In November 2019, Dewan Housing became the first non-banking financial company to be referred to the insolvency resolution process under Indian bankruptcy law. The process has seen four rounds of bids, of which the last two were driven by a bid submitted after the deadline. While one bidder withdrew from the process on grounds of unfair treatment, other bidders have protested against the late-stage non-compliant bid, which has further prolonged the insolvency resolution process and created a threat of litigation. While late-stage bids may be acceptable in exceptional circumstances, this cannot be allowed to become a regular feature of the insolvency resolution process. As described in more detail in this note, maximization of value of assets is not the sole objective of an insolvency resolution regime; such regime must also provide transparency and certainty, symmetry of information and a time-bound process to better preserve economic value.
This note, first published on the National Law School Business Law Review blog, discusses recent amendments to the [Indian] Insolvency and Bankruptcy Code, 2016 in light of the COVID-19 pandemic, which inter-alia temporarily prevent creditors from initiating insolvency proceedings against corporate debtors. While the proposed changes are a step in the right direction, the Government should also consider the impact of the pandemic on pending proceedings as well as alternative mechanisms to restructure debt and resolve defaults in a cost-effective manner to preserve value.
This note attempts to explain the unique predicament of operational creditors under the Insolvency and Bankruptcy Code, 2016 (IBC). It examines the various factors considered by the judiciary in recent pronouncements that have shaped the status of the operational creditors and outlines solutions that could be considered for a constructive resolution of the issues at hand.
This note is divided into four parts – the first part discusses certain issues considered by the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and others, and its key findings in this regard. In the second part, the authors highlight how the IBC and the ruling of the Supreme Court unfairly disadvantage operational creditors, and offer solutions in line with international practice. In the third part, the authors point out a lacuna in the IBC regarding the treatment of the claims of creditors with ‘disputed’ claims in an insolvency resolution process and propose an alternate framework to determine such claims. The last part underscores the key takeaways from this article and a few concluding thoughts.
On June 5, 2020, the Insolvency and Bankruptcy Code, 2016 was amended to inter-alia prohibit creditors and corporate debtors from initiating corporate insolvency resolution proceedings in respect of defaults arising during the six (6) month period from and including March 25, 2020 (the date of commencement of the national lockdown) – this period may be extended up to one (1) year.
As a part of a series of relief measures in response to the current pandemic situation, the Finance Minister of India has announced on May 17, 2020 a proposed suspension of fresh initiation of insolvency proceedings up to one year. In addition, it has been announced that the Central Government will be empowered to exclude COVID-19 related debt from the definition of “default” under the Insolvency and Bankruptcy Code, 2016, as amended. It is envisaged that an ordinance will be issued to give effect to such measures. This note considers certain points in connection with the proposed ordinance.
For the success of any insolvency regime, it is critical that distressed companies are prevented from takings measures which could hamper recovery to creditors in the event insolvency proceedings were to commence. Such protective provisions assume particular importance in the Indian context, where companies are often closely held by promoter groups who may seek to transfer value from assets through opaque structures to other group companies for their own benefit. Accordingly, the National Company Law Tribunal (the “NCLT”) is empowered to undo any such transaction to protect the interests of creditors and other stakeholders under the Insolvency and Bankruptcy Code, 2016 (the “IBC”).
Recently, in the matter of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and others (“Jaypee Infratech”), the Supreme Court of India clarified certain key aspects in respect of preferential transactions under Section 43 of the IBC. Such preferential transactions are one of the four categories of “avoidable” transactions (i.e., those which may be annulled or disregarded) under the IBC, the others being undervalued, extortionate and/or fraudulent transactions.
This note briefly discusses the different types of avoidable transactions under the IBC, the guidance issued by the Supreme Court on certain aspects of such transactions in Jaypee Infratech and a few key considerations for parties to mitigate the risk of their transactions falling within the ambit of such avoidable transactions.
In the wake of the COVID-19 pandemic, several corporate borrowers will find themselves in challenging financial circumstances that may require negotiations with their lenders or even full-fledged restructuring. The Reserve Bank of India (RBI) and Indian courts have granted temporary relief measures to offset the strain on borrowers. If required by borrowers or lenders, India offers the following out-of-court and in-court restructuring and enforcement mechanisms: (i) the RBI Framework for Resolution of Stressed Assets (introduced in June 2019); (ii) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act); and (iii) the Insolvency and Bankruptcy Code, 2016 (IBC). This note sets out such mechanisms and available relief measures. Given that the situation is constantly evolving, borrowers and lenders should remain vigilant about tracking legal and regulatory developments.
The COVID-19 pandemic has caused widespread disruption of businesses and daily life. As governments across the world struggle to contain the pandemic, a number of regulatory and policy measures are being implemented by the Government of India to minimize the impact of the disruption caused to several classes of persons and corporate bodies.
A recent measure is the increase in the threshold for default by corporate debtors under Section 4 of the Insolvency & Bankruptcy Code, 2016 (the “Code”) from INR 100,000 to INR 10,000,000 and a potential suspension of certain key provisions of the Code. These measures may have some positive and certain unintended consequences of concern to stakeholders.
Directors of a company in financial difficulty should be aware that their conduct may be subject to close scrutiny if the company is subject to insolvency proceedings under the Insolvency and Bankruptcy Code, 2016, as amended. The directors of such companies should take all steps to ensure that the company continues as a going concern. This is relevant as courts have held that unless all measures have been taken to revive a company, the making of a winding-up order may not be in the best interests of creditors, and going concern values may result in higher repayments to the creditors. In this regard, directors of a company in financial difficulty should be aware that their conduct may be subject to close scrutiny if the company falls into insolvency and such directors should be able to defend their actions provided that they were made in good faith.
By a judgment dated November 15, 2019, the Supreme Court of India has put an end to the long drawn out battle for the acquisition of steel giant – Essar Steel India Limited (“Essar Steel”) under India’s newly introduced insolvency legislation.