Portions relating to corporate insolvency in the Insolvency and Bankruptcy Code, 2016 (“Code”), were notified to come into effect from December 01, 2016. IFIN General Counsel, Vinay Bhatia, caught up with Santosh Janakiram and Dhananjay Kumar from Cyril Amarchand Mangaldas (CAM), and Dinkar Venkatasubramanian and Pulkit Gupta from Ernst & Young (EY), on their views on the Code, and the way forward.  Here are some of the excerpts of the discussion.
VB: Can you help summarise what are the important elements of the Code, and if you see this as a game-changer in the financial credit environment, and if it is the new order
CAM: The important elements of the Code include: (i) a time-bound resolution regime for distressed companies with limited court intervention; (ii) creditor in control regime; (iii) professionals managing the insolvency process; (iv) moratorium on overlapping proceedings; and (v) flexibility to financially or operationally restructure a distressed company without consent of the company or their shareholders. The Code is certainly a game changer for the financial credit market. If supported with adequate infrastructure, the Code will change the way creditors and debtors have looked at financial credit in India.
EY: The Code ensures certainty in the process, including what constitutes insolvency, the processes to be followed to resolve the insolvency, and the process to resolve bankruptcy once it has been determined. Such a framework can incentivize all stakeholders to behave rationally in negotiations towards determination of viability, or in bankruptcy resolution. In turn, this will result in shorter recovery timeframes and better recovery, and greater certainty on lenders’ rights leading to the development of a robust corporate debt market and unlocking the flow of capital.  The Code does make some fundamental changes to the existing insolvency resolution process, procedurally as well substantively.
VB: What are the important elements of change that the Code has brought about from the previous regime of insolvency in India? How would you compare this with the US and the UK systems? Do you think India has borrowed from the best of both systems? Is our infrastructure geared up for the change
CAM: Two important headline changes over the current regime are: (i) a creditor driven resolution regime; and (ii) a unified, time bound resolution and liquidation process. This is unlike the previous insolvency regime which was mainly court driven. In the US, the primary insolvency process (Chapter 11) is a debtor in possession model while India has chosen a creditor in possession model. Also, courts play a central role in the U.S. insolvency process, whereas the Code limits court’s intervention which is appropriate given the backlog of cases we have.
 In terms of principles, procedure and the role played by professionals, India has followed the UK administration model.
The current infrastructure is not fully geared to deal with the entire insolvency jurisdiction (both under the Code and the Companies Act, 2013) but we believe that this is a work in progress.
EY: The Code proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.   From balance sheet based test of insolvency in the previous regime, the Code now wants to trigger insolvency proceedings on the basis of cash flow default. It is modelled on ‘creditor-in-control’ bankruptcy law in UK as compared to ‘debtor-in-possession’ regime in US. The Code aims to combine best practices from across the world in a way to make it relevant for Indian context.
We currently may not have the ready infrastructure to manage the drastic changes, however that should not be a deterring factor. It can be created with concerted effort from all stakeholders.
VB: We have also notified changes to the Winding-Up and Liquidation regime under the Companies Act, 2013. Specifically on the liquidation process, is there a significant improvement that you see in the timelines
CAM: The Companies Act, 2013 requires the NCLT to fix a timeline for the liquidation process to complete and the Act also provides for regular progress reports. Overall, with involvement of professionals (under both the Code and the Companies Act, only insolvency professionals can be appointed as liquidators), the liquidation timelines will improve. The Code on the other hand requires liquidation to be completed within two years and an extension is granted only in exceptional cases. Such timelines were not prescribed under the 1956 Act. It is relevant to note that rules in relation to liquidation under Companies Act, 2013 have not been notified yet.
VB: You are of the belief that the Code is not a recovery tool in the hands of Lenders. Can you elaborate on that?
CAM: The Code is not meant to be a recovery/collection tool for lenders as the applicant creditor merely initiates the insolvency resolution process but the control of the process rests with the committee of creditors. The NCLT does not pass any order for payment of the debt of such creditor pursuant to the application. Also, the very fact that there is a moratorium on inter alia, the enforcement of security interests suggests that the Code is not a recovery tool. The priority accorded to secured creditors’ unpaid dues (below all other financial creditors) is also a clear indication that the Code bases itself on collective resolution rather than individual collection.
EY: The Code amply clarifies that insolvency or bankruptcy is a commercial issue, backed by law to enforce transparency and objectivity. It is modelled based on the thinking that as all businesses cannot succeed, it is perfectly normal for some businesses to fail, making it important to emphasise on corrective action.  One of the objectives of the Corporate Insolvency Resolution process (CIRP) is to provide an opportunity to work out a resolution / turnaround plan for the enterprise and give one more opportunity to recover a better value from the business than liquidation.

