India’s jump from Rank 130 to 100 in World Bank’s ease of doing business rankings can be largely attributed to various legal reforms in the country, including the Insolvency and Bankruptcy Code, 2016 (“IBC”), which has been notified with a vision to resolve the rampant insolvency situation.
IBC essentially provides for revival of insolvent corporate entities through a corporate insolvency resolution process (“CIRP”) in a time bound manner, failing which such entities undergo liquidation. Over the past one and half years, IBC has proved instrumental in addressing the corporate insolvency situation in the country. However, several crucial issues have emerged under IBC framework. With a view to address some of those issues, the Government of India promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (“2018 Ordinance”) on 6 June 2018. Despite this move, certain issues still remain unresolved and require proper analysis. A few critical points are discussed below.
- In practice, is the process time-bound? Even though IBC lays down that the CIRP has to be concluded within a period of 270 days (including an extension of maximum 90 days), the adjudicating authorities under IBC, namely the National Company Law Tribunal (“NCLT”) and the appellate body, National Company Law Appellate Tribunal (“NCLAT”), across various jurisdictions have started to allow exclusion of certain days from computation of this period ‘if the facts and circumstances justify such exclusion’, largely due to increased litigation on various unsettled issues under IBC. The NCLAT has also laid down a few grounds as illustrations for claiming such exclusion (for example, if CIRP is stayed, or resolution professional is not functioning). This has made strict adherence to the timelines contemplated under IBC a practical challenge. The press release issued by the Government with respect to the 2018 Ordinance stated that further clarity would be brought about vide regulations laying down mandatory timelines, processes and procedures for CIRP by addressing some of the specific issues including non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets. The existing regulations,once amended, to bring in place the proposed strict timelines will need to be examined.
- Is the Limitation Act, 1963 applicable to proceedings under IBC? The law relating to limitation of suits and other legal proceedings is covered under the Limitation Act, 1963 (“Limitation Act”). IBC earlier did not clearly set out whether the Limitation Act was applicable to the proceedings under it. Though NCLAT had in the matter of Speculum Plast Private Limited. v/s PTC Techno Private Limited (Speculum Case) held that the Limitation Act was not applicable to the proceedings under IBC, an appeal was referred to the Supreme Court. Pending the appeal, the 2018 Ordinance has shed some light on this issue by making the provisions of the Limitation Act applicable to the proceedings under IBC. The status of various applications pending before the NCLTs and pending appeal before the NCLAT or the Supreme Court may need to be seen in view of this newly inserted provision, especially since the new provision does not clarify whether the pending applications are protected under this provision. Also, the status of various applications which could not be filed in light of the Speculum Case, needs to be clarified. Interestingly, the NCLAT in the Speculum Case had observed that even if the Limitation Act were to be made applicable to IBC, the period of limitation of 3 years as per the Limitation Act would begin to run from the date when the right to apply under IBC accrued, i.e. 1 December 2016 (when IBC was notified). If the NCLTs take a cue from these observations of the NCLAT, could it mean that virtually no application can be rejected on the grounds of expiry of limitation period until 1 December 2019 or 3 years from the date of enforcement (6 June 2018) of the 2018 Ordinance?
- Obligations on the insolvency professional? IBC has provided various obligations upon an insolvency professional including keeping the corporate debtor as a going concern. In addition, the 2018 Ordinance has cast another responsibility for complying with the requirements under any law for the time being in force on behalf of the corporate debtor. In many instances, the regulator (Insolvency and Bankruptcy Board of India) has imposed penalties on insolvency professionals who have failed to comply with their obligations. However, as a practical matter, insolvency professionals (being individuals) may find it difficult to ensure strict compliance with IBC rules and regulations therein, as sole responsible persons appointed for the purpose. We may expect a change in the existing rules and regulations permitting a corporate body or a firm to be appointed as an insolvency professional to run the CIRP. Such an amendment would enable safeguarding and ring fencing the value of a corporate debtor under CIRP.
- Mandatory sale of shares of existing shareholders in a resolution plan? As per the provisions of IBC, a resolution plan may provide for the measures required for implementing it, including but not limited to the substantial acquisition of shares of the corporate debtor. It will be an interesting situation to see whether a contemplation in the resolution plan to require the sale of shares of an existing shareholder/promoter can be made binding against such shareholder/promoter, especially as IBC makes the resolution plan binding against the shareholders. In fact, IBC also provides that a provision in a resolution plan which would otherwise require the consent of the members or partners of the corporate debtor, under the terms of the constitutional documents of the corporate debtor, shareholders’ agreement, joint venture agreement or other document of a similar nature, shall take effect notwithstanding that such consent has not been obtained. These provisions seem to largely undermine the rights of the shareholders of the corporate debtor, especially when IBC has been introduced as a non-obstante law.
- What are the difficulties in withdrawing an application under IBC? Until the 2018 Ordinance, the language under IBC did not specifically provide for withdrawal once a petition for initiation of CIRP against a corporate debtor was admitted. Many parties had explored the settlement options after their cases were admitted. The NCLAT and Supreme Court of India had also allowed withdrawal on a case-by-case basis, which led to plethora of litigations. The Supreme Court had been exercising its powers under Article 142 of the Constitution of India (which gives it the power to pass orders for doing complete justice) to allow withdrawal. The 2018 Ordinance now provides for withdrawal after admission of an application under IBC, subject to the approval of the Committee of Creditors (“COC”) with 90% of the voting share. Since the procedure for such withdrawal has not been laid down yet, it will be interesting to see whether this mechanism proves viable, in practice. Also, keeping such a high threshold for withdrawal may pose practical difficulties, especially for operational creditors who do not form part of the committee of creditors.
