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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

Recent trends in IBC

Resolution Division

(resolution@vinodkothari.com)

The field of Insolvency in India has of late seen constant change in order to adapt the ever moving global scenario. Being one of the topics that has been trending ever since its inception and with the possible introduction of several new concepts including subjects like pre pack insolvency and some recent amendments due to the pandemic, a compilation on the following topics in our presentation providing a brief glance through on the same has been made-

  1. Amendments due to COVID 19
  2. Separate Insolvency process for MSME’s
  3. Expected introduction of pre pack insolvency framework
  4. Assignment of NRRA
  5. Group Insolvency
  6. Developments in Going Concern Sale

http://vinodkothari.com/wp-content/uploads/2021/01/Recent-trends-in-IBC.pdf

 

 

Dissolution without Resolution- A disguised Strike-off under IBC?

Megha Mittal

(resolution@vinodkothari.com)

In a first of its kind, the Hon’ble National Company Law Tribunal, Bengaluru Bench vide its order dated 16th November, 2020, in the matter of Synew Steel Private Limited[1], has ordered for direct dissolution from CIRP, thereby waiving off the mandatory requirement to undergo the liquidation process.

The said order was inspired by the fact that the corporate debtor had nil assets, which in turn made it certain that the liquidation process would not have been successful. Hence, to save the unfruitful costs that would have been incurred, the corporate debtor was allowed a direct dissolution.

In this article, the author makes a humble attempt to analyse this rather path-breaking order, and the implications it may carry.

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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.

 

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

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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