Skip to main content

Legal Capsule: Enforcement of Rights Of Foreign Lenders Under IBC, 2016 by Economic Laws Practice

Prior to the enactment of the Insolvency and Bankruptcy Code, 2016 (“Code”), recourse for insolvency and debt recovery matters under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”)and the Recovery of Debts due to Banks and Financial Institutions Act, 1993 was available only to domestic financial creditors. As things stood back then, foreign creditors could not seek recourse under these statutes.

As a significant step toward creating a level playing field and extinguishing the undue advantage accorded to domestic financial creditors, the Code has now brought within its purview foreign creditors as well, encompassing both operational as well as financial creditors.

Indian judiciary has played an active role in bringing about this change and ensuring recourse is provided to foreign creditors under the Code. While Ahmadabad and Mumbai benches of NCLT had admitted applications by foreign financial creditors against Essar Steel India Limited[1] and Ruchi Soya Industries Limited[2] respectively, the Hon’ble Supreme Court, in the case of Macquarie Bank Limited v. Shilpi Cable Technologies Limited[3], while deciding on the matter of whether a foreign operational creditor needs to bank with an Indian bank to file a claim, held that, “The Code cannot be construed in a discriminatory fashion so as to include only those operational creditors who are residents outside India who happen to bank with financial institutions which may be included under Section 3(14) of the Code.It is no answer to state that such person can approach the Central Government to include its foreign banker under Section 3(14) of the Code, for the Central Government may never do so. Such persons ought to be left out of the triggering of the Code against their corporate debtor, despite being operational creditors as defined, would not sound well with Article 14 of the Constitution, which applies to all persons including foreigners. Therefore, as the facts of these cases show, a so called condition precedent impossible of compliance cannot be put as a threshold bar to the processing of an application under Section 9 of the Code.”

Key considerations

The following points are important for foreign creditors to take note of, as they seek to enforce their rights under IBC, 2016:
  • Foreign creditors will individually be able to initiate the insolvency process and thereby bring the corporate debtor and all other creditors to the table to finalise a resolution process.
  • A foreign creditor, being an applicant, will have a right to choose the interim resolution professional who will accept claims from all, form the committee of creditors and also organize for determination of ‘liquidation value’ for the Corporate Debtor.
  • All financial creditors (including foreign financial creditors) will form part of the committee of creditors and can participate either physically or through video conferencing and vote on all matters during the resolution process. The voting share shall be proportionate to the extent of the debt owed to such creditor vis-à-vis the cumulative financial debt.
  • As a creditor and a claimant, the foreign creditor will be provided with the information memorandum, the resolution process details, resolution plans and will therefore be privy to all information in relation to the corporate debtor, as available with the members of the committee. The resolution professionals are prohibited from sharing information separately with any other individual entity.
  • For creditors who have provided external commercial borrowing or for any other transaction where terms have been reported to the RBI, any alteration of terms may require permission or additional filings. However, the resolution plan can seek waivers and the National Company Law Tribunal can direct authorities to consider providing the necessary approvals in the interest of reviving the business of the corporate debtor.
  • The resolution plan, once approved and sanctioned by the adjudicating authority, becomes binding on all the shareholder, creditor and stakeholders of the company including dissenting financial creditors and operational creditors. Additionally, the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
  • Associated regulations have also been considerably relaxed to facilitate the insolvency process. For example, shareholders’ approval if required for a certain act under the Companies Act, 2013, will not be required in order to implement the resolution plan. Similarly, there have been exemptions provided under the Income Tax Act, 1961 and by regulators such as the Securities and Exchange Board of India.
  • In case the group companies have provided support (either as guarantor or security provider), it may be adequate indication to make demands on them directly or initiate action against them. The moratorium under the Code is only applicable qua the corporate debtor and its assets.
  • For Indian companies that have assets outside India, the regulations for cross border insolvency have been notified by the Indian government. However, the government is required to finalise agreements with reciprocal territories to make it effective.
  • Moratorium, once declared under the Code, is applicable to the assets of the corporate debtor along with institution or continuation of any proceedings. Foreign creditors must be aware of this fact for all cases where the insolvency process is initiated in order to protect their own interest.
  • It is imperative that the creditors file their claims with the resolution professional. Until the creditor lodges its claim, it cannot be part of the committee of creditors. The Code does not require the notice to be provided to a creditors.
  • As a result of the Code, transaction documents may be required to be modified to add information covenants, alter certain representations and some of the events of default. Also, it would be important for creditors to ensure that all relevant information qua the transactions are updated with the relevant repositories. 