- Whether moratorium is applicable to personal guarantor? IBC provides for applicability of ‘moratorium’ upon the admission of an application by the NCLT against a corporate debtor. The moratorium is essentially a period wherein no suits or proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against a corporate debtor. However, whether personal guarantee of the corporate debtor can be invoked pending the proceedings under IBC and in the light of the moratorium, was a question that created a lot of stir. While the Allahabad High Court in Sanjeev Shriya v/s State Bank of India & Ors, and Deepak Singhania & Anr v/s State Bank of India, (“Sanjeev Shriya Case”) vide order dated 6 September 2017 had answered the question in negative, with the ratio that while the liability of guarantors is co-extensive, but the entire proceeding which is going on before IRP under IBC is still in fluid stage and for the same cause of action, two split proceedings cannot go simultaneously before the debt recovery tribunal as well as NCLT. The 2018 Ordinance has intended to resolve the confusion, by stating that moratorium shall not apply to the surety in a contract of guarantee to a corporate debtor. This move could, however, give rise to multiple parallel proceedings as certain creditors would choose to rather invoke the guarantee than wait for CIRP to conclude. This might also lead to reconstitution of many COCs which have already been formed. It will also be interesting to see how the guarantors parallelly run two proceedings in light of the ratio of Sanjeev Shriya case.
- Whether operational creditors have any say in CIRP? As per IBC, the resolution plan requires approval from the COC which is constituted of financial creditors only even if there are operational creditors; however, in case there are no financial creditors, the COC comprises of operational creditors. There can be circumstances where a corporate debtor may have higher exposure of operational debt than financial debt – in such a scenario, it is not right to allow only the financial creditors to have the ability to adopt or reject a resolution plan.The 2018 Ordinance has in fact brought the allottees of any real estate project within the ambit of the “financial creditors”. Such allottees would also enjoy the rights available to a financial creditor such as forming a part of the COC and voting during the CIRP, but the operational creditors have been kept out of it.
- Criteria for eligibility of ‘resolution applicant’: too stringent? With an aim to put in place certain safeguards to prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of IBC, amendments have been made vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 and further by the 2018 Ordinance, to IBC to keep-out such persons who have wilfully defaulted, or are associated with non-performing assets, or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company. However, the grounds for eligibility of such a resolution applicant have been made quite stringent – given that the amendment is new, and its effects are still being tested, there is an apprehension that it might become impractical for bona-fide resolution applicants to submit a resolution plan, thereby defeating the spirit of IBC for revival of insolvent corporate entities. The 2018 Ordinance however states that the eligibility criteria as amended thereunder shall apply to the resolution applicant who has not submitted a resolution plan as on 6 June 2018. It would mean that the eligibility criteria applicable to the resolution applicants who have already submitted a resolution plan would be different from the eligibility criteria applicable to the resolution applicants who are yet to submit a resolution plan vis-à-vis the same corporate debtor. This might lead to an unfair advantage to certain resolution applicants over the others, so far as their eligibility criteria is concerned.
- Special resolution (75%) under Section 10 (suo-moto initiation of CIRP by corporate debtor)? Section 10 of IBC contains a provision whereby the corporate debtor itself can file an application for initiation of CIRP. This provision was earlier misused by certain promoters to avoid the attachment of their personal property which was secured against the loan facilities availed by the corporate debtor by obtaining an order of admission and hence moratorium. In order to rectify this shortcoming, the 2018 Ordinance has inserted a requirement of special resolution of the shareholders of the corporate debtors to trigger insolvency resolution under Section 10 of IBC. Given that this change is in nascent and has not been tested, in case of a typical joint venture structure (51%-49%), just one JV partner of a loss making JV may find it difficult to invoke the provisions of Section 10 of IBC for initiating CIRP.
IBC has brought about various welcome changes in the insolvency regime in India, such as incorporation of insolvency professional entities (“IPE”), through which both Indian and foreign insolvency professionals can provide services, thereby increasing the pool of talented and experienced insolvency professional in the country. In fact, IBC also contemplates and contains provisions whereby the Indian Government can enter into bilateral treaties with other countries for application of IBC to assets or property situated outside India.
Further, with a view to boost the micro, small and medium sector enterprises (“MSME”), the 2018 Ordinance has empowered the Government of India to provide a special dispensation under IBC. The immediate benefit it would provide is that, it would not disqualify the promoter to bid for his enterprise undergoing CIRP, provided he is not a wilful defaulter and does not attract other disqualifications not related to default. It has also empowered the Central Government to allow further exemptions or modifications with respect to the MSME Sector, if required, in public interest.
Though it is true that there are various gaps which need to be filled and various practical difficulties which need to be addressed under IBC, it has so far proved to be effective in meeting its purpose. As this law evolves, it is likely to further boost India Inc’s corporate governance practices and help the country optimally address the widespread problem of mounting corporate debt.