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Introduction and recent developments
The Insolvency and Bankruptcy Code 2016 (the Code) saw two years of enactment and 19 months of implementation in the summer of 2018. The Indian government defied its poor track record on the implementation of laws by deploying unprecedented political will for effective roll out of the Code – a feat well-accomplished. The Insolvency and Bankruptcy Board of India (IBBI), the new regulator established under the Code, chartered the course of its implementation with great zeal while the National Company Law Tribunal (NCLT), the special bankruptcy tribunal, rose to the occasion with quick decision-making majorly aligning with the objectives of the Code. Other stakeholders responded with enthusiasm to support the Code. Indeed, so much so that the government decided to take a leap of faith, making way for the top dozen non-performing assets (NPAs), comprising 25 per cent of the total NPAs in the books of Indian banks, to be pushed into insolvency proceedings.
The government keenly observed developments and experience in the insolvency process of the cases filed and rapidly brought in changes to plug the gaps spotted in the Code to make the process and outcomes more efficient and efficacious. Two sets of amendments were introduced in the Code, one in November 2017 and the second in June 2018 by way of ordinance, as Parliament was not in session in these months. The later amendment was based on recommendations of a high-powered reforms committee set up by the government. One of the amendments, carried out in November 2017, was controversial as it barred promoters of stressed assets from bidding for their own assets unless the paid the outstanding dues with interest and other charges. The key amendments are discussed in some detail under relevant heads in the article. More recently, the government has placed for comments in public domain the draft of a cross-border insolvency law based on the UNICITRAL Model Law on Cross-Border Insolvency.
The IBBI has been at the forefront of creating the regulatory architecture of the new insolvency law. It has set the bar high right from the start and the market is vying to match its pace rather than the reverse of it. Over a half-dozen amendments have been introduced since December 2016 to streamline the insolvency resolution and liquidation processes, and provide the soft and hard infrastructure to support the new insolvency framework. The insolvency professionals have been quick learners and significant progress has been made in creating skilled and trained insolvency professionals in the market.
The Code envisages a 'creditor-in-control regime', with the committee of creditors comprising of financial creditors being a key stakeholder, in a way one of the most important. Since most significant decisions in the insolvency process require approval of the committee, enormous responsibility rests on financial creditors to take timely and transparent decisions. The creditors have demonstrated a remarkable learning curve in a short span of time. Further improvements are expected along the way forward.
With the collective effort of stakeholders, a number of resolution plans have been approved by the NCLT and are under implementation. The overall experience of the Code has surpassed expectations and encouraged a spate of filings by creditors. Jurisprudence is rapidly developing and clouds of doubts disbursing gradually. Some credible success stories are likely to be ready for narration in the next few months out of the outcome of large cases undergoing insolvency process.
In the meantime, the NPAs of the Indian banks continue to mount. At the time of writing, a panel of bankers set up by the government recommended the setting up of an asset management company as a special purpose vehicle to which NPAs of 5 billion rupees and above.
Main features of the Code
The Code introduced significant legal and structural changes in the insolvency framework comprising many new principles and concepts alien to the Indian market. The Code introduces a shift from the 'debtor-in-possession' regime to a 'creditor-in-control' regime, making it a creditor-friendly legislation. It is based on the United Kingdom's administration procedure, although a few provisions have been customised for India.
- The law establishes a new discipline of insolvency professionals. These insolvency professionals perform a central role in the corporate insolvency process, including management of the debtor's enterprise as a going concern.
- The Code has designated the NCLT as the adjudicating authority to provide oversight of insolvency cases.
- The role of the court has been reduced.
- Creditors have been provided with greater powers to approve decisions made by the resolution professional appointed as office-holder in the corporate insolvency resolution process.
- Strict timelines have been provided for resolution and liquidation, shorter even than what is provided in English law.
A corporate insolvency resolution process can be initiated in respect of a company that has committed a default. A default would have occurred when the debtor fails to pay the whole or any part or instalment of the amount of debt (see below for definition) that has become due and payable. While a financial creditor is required to present a record of default before the NCLT for any initiation of the corporate insolvency resolution process, an operational creditor must issue a statutory notice to a corporate debtor in the manner provided in the Code before approaching the NCLT. A default in payment of 100,000 rupees is sufficient to attract insolvency proceeding.
What is a debt?
The Code defines 'debt' as a liability or obligation in respect of a claim, which is due from any person and includes financial debt and operational debt. A 'claim' means:
- a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; or
- a right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.