Foreign investors exploring distressed assets investment opportunity in India will certainly find these developments reassuring. The Code has now created a level playing field to ensure that lenders of all stripes are on the same footing and equal opportunity is created for all creditors in case of a default by a corporate debtor. In light of several companies entering the revival phase, there is heightened search for entities that are willing to provide cash injection, whether through debt, equity or mezzanine structures. The foreign party, as a resolution applicant, can also submit a resolution plan for the corporate debtor’s resolution (promoters of defaulted companies have been made ineligible for bidding under the resolution process for companies under the Code).

The clear intent of the judiciary to adhere to timelines suggested in the Code, being duly implemented, will provide a huge boost to investor sentiment and provide clarity qua enforcement timelines. This new regime has created a functional and effective way for foreign creditors to recover from their Indian borrowers and is a significant step forward for India, bringing the prevailing practice in line with global standards.

Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry. Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back? Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms

ChrysCapital, Motilal Oswal PE & Sequoia named PE-VC Firms of the Decade

Press Release ChrysCapital, Motilal Oswal Private Equity and Sequoia Capital India have been named the top Private Equity & Venture Capital investors in India during the last decade, as part of Venture Intelligence’s APEX Awards. The Venture Intelligence “Awards for Private Equity Excellence” (APEX) is dedicated to celebrating the best that the Indian Private Equity & Venture Capital industry has to offer.  While ChrysCapital won the “Private Equity Investor of the Decade” award, Motilal Oswal Private Equity was feted as India’s “Growth Capital Investor of the Decade”. The Indian arm of the storied Silicon Valley VC firm, Sequoia Capital, was named the country’s “Venture Capital Investor of the Decade”. The APEX Awardees are selected based on both Self Nomination by the participating PE-VC firms as well as "crowd sourced" nominations and voting from the Limited Partner, PE-VC and advisory communities. (The main criteria were Exit Track Record, New Fund Raises & Fo

Ambit tops League Table for Transaction Advisors to Private Equity deals in 2019

Ambit Corporate Finance topped the Venture Intelligence League Table for Transaction Advisor to Private Equity Transactions for the year 2019. Ambit advised PE deals worth $2.4 Billion (across 4 qualifying transactions) during the period. Citi ($1.1 Billion across 2 deals) and  Avendus  ($969 million across 12 deals) took the second and third spot. Edelweiss Financial Services ($758 million across 9 deals) and  PwC  ($708 million across 15 deals) completed the top five in 2019.  The  Venture Intelligence League Tables , the first such initiative exclusively tracking transactions involving India-based companies, are based on value of PE and M&A transactions advised by Financial and Legal Advisory firms. Ambit Corporate Finance advised the $1.9 Billion buyout of Pipeline Infrastructure from Reliance Industries   by Brookfield Asset Management  and the IFC and I Squared Capital-backed   Cube Highways' acquisition of Delhi-Agra Toll Road from Reliance Infrastructu

Jio deals help PE investments climb 12% in H1'20 to $18.8 B

Press Release With Reliance Industries' communications unit Jio Platforms attracting 51% of the investment value, Private Equity-Venture Capital (PE-VC) investments in India rose 12% during the first 6 months of 2020 to $18.8 Billion (across 341 deals), shows data from  Venture Intelligence , a research service focused on private company financials, transactions and their valuations. Investments totaling over $9.5 Billion in Jio by a troop of global private equity firms, following social media giant Facebook's $5.7 Billion mid April investment in the company, helped overall PE-VC investments better the $16.8 Billion (across 503 transactions) invested during the same period in 2019. (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate).   Jio Platforms' $9.5 Billion Private Equity haul (excluding Facebook’s strategic investment) was led by Middle Eastern and American investors with KKR, Saudi Arabia's Public Invest

Inventus, Sixth Sense, Blume & Norwest win Apex'20 Venture Capital Awards

Inventus Capital Partners, Sixth Sense Ventures, Blume Ventures and Norwest Venture Partners were voted the top Venture Capital investors in India during 2019. The Venture Intelligence “Awards for Private Equity Excellence” (APEX) is dedicated to celebrating the best that the Indian Private Equity & Venture Capital industry has to offer. Other 2019 winners in the VC segment included  Axilor Ventures which was voted   the  Accelerator of the Year for the second year running, 3one4 Capital (VC Fund Raise of the Year) and Innoven Capital (Venture Debt firm of the Year). The APEX Awardees are selected based on both Self Nomination by the participating PE-VC firms as well as "crowd sourced" nominations and voting from the Limited Partner, PE-VC and advisory communities. (The main criteria are Exit Track Record, New Fund Raises & Follow-on Funding Rounds for Portfolio Companies).    " It is an honour to be recognised by entrepreneurs and investors as