By Bahram N. Vakil
Advocate
Two years ago,
India was accorded number 130 in the World Bank’s Ease of Doing Business 2017
rankings,
with the average time for resolution standing at 4.3 years. Low recovery rates
had led to a dip in the number of high-risk high-return ventures, as investment
returns could not be guaranteed to investors’ satisfaction. However, with the
onset of the Insolvency and Bankruptcy Code, 2016 (“IBC”), there has been a sea
change in the restructuring space, leading to an increasingly diligent business
environment and a quicker turnaround on account of resolution plans being
completed within a year of the commencement of the IBC in several cases. India
displayed rapid progress as per the Ease of Doing Business 2018 rankings,
as it rose thirty ranks, and has
proceeded to further improve by twenty three ranks and jumped to number 77 in
the recently published Ease of Doing Business 2019 Rankings.
LEGAL CHANGES
Committee of Creditors
The IBC has undergone
a substantial amount of changes from its inception, evolving gradually based on
the needs of all the stakeholders involved. The commercial wisdom of the
committee of creditors (“CoC”) comprising of financial creditors has
been given utmost weightage, which can be deduced in a number of cases. The
voting threshold for major decisions to be undertaken by the CoC has been
reduced from 75 % to 66 %, whilst routine decisions can now be taken with the
approval of 51 % of the CoC, which was 75 % prior to the latest amendment.
Further, withdrawal of an application is now only permitted if 90 % of the CoC
approve the same.
Section 29A of the IBC
Section 29A of the IBC, which pertains to the eligibility criteria of
resolution applicants, has inspired intense debate from its inception. The
section has now been substantially amended in order to widen the scope of
ineligible resolution applicants, so as to protect the interests of the company
as a going concern and ensuring maximisation of the value of the assets. The
most notable case in this regard has been the ongoing resolution process of
Essar Steel Limited, wherein ArcelorMittal and Numetal Limited have been
engaged in a competitive bid process in order to acquire Essar Steel Limited.
This case has been instrumental in setting out the eligibility criteria
applicable to resolution applicants under the IBC.
Subsequent amendments have resulted in increasingly stringent conditions
being applied to defaulting promoters and their connected parties in order to
prevent them from finding loopholes to regain their companies after leading
them to financial distress. The exception to this rule is the MSME industry,
whose promoters are currently exempt from the restrictions applicable u/s. 29A
of the IBC.
Cross-Border Insolvency
Laws
With a number of creditors and assets located across the globe,
regulating the recovery and involvement of foreign assets and creditors has
gained an increasing urgency in order to address the interests of all
stakeholders. This has led to lawmakers initiating the process of aligning
domestic cross-border insolvency laws with existing international laws under
UNCITRAL. While the draft chapter, which is currently undergoing an extensive
review, deals with the laws pertaining to corporate debtors only, eventually
the focus will also include personal cross-border insolvency laws.
Impact of IBC across
all spheres of law
In order to
facilitate the smooth implementation of the IBC, a number of significant
changes have been introduced across several spheres of law, in the form of
amendments to the Income Tax Act, 1961, the Companies Act, 2013, multiple
Securities and Exchange Board of India (“SEBI”) regulations and the Real
Estate Regulations and Developments Act, 2016 (“RERA”).
a) Relaxations under Income Tax Act
With regard to
income tax, there have been two relevant changes in the form of amendments to
the Finance Act, 2018. Section 79 of the Finance Act, 2018 has been amended to
provide that business losses shall not lapse in respect of a company, whose
resolution plan has already been approved by the National Company Law Tribunal
(“NCLT”). However, the amendment has a caveat in the form of an
opportunity to appeal to higher authorities.
Moreover, section 115JB has been amended to provide that in the case of
companies whose application is admitted by the NCLT under the IBC, the amount
of total loss brought forward (which is inclusive of unabsorbed depreciation)
would be allowed to be reduced from the book profit for the purpose of levying
minimum alternate tax.
Additionally, a
reference could also be made to the Monnet Ispat & Energy Limited judgment,
which has rendered further clarity on the priority of the ranking provided to
the Income Tax Department under the waterfall mechanism provided u/s. 53 of the
IBC.
b) Exemptions under Companies Act, 2013
Under the Companies
Act, 2013, if a resolution plan has already been approved by the NCLT, then the
consent of shareholders of the corporate debtor (which is generally required
for significant corporate actions such as reduction of capital, disposal of
material assets and preferential allotment of shares), is not necessary for the
resolution plan to take effect.
c) SEBI
(Delisting of Equity Shares) Regulations, 2009
Delisting of
securities from stock exchanges generally requires compliance with stringent
pricing norms and appropriate shareholder consent. However, if delisting is
proposed under a resolution plan under the IBC, then exemptions from the
elaborate delisting requirements are available, provided, the resolution plan
under the IBC grants an exit option to the existing public shareholders at a
price not less than their liquidation value and the price provided to promoters
and/or other shareholders. Further, an application for listing of shares
delisted pursuant to a resolution plan under the IBC can now be made without
adhering to the cooling-off period prescribed under the delisting regulations.