The corresponding obligation of the debtor to pay may arise out of a financial debt or an operational debt. Broadly, 'financial debt' means a debt with interest, if any, which is disbursed against the consideration for the time value of money. An 'operational debt' means a claim in respect of the provision of goods or services, including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to central government, any state government or any local authority. As per the June 2018 amendment, any amount raised from allottees under a real estate is deemed to have the commercial effect of a borrowing. This amendment was introduced to safeguard the interest of homebuyers in real estate projects facing insolvency proceedings. The high-profile insolvency of real estate players including Jaypee Infratech Limited, involving over 20,000 homebuyers who had not been delivered flats booked by them, raised concerns for policymakers, resulting in the amendment rendering homebuyers as financial creditors. The amendment has received mixed response from the market. Many see this as a political appeasement rather as a prudent measure to balance interest of stakeholders.
Who can initiate the insolvency process?
The process for initiating a corporate insolvency resolution may be led by a financial or operational creditor, or a corporate debtor. However, the following are disqualified from initiating the process:
- a corporate debtor undergoing a corporate insolvency resolution process;
- a corporate debtor who has completed a corporate insolvency resolution process 12 months preceding the date of making of the application;
- a corporate debtor or a financial creditor who has violated any of the terms of a resolution plan that was approved 12 months before the date of making of an application; or
- a corporate debtor in respect of whom a liquidation order has been made.
Admission of application
The NCLT has to make a decision on an application filed before it within 14 days. Where the NCLT admits an application for commencement of corporate resolution process, it shall pass an order:
- granting a moratorium;
- appointing an insolvency professional as interim resolution professional (IRP); and
- cause a public announcement of the initiation of the corporate insolvency resolution process to be made by the IRP and invite claims from creditors.
The order declaring a moratorium prohibits the following:
- the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
- transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
- any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property, including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002; and
- the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
The order of moratorium does not affect the supply of essential goods or services to the corporate debtor, which shall not be terminated or suspended or interrupted during the moratorium period. The order of moratorium is effective from the date of order until the NCLT approves the resolution plan or passes an order for liquidation of the corporate debtor.
As per the June 2018 amendment, invocation and enforcement of guarantees was excluded from the purview of moratorium. It is pertinent to note that executing personal guarantee by promoters of borrower companies to secure its debt is a common practice in the Indian financial sector. The scope of moratorium is presently pending for adjudication in the Supreme Court of India.
Interim resolution professional: appointment, tenure, power and duties
Insolvency professionals appointed by the NCLT as IRPs play a key role in the initial stages of the process. The insolvency professional to be appointed by the NCLT is proposed by the person initiating the insolvency process. The term of the IRP is 30 days from the date of appointment or till such time a resolution professional is appointed by the committee of creditors.
Management of affairs of a corporate debtor
On commencement of the insolvency resolution process and appointment of the IRP:
- management of the affairs of the corporate debtor is vested in the IRP;
- the powers of the board of directors are suspended and exercised by the IRP; and
- the officers and managers of the corporate debtor report to the IRP and are required to provide access to such documents and records of the corporate debtor as may be required by the IRP.
The main duties of the IRP are to:
- collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to business operations;
- prepare a list of assets and liabilities as on the initiation date;
- receive and collate all the claims submitted by creditors pursuant to the public announcement;
- constitute a committee of creditors;
- take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor.
The Code provides that the IRP shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. For this purpose, the IRP has been provided with the authority to:
- appoint accountants, legal or other professionals as may be necessary;
- enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions that were entered into before the commencement of the corporate insolvency resolution process; and
- issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern, and take all such actions as are necessary to keep the corporate debtor as a going concern.
Committee of creditors
The IRP has to constitute a committee of creditors after collation of all the claims received against the corporate debtor, and determination of the financial position of the corporate debtor. The formation of the creditor committee is designed to facilitate active creditor participation in the insolvency proceedings. The committee of creditors comprises of all the financial creditors of the corporate debtor. However, a related party to whom a corporate debtor owes a financial debt does not have any right of representation, participation or voting in a meeting of the committee of creditors. The suspended board of directors and operational creditors, having 10 per cent of the aggregate of admitted claim, are entitled to attend meetings of the committee of creditors but do not have voting rights.
