The Insolvency and Bankruptcy Code, 2016 (the Code/ IBC) instituted about a year ago, continues to be in vogue. Acting as a key factor in the change of relationships between the creditors and debtors, it keeps adding a new colour to an everyday plain tabloid. The Code aims at establishing a time bound resolution of stressed assets within a maximum period of 270 days, failing which the corporate debtor will be liquidated. Much has been written about the issues under the Code vis-à-vis other regulations such as SEBI and Income Tax and the different measures taken by the government to address them. In this article, we attempt to throw light on the practical difficulties under the Code and the need to address them.
The Code still remains a work in progress and is continuously evolving. The government reviews the Code constantly to address its teething troubles. Like any new law, the Code requires regular tweaks for effective implementation. Recently, the Reserve Bank of India (RBI) scrapped numerous loan restructuring schemes (SDR, S4A, etc.) prevalent among banks for restructuring various defaulted loans and made their resolution time bound from March 2018. Stressed cases above the prescribed thresholds have to be resolved within the timelines, failing which the lenders shall file insolvency applications under the Code within 15 days. This appreciated move would ensure calibrated and time-bound resolution of all bad loans in the banking sector.
With the advent of the Code, the RBI had referred 12 major accounts with Non-Performing Assets (NPAs) for early resolution under the framework. Even as the 270-day deadline for these cases approaches in the next few weeks, the resolution of these cases may not see the light of the day within the stipulated deadline owing to various regulatory and commercial issues.
One of the unsettling issues was the prospect of promoters using the Code to regain control over their company by bidding for the assets and paying a fraction of what they originally owed to the lenders. To prevent this, the government released an ordinance introducing section 29A, which barred promoters from bidding for their own companies. This gave leeway to promoters to bid for their companies using clean front men. To address this, in the amendment bill replacing the ordinance, the government widened the scope of persons who are disallowed from bidding for their assets in the resolution process. Besides including promoters with NPAs of more than a year, section 29A also includes “connected persons.” However, the promoters can bid for their assets if they clear their dues before submitting a resolution plan. The definition of “connected persons” as laid out in the section includes a person who is a promoter or who are/ will be in the management and control of the resolution applicant, holding companies, subsidiary companies, associate companies or related parties of the persons referred to under the section. This provision makes a wide range of persons or entities ineligible because of their ties to entities barred under section 29A. Although the government makes a commendable effort to keep all ineligible characters away from the proceedings, this amendment could also hinder the resolution of insolvent companies.
The issue of “connected persons” has already become prevalent in case of many bids, thus creating apprehensions of legal logjams in the entire process. This can be seen in the bid for Essar Steel, which was locked in a battle between the two bidders: Arcelor Mittal and Numetal Mauritius. Although section 29A gives more teeth to the Code to distance dishonest promoters, it also debars indirect parties from participating in the resolution process, thereby, adversely affecting the fortunes of companies that are genuinely looking for a second chance. To avoid any mayhem under the Code, the government is considering easing the “related party” norms to ensure that the law is not overly restrictive and does not cut down the number of those eligible to bid for assets.
As the world shrinks into a global village with relationships developing between different economies, it is important to note that there is a missing piece in the Code, which might become significant for companies with substantial presence outside India. With an increasing number of Indian companies becoming global, there is greater need for a cross-border insolvency mechanism in the Code to help resolve insolvency cases involving foreign assets. For instance, if a holding company becomes insolvent but has a solvent subsidiary abroad, a reciprocal agreement with that country can help resolve such cases with ease. Unlike many other countries, India is not a signatory to a similar model law set by the United Nations. Lately, the government is facing problems in accessing the foreign assets of defaulters. To mitigate such barriers, the government is likely to tweak the Code and create a mechanism to resolve cross-border insolvency cases.
Banks in India place reliance on promoters and the personal guarantees they give. This is a cause of worry today because while most companies are crumbling under the weight of excessive gearing, promoters are carrying even higher leverage at the personal level. The issue faced here is–can the lenders invoke personal guarantees of promoters under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) and liquidate their assets? In a recent decision, the National Company Law Appellate Tribunal (Tribunal) ruled that once a company is admitted under the IBC, a moratorium is triggered, and hence, no legal action can be taken against such company. Thus, as per the Tribunal, the lenders cannot invoke personal guarantees and liquidate assets of a debtor facing bankruptcy proceedings. However, the lenders hold that since the insolvency proceedings are against the company and not against the guarantor, the moratorium period should apply to the company and not to the guarantor. Reviewing this and on recommendations of the insolvency law committee, the Code may be amended to allow lenders to invoke the personal guarantees of promoters, even if the resolution process has been initiated.
Inspired by other nations, in an attempt to bring together all the proceedings related to insolvency under one umbrella, the Code overlooked some of these domestic issues, which if addressed properly, would result in an efficient revival and certainly enhance the ease of doing business in India.
The views expressed in this article are personal. The article includes input from Sneha Subramanian, Associate, M&A Tax, PwC India