management by the very application of section 29A. The fresh start would have no meaning if the corporate debtor or the new management thereof have to bear the brunt of offences which the corporate debtor or its officers committed prior to ablution under the Code – that is, one cannot be made to reap what they did not sow. As such, it was important to provide immunity to the corporate debtor and its assets, the successful resolution applicant and the new management personnel.

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Sectoral regulators empowered to petition insolvency of financial services providers: Central Govt notifies insolvency rules

Vinod Kothari

(resolution@vinodkothari.com

The Central Govt on 15th November notified rules of procedure for insolvency proceedings for financial services providers, thereby indicating that the resolution and liquidation process for financial services entities has been taken out from the proposed enactment dealing with distress of financial entities. Notably, the actions in case of distress of financial services firms is not limited to insolvency – regulators take prompt corrective action, depending on the severity of the distress.

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Financial Service Provider under the clutch of IBC? Nature of the “debt” vs. Nature of the “debtor”

-Megha Mittal

(resolution@vinodkothari.com)

In a first of its kind, the Hon’ble National Company Law Tribunal, Principal Bench at New Delhi (“NCLT”) vide its order dated 04.11.2019[1] in the matter of Apeejay Trust v. Aviva Life Insurance Co. India Ltd., has initiated corporate insolvency resolution process against the Corporate Debtor, despite it being a financial service provider under the Insolvency and Bankruptcy Code, 2016 (“Code”).

In the above pretext, one may recall the order of the Hon’ble National Company Law Appellate Tribunal in the matter of Randhiraj Thakur v. Jindal Saxena Financial Services[2], wherein the Hon’ble Appellate Tribunal upheld that financial service providers shall not fall within the ambit of the Code. The order of the Hon’ble NCLAT in the said matter has been discussed in our articles “NBFCs and IBC- the Lost Connection[3] and “State of Perplexity- Applicability of IBC on NBFCs”[4].

In this article, the author has made a humble attempt to analyse the order of the Hon’ble NCLT based on its facts, observations and the extant law.

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