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Inter-se Ranking of Creditors – Not Equal, but Equitable

-Megha Mittal, Associate and Prachi Bhatia, Legal Intern 

(resolution@vinodkothari.com)

Insolvency laws, globally, have propagated the principle of equitable distribution as the very essence of liquidation/ bankruptcy processes; and while, “equitable distribution” is often colloquially read as “equal distribution” the two terms hold significantly different connotations, more so in liquidation processes – an ‘equitable distribution’ simply means applying similar principles of distribution for similarly placed creditors.

Closer home in India, the preamble of the Insolvency and Bankruptcy Code, 2016 (‘Code’/ ‘IBC’) also upholds the principles of equitable distribution – thus balancing interests of all stakeholders under the insolvency framework. Judicial developments have also had a significant role in holding such equity upright[1]. However, in the recent order of the Hon’ble National Company Law Appellate Tribunal, in Technology Development Board v. Mr. Anil Goel[2], the Hon’ble NCLAT has refused to acknowledge the validity of inter-se rights of secured creditors once such security interest in relinquished in terms of section 52 of the Code.

In what may potentially jeopardize interests of a larger body of secured creditors, the Appellate Authority held that inter-se arrangements between the secured creditors, for instance, first charge and second charge over the same asset(s), would not hold relevance if such secured creditors choose to be a part of the liquidation process under the Code – thus placing all secured creditors at an equal footing. The authors humbly present that the instant order may not be in consonance with the established and time-tested principles of ‘equitable’ treatment of creditors. The authors opine that contractual priorities form the very basis of a creditor’s comfort in distress situations – as such, a law which tampers with such contractual priorities (which of course, are not otherwise hit by avoidance provisions) in those very times, will go on to defeat the commercial basis of such contracts and demotivate the parties. This, as obvious, cannot be a desired outcome of a law which otherwise delves on the objective of ‘promotion of entrepreneurship and availability of credit’. The authors have tried putting their perspective in this article.

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An Odd Scheme: Case for exclusion of schemes of arrangement from scheme of liquidation

Sikha Bansal, Partner

[resolution@vinodkothari.com]

The Article below has also been published on the IndiaCorplaw Blog, see here 

The concerns around section 230 schemes in the background of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) have been partly addressed with the ruling of Supreme Court (SC) in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. The SC has held that the prohibition contained in section 29A should also attach itself to a scheme of compromise or arrangement under section 230 of the Companies Act, when the company is undergoing liquidation under the auspices of IBC. Reason being: proposing a scheme of compromise or arrangement under section 230 of the Companies Act, while the company is undergoing liquidation under the provisions of the IBC, lies in a similar continuum.

Earlier, there were several rulings of NCLAT which allowed schemes of arrangement during liquidation – for instance, see S.C. Sekaran, Y. Shivram Prasad, etc. After such rulings, the IBBI (Liquidation Process) Regulations were amended to include Regulation 2B, which also state that “a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.” Read more

Comments on Proposed Framework for Prepacks

-Sikha Bansal & Megha Mittal

(resolution@vinodkothari.com)

While there had been murmurs of a prepack insolvency resolution framework, the Report of the Sub-Committee of the Insolvency Law Committee, on Pre-packaged Insolvency Resolution Process[1] issued on 8th January, 2021 (“Sub-Committee Report”/ “Report”) comes as the first concrete step in bringing prepacks to India. In an earlier write-up, we have discussed possible framework for bringing pre-packs in India; see here- Bringing Pre-Packs to India

Below we discuss the various facets of the Report in terms of application and feasibility, both legal and practical.

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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

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

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.

 

Implications of IBC Ordinance, 2020- Quick Round up

Resolution Division, 

(resolution@vinodkothari.com)

The President today signed in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [‘Ordinance’] to implement the already-talked-about abatement of IBC filings for the period of the COVID disruption, and accordingly, amend the Insolvency and Bankruptcy Code, 2016 [‘Code’]. We analyse the Ordinance in quick bullet points –

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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.

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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