VB: The Code has given birth to a new regime of professionals – the Insolvency Professionals (IPs)? How do you see this evolving and how critical is their role in this
EY: Some of the key tasks IPs are entrusted under the Code are:

  • Manage the affairs of the corporate debtors as a going concern
  • Constitute the CoC, convene its meetings and conduct such meetings
  • Discharge various duties necessary to operate the enterprise as a going concern
  • Submit a resolution plan to the adjudicating authority as approved by the CoC

Lot of capacity building measures will have to be undertaken by the IBBI and IPAs to train and develop insolvency professionals. IP is one of the key pillars of the Code and quality and standard of job done by IP would be very critical for successful implementation of the Code.  This is probably first of its kind profession in India which gives so much power to a professional. It requires a significant mind set change in all stakeholders including the professional who would apply to be an IP. 
VB: There have been various initiatives that have been taken to help lenders and creditors – some of which have been effective and some of which not. What is the differentiating factor in the Code that can potentially ensure its success?
EY Some of the key factors that differentiate the Code and potentially ensure its success would be:

  • Right to control the borrower upon default and maximise recovery
  • Lender can initiate the process even if the default is in respect of the debt of another lender
  • Need for more robust monitoring systems to enable judicious exercise of powers
  • Lack of lender consensus on resolution plan can push the borrower into liquidation, hence, no action may not be a possible approach under the Code
  • Clear priority of distribution (waterfall) upon liquidation; government dues subservient to those of secured creditors and unsecured financial creditors

VB: Are there any FAQs that you can share with us on the Code?

  • What is the impact of the Code on the existing legislations such as SARFAESI, SICA, and Companies Act? SARFAESI is not affected by the Code except for the stay on enforcement during the moratorium period. SICA, as proposed from 2002, has now been repealed. Companies Act has been amended to streamline it with the Code
  • Can the Code be triggered in case of non-payment of dues by Government-owned companies? Yes
  • What has been the response of the RBI to the Code? Specifically, how does this impact bank provisioning guidelines? RBI is yet to clarify the asset classification and provisioning norms for restructuring under the Code
  • How does the Code help avoid litigations that may delay revival? There is a moratorium on initiation or continuation of any legal proceedings for a period of 180 days from the date of admission of the application
  • Should creditors trigger the insolvency process upon every default? Or should they evaluate other options outside the framework? Answer to this question may depend on viability of the business. If the business is viable and capable of turnaround, lenders may decide to trigger an CIRP
  • Does the Code provide immunity to the financial creditors to take hard measures (including haircuts) without fear of undue vigilance? What are the consequences of lack of consensus or lack of action? There is no immunity under the Code for the financial creditors for their decisions. However, the transparent and public process of resolution under the Code should help in dealing with vigilance issues. Lack of consensus or action will send the company into liquidation
  • Are the rights of foreign creditor any different from those of domestic creditors? All financial creditors are treated at par in terms of their right to initiate an CIRP and participation in the CIRP
  • What are the powers to minority creditors, operational creditors, and unsecured creditors? Can they block the resolution or liquidation process? Creditors can challenge the resolution plan on limited grounds. If 75% in value of the financial creditors approve a plan, it can not be blocked. However, dissenting creditors are given payouts of liquidation value in priority. Under the resolution plan, operational creditors can not be provided less than the relative liquidation value
  • How would personal guarantees of the promoters be enforced? Enforcement of such guarantees will occur under the DRT Act/in courts. A bankruptcy process can be initiated under the Code (when effective) against a personal guarantor, which action will be clubbed with the CIRP of the corporate debtor
  • Can IP take control of the assets in a subsidiary? No, assets of the subsidiary are out of CIRP/liquidation estate


 


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