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.
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