Powers of committee of creditors
The committee of creditors have the right to:
- appoint the resolution professional in its first meeting, and to replace the resolution professional at any stage;
- require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process. When so requested, the resolution professional must make available any financial information within a period of seven days;
- approve the resolution plan; and
- approval certain actions of the resolution professional.
Prior approval of the committee of creditors by the resolution professional is required for the following actions:
- to raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;
- to create any security interest over the assets of the corporate debtor;
- to change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in the case of the corporate debtor being a company;
- to record any change in the ownership interest of the corporate debtor;
- to give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;
- to undertake any related party transaction;
- to amend any constitutional documents of the corporate debtor;
- to delegate its authority to any other person;
- to dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties;
- to make any change in the management of the corporate debtor or its subsidiary;
- to transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business;
- to make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; and
- to make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor.
The resolution professional is required to seek the vote of the creditors prior to taking any of these actions at a meeting of the committee of creditors.
Decision-making by committee of creditors
The Code requires that the following decisions made by the committee of creditors require a vote of not less than 66 per cent of the voting shares of the financial creditors:
- appointment or removal of resolution professional;
- extension of corporate resolution plan process period (after expiry of initial 180 days);
- approval of resolution plan; and
- decision to liquidate the corporate debtor.
Before the June 2018 amendment, the above decisions required a vote of not less than 75 per cent of the voting shares of the financial creditors. The rest of the decisions can be taken by 51 per cent of the voting shares of the financial creditors.
Where a corporate debtor does not have any financial creditors, the committee of creditors shall comprise 18 operational creditors holding highest debt and a representative of workmen.
Resolution professional: appointment, removal, powers and functions
The committee of creditors may, in the first meeting (and by a majority vote of not less than 66 per cent of the voting shares of the financial creditors), either resolve to appoint the IRP as a resolution professional or to replace the IRP by another resolution professional.
The resolution professional has the same powers as that of the IRP. He is responsible for the conduct of the corporate insolvency resolution process and manages the operations of the corporate debtor as a going concern for the duration of the corporate insolvency resolution process. It is the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including its continued business operations. For this purpose, the resolution professional must undertake the following actions:
- to take immediate custody and control of all the assets of the corporate debtor, including the business records;
- to represent and act on behalf of the corporate debtor with third parties, and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;
- to raise interim finances subject to the approval of the committee of creditors, wherever required;
- to appoint accountants, legal or other professionals in the manner specified by the board;
- to maintain an updated list of claims;
- to convene and attend all meetings of the committee of creditors;
- to prepare the information memorandum as discussed above;
- to invite prospective lenders, investors and any other persons to put forward resolution plans;
- to present all resolution plans at the meetings of the committee of creditors; and
- to file an application for avoidance of transactions, if any.
Another key function of the resolution professional is to prepare an information memorandum for formulating a resolution plan, namely the information required by an interested person to make the resolution plan for the corporate debtor. This includes the financial position of the corporate debtor, list of assets and liabilities, list of creditors and the security interest held by them and other relevant information.
The resolution professional invites expressions of interest from interested persons to submit a resolution plan for the corporate debtor. The committee of creditors approves the eligibility criteria and process for examination of resolution plans. The resolution professional is the manager of the process.
An eligible applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. A resolution plan means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern. With the November 2018 amendment, the government barred promoters of corporate debtors and their related parties and persons acting in concert with them from submitting resolution plans by introducing the infamous section 29(a) in the Code. This was a bold move and addressed a moral hazard of assets being sold at a high discount to defaulters. As expected, the amendment caused disruption in nearly all pending insolvency proceedings, as the eligibility of all bidders had to be ascertained before examining their bids. Before, the resolution plan had to qualify for consideration, while now the bidder has also to qualify. Previously, in cases where only the promoter had submitted a plan, and such promoter was found to be ineligible, fresh bids had to be invited. If the total time of 270 days had lapsed in these cases or no bidder came forward the debtor faced the risk of being pushed into liquidation.
The amendments are unduly harsh to bona fide defaulters and guarantors. Just because an account has turned non-performing does not render its promoter dishonest. Not every default can be equated to malfeasance. There are many honest promoters who may have defaulted for reasons beyond their control. Modern insolvency laws are built on the principle of granting a fresh start to the honest but unfortunate debtor. It is unfair to exclude them from consideration by bracketing them with dishonest promoters.
In June 2018, the government reconsidered the Code and made changes to address its unintended consequences. However, further dilution is required in section 29(a) to ring-fence bona fide defaulters.
