Restructuring and Insolvency Archives

Renewed Challenges to the IBC Distribution Waterfall

Insights | December 28, 2022 | Practice Area: General Corporate, Mergers and Acquisitions, Regulatory, Restructuring and Insolvency

The Insolvency and Bankruptcy Code, 2016 (“IBC”) ushered in a new era in the Indian insolvency regime by introducing a distribution waterfall mechanism under Section 53 of the IBC. The waterfall mechanism prioritizes dues owed to financial creditors over dues owed to operational creditors and government authorities.
The waterfall mechanism in the IBC is based on the recommendations of the Bankruptcy Law Reforms Committee. The preamble to the IBC also highlights its objective of balancing the interests of the stakeholders, including by alteration in the order of priority of payment of government dues.
There has recently been a rising trend of courts and tribunals seeking to deviate from the distribution waterfall under the IBC. Unfortunately, this tends to put the success of an insolvency resolution process at risk. In this note, we examine three recent examples and discuss why any such deviation could disturb the delicate balance sought to be achieved under the IBC.

Vidarbha Industries v. Axis Bank: An Unsettling Literal Interpretation

Insights | November 25, 2022 | Practice Area: General Corporate, Regulatory, Restructuring and Insolvency

The enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) marked a historic shift in India’s insolvency regime shifting the focus from recovery to resolution. The Bankruptcy Law Reform Committee (“BLRC”) reports highlighted the need for the legislative policy to initiate a resolution process at the instance of default to prevent erosion of value. Keeping this objective in mind, the IBC lays out a party driven process which places the creditors at the helm of the resolution procedure.
The Supreme Court of India (“Supreme Court”) has repeatedly held that keeping in mind the objectives of the IBC, the adjudicating authority at the stage of admission into the corporate insolvency resolution process needs to restrict its analysis to: (1) the existence of debt and (2) default in payment of debt. However, on July 12, 2022, the Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited (“Vidarbha”), relying on the use of the word “may” in the relevant statutory provision, applied the literal interpretation test and held that National Company Law Tribunal has the discretion to admit an application after it is satisfied regarding the existence of debt.
This judgment, which departs from precedent, could have serious consequences for the insolvency regime in India. This note discusses the implications of a literal interpretation test in context of Vidarbha and highlights the need for an intervention to avoid the mistakes of the past.

Insolvency and Bankruptcy Code: Resolution Plan Approved by the Committee of Creditors Cannot be Modified or Withdrawn

Insights | September 28, 2021 | Practice Area: Litigation and Arbitration, Restructuring and Insolvency

Recently, pursuant to its decision in Ebix Singapore Private Limited v Committee of Creditors of Educomp Solutions Limited and Anr., the Supreme Court of India extensively analyzed the status of a resolution plan approved by the Committee of Creditors but pending approval of the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016. The Supreme Court observed that such a resolution plan binds the Committee of Creditors and the Resolution Applicant and reinforced the strength of the decision of the Committee of Creditors in favor of a resolution plan. The Supreme Court also, once again, clarified the scope of scrutiny, at the stage of approval of a resolution plan, by the National Company Law Tribunal and consequently by the National Company Law Appellate Tribunal.

An Alternative Approach to a Code of Conduct for the Committee of Creditors in an IBC Process

Insights | September 22, 2021 | Practice Area: Corporate Governance and ESG, Litigation and Arbitration, Mergers and Acquisitions, Restructuring and Insolvency

Recently the Standing Committee on Finance in a report placed before the Parliament on August 3, 2021 proposed a Code of Conduct for the Committee of Creditors in a corporate insolvency resolution process under the Insolvency and Bankruptcy Code. Following such report, the Insolvency and Bankruptcy Board of India has published a discussion paper on August 27, 2021 which includes, among other things, a draft Code of Conduct. This note considers an alternative approach for such a Code of Conduct.

Pre-pack Resolution Route Needs Incentives

Insights | September 1, 2021 | Practice Area: Banking and Finance, Restructuring and Insolvency

The recent amendment to the Insolvency and Bankruptcy Code, 2016 (“IBC”) replaces an ordinance promulgated earlier this year, and provides for a pre-packaged insolvency resolution process (“PIRP”) for micro, small and medium enterprises (“MSMEs”). The PIRP comes in the backdrop of the financial stress caused by COVID-19 and aims to cause minimal disruption to business and to ensure job preservation. While the PIRP is well intended, how effective it will be in resolving stress on corporate debtors in the MSME sector will come down to how it is implemented and if required, fine tuning its design.

The Videocon Insolvency Resolution Process: Is Reading Between the Lines Warranted?

Insights | August 5, 2021 | Practice Area: Corporate Governance and ESG, Litigation and Arbitration, Mergers and Acquisitions, Restructuring and Insolvency

By an order dated July 19, 2021, the National Company Law Appellate Tribunal (the “NCLAT”) stayed the operation of the order of the National Company Law Tribunal (the “NCLT”) which had approved a resolution plan in relation to the Videocon group. In staying the operation of the NCLT’s order, the NCLAT appears to have been influenced by the observations of the NCLT on two points, a substantial haircut and a breach of confidentiality. Apart from these two points, this note considers a possible shortcoming in the NCLT order in relation to treatment of dissenting creditors.

Residuary Jurisdiction of the National Company Law Tribunal under Section 60(5) of the Insolvency and Bankruptcy Code, 2016: A Brief Analysis

Insights | May 12, 2021 | Practice Area: Banking and Finance, Litigation and Arbitration, Restructuring and Insolvency

Pursuant to Section 60(5) of the Insolvency and Bankruptcy Code, 2016 the National Company Law Tribunal is bestowed with wide jurisdiction to decide: (i) ‘any’ application or proceeding against a corporate debtor; (ii) ‘any’ claim made by or against a corporate debtor including claims by or against its subsidiaries; and (iii) ‘any’ questions of priority or ‘any’ question of law or facts, arising out of or in relation to insolvency resolution or liquidation proceedings of the corporate debtor. Are there any limits to such jurisdiction of the National Company Law Tribunal?

Case Note: Judgement of the Supreme Court in the Essar Steel Case

Insights | April 2, 2021 | Practice Area: Banking and Finance, Litigation and Arbitration, Restructuring and Insolvency

By a judgment dated November 15, 2019, the Supreme Court of India in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others delivered its final verdict on the acquisition of Essar Steel India Limited under the Insolvency and Bankruptcy Code, 2016. The proceedings under the IBC in relation to the acquisition of Essar Steel lasted for more than two years and laid down precedents on several questions arising out of the then newly introduced insolvency legislation in India. This paper is a comment on this judgment. It critically analyses the decision of the Supreme Court and the impact of the judgment on insolvency law in India.

IBC: Supreme Court of India Endorses the Fresh Start on a Clean Slate Principle

Insights | March 1, 2021 | Practice Area: Litigation and Arbitration, Regulatory, Restructuring and Insolvency

The Supreme Court of India in the Essar Steel case held that allowing claims apart from those covered in a resolution plan to survive after approval of a resolution plan militates against the rationale of Section 31 of the IBC. The Supreme Court recognized that a successful resolution applicant should be given an opportunity to take over and run the business of the corporate debtor on a clean slate. Subsequently, the legislature introduced Section 32A of the IBC to provide that a corporate debtor shall not be prosecuted for an offence committed prior to the corporate insolvency resolution process, subject to certain conditions. Recently, the Supreme Court dismissed a writ petition challenging the constitutional validity of Section 32A of the IBC. The Supreme Court issued an unequivocal declaration of the need to give the successful resolution applicant a fresh start.

Dewan Housing: Why insolvency resolution processes need a greater degree of certainty

Insights | December 28, 2020 | Practice Area: Banking and Finance, Mergers and Acquisitions, Restructuring and Insolvency

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.