The resolution professional is required to examine each resolution plan received by him or her to confirm that each plan:
- provides for payment of the insolvency resolution process costs in a manner specified by the board as priority over the repayment of other debts of the corporate debtor;
- provides for the repayment of the debts of operational creditors, which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor and shall be paid within 30 days from sanction of the plan;
- provides for dissenting financial creditors to be paid ahead of creditors voting in favour of the plan but on liquidation value;
- provides for management of the affairs of the corporate debtor after approval of the resolution plan;
- provides for the implementation and supervision of the resolution plan;
- does not contravene any of the provisions of the law for the time being in force; and
- conforms to such other requirements specified by the IBBI.
Approval of resolution plan by the creditors
A resolution plan, which conforms to the conditions referred to above, is presented to the committee of creditors by the resolution professional for its approval. The committee of creditors may approve a resolution plan by a vote of not less than 66 per cent of voting shares of the financial creditors after examining it feasibility and viability and by recording reasons for accepting or rejecting the plan. The resolution applicant whose plan is under consideration may attend the meeting of the committee of creditors. However, the resolution applicant does not have a right to vote at the meeting of the committee of creditors unless the resolution applicant is also a financial creditor.
Approval of the resolution plan by the NCLT
The resolution plan as approved by the committee of creditors is presented by the resolution professional to the NCLT for approval. If the NCLT is satisfied that the resolution plan as approved by the committee of creditors meets the requirements set out above, it shall approve it. The resolution plan approved by the NCLT is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. As a consequence of the order of approval, the moratorium order passed by the NCLT shall cease to have effect.
Rejection of the resolution plan
If the NCLT is satisfied that the resolution plan does not confirm to the stated requirements, it may, by an order, reject the plan and order liquidation of corporate debtor.
Time limit for completing insolvency resolution process
The corporate insolvency resolution process must be completed within a period of 180 days from the date of its commencement. The period of 180 days can be extended by the NCLT up to a maximum period of 90 days. Therefore, the total period for resolution of corporate insolvency, including the extended period, can be up to a maximum of 270 days. An extension can be granted by the NCLT once an application is filed by the resolution professional, but only if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 66 per cent of the voting shares, and if the NCLT is satisfied that the subject matter of the case is such that the corporate insolvency resolution process cannot be completed within 180 days.
Appeal before the National Company Law Appellate Tribunal
An appeal by a person aggrieved by an order approving the resolution plan by the NCLT may be filed before the National Company Law Appellate Tribunal (NCLAT) on any of the following grounds:
- the approved resolution plan is in contravention of the provisions of any law for the time being in force;
- there has been material irregularity in the exercise of powers by the resolution professional during the corporate insolvency resolution period;
- the debts owed to the operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the board;
- the insolvency resolution process costs have not been provided for repayment as a priority over all other debts; or
- the resolution plan does not comply with any other criteria specified by the board.
Limitation for filing appeal is 30 days. The NCLAT may allow an appeal to be filed after the expiry of 30 days if it is satisfied that there was sufficient cause for not filing the appeal, but this period shall not exceed 15 days.
Appeal before the Supreme Court of India
Any person aggrieved by an order of the NCLAT may file an appeal to the Supreme Court on a question of law arising out of the order under the Code within 45 days from the date of receipt of the order. The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within 45 days, allow the appeal to be filed within a further period not exceeding 15 days.
India is in the process of laying the foundations of a mature market economy. The Code is an endeavour to provide one critical building block of this process. It also has the potential to significantly change the way business is done in India.
The Code is largely a sound piece of legislation, though it has its flaws. History has shown that reforms rarely contain all the solutions needed to resolve all the problems of a legal system. The Code has successfully sailed through rough currents of the initial days of its implementation. We will need to wait patiently to find out whether the Code will lead to the development of a robust corporate debt market and unlock the flow of capital.
The cross-border insolvency framework was the only missing piece in the block. It was widely expected that India would enact the UNCITRAL Model Law on Cross-Border Insolvency or provide for an alternate framework to deal with cross-border insolvency issues as part of the Code before the end of 2018. The scale and pace of insolvency reforms undertaken by the government prove political will is critical to drive reforms. As general elections approach, the attention of the government might be taken over by policies involving populist agenda. The government must ensure the present momentum is not disrupted. In the world of insolvency, developments are rapid and many.