d) Exemptions under SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015
Shareholder consent
is no longer required if certain actions are undertaken pursuant to an approved
resolution plan under the IBC. These include undertaking material related party
transactions, divesting control in a material subsidiary and selling more than
20 % of the assets of a material subsidiary. Relaxations have also been
provided for undertaking the actions listed herewith pursuant to an approved
resolution plan under the IBC such as change of promoter, a company procuring
professional management, and a reclassification of promoter(s) or promoter
group as public shareholder.
e) Exemptions under SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011
Companies which
have an approved plan under the IBC have also been exempted from the
requirement of making an open offer. Further, successful acquirers under a
resolution plan are now permitted to hold more than
75 % of the shares in a listed company, which would have otherwise breached the
requirement for a minimum public shareholding of 25 %.
f) Exemptions under SEBI (Issue of Capital and
Disclosure Requirement) Regulations, 2011
Preferential
allotment of shares can be made by companies if the preferential allotment
takes place as the result of a resolution plan under the IBC. Further
exemptions include relaxation from the multiple pricing requirements and
requirement of shareholder consents for allotment of equity shares and
convertible securities.
g) Real Estate Regulations and Developments
Act, 2016
With the Jaiprakash Associates Limited – Jaypee Infractech Limited case gaining
an exceptional amount of traction, it became essential to address the concerns
of home buyers as significant financial creditors. With the ordinance on 6th
June, 2018 and subsequently the amendment of 17th August, 2018
coming into effect, allottees under the Real Estate Regulations and
Developments Act, 2016 are now included as financial creditor(s) in keeping
with the amendment to the definition of financial debt.
The amendment and the outcome of the Jaypee Infratech Limited
matter has shown the efforts made by lawmakers to secure and protect the
interests of homebuyers who did not have any representation in the CoC despite
their substantial investment.
STRUCTURAL AND CULTURAL
CHANGES
The architects of
the IBC drafted the law with an endeavour to ensure that the company remains a
going concern. The IBC has provided the economy a medium to ensure commercial
stability. The IBC has now gained traction as a means of ensuring the
maximisation of the value of assets in a time-bound manner and preventing the
obliteration of the value of the assets of the company on account of corporate
distress.
In the course of
the last two years, a system comprising of experienced professionals and
organisations such as Insolvency Professionals (“IP”), Information
Utility (“IU”), Insolvency Professional Entities (“IPE”),
Insolvency and Bankruptcy Board of India (“IBBI”) in collation with the
adjudicatory authorities has managed to create an efficient ecosystem. The
combined efforts and experience of the aforementioned parties in dealing with
stressed assets can be credited for the significant turnaround the market has
undergone.
The IBBI has taken
up the mantle of regulating the aforementioned parties with multiple
regulations, guidelines and circulars, in order to help these parties to
smoothly navigate through these problematic situations. The adjudicatory
authorities have provided further clarity with regard to the laws applicable
and have adopted alternate approaches occasionally to ensure that the interests
of all stakeholders are not compromised.
The culture of
creditors consistently having to pursue debtors to ensure recovery has
gradually evolved into a culture wherein the promoters are viewing debt
repayment as an obligation, and not as an option, leading to speedier
resolution and recovery for the creditors. With promoters being held
accountable under the IBC, promoters have begun to take proactive steps to
ensure that defaults do not occur or are engaged in offering out-of-court
settlements for existing debts to their creditors.
The change has
percolated beyond debtors and creditors, and has led to a significant and
expedited improvement in the overall economic culture prevalent in the market,
with corporates opting to take quicker action with regard to deployment of
resources and smoother functioning in terms of timely payments in order to
reduce any possibilities of being involved in insolvency proceedings.
RBI Circular dated 12th
February, 2018 on Stressed Assets
Reporting
requirements have become increasingly stringent especially on account of the
RBI 12th February, 2018 circular (“Circular”), which in addition to
the multiple amendments to the law, has led to significant improvements in the
prevalent debt culture, with lenders exercising more caution by using
feasibility and viability as the determinants for future projects.
The IBC has
increasingly become more inclusive and creditor-friendly by providing for
mitigation of risk not only for financial creditors but also for operational
creditors. With regard to financial creditors, home buyers are also considered
as a class of financial creditors, a step which has provided substantial relief
to the common population in addition to corporate organisations.
The circular has also led to an improvement in ensuring post-credit
disbursement discipline, in addition to future lenders increasing their
diligence and prudence while determining the viability of a project which they
intend to fund.
It must be noted,
however, that the ensuing litigation filed by a number of power companies has
led to a halt to the ongoing process of bringing to task a number of defaulting
companies as banks refrain from reporting them as non-performing assets.
Project Sashakt
In addition to the
Circular, Project Sashakt has also been largely responsible for introducing a
structural change in the business environment by increasing transparency and
investor confidence with regard to the financials of a bank. Early resolution
is key to the preservation of organisational capital and to ensuring a quicker
turnaround with regard to the resolution process.
The committee
headed by Mr. Sunil Mehta suggested a five-pronged approach, which would result
in bad loans amounting to up to Rs. 50 crore being managed at the bank level,
within a stipulated deadline of 90 days, whilst bad loans between Rs. 50 crore
to Rs. 500 crore would require banks to enter into an intercreditor agreement,
which would authorise the elected lead bank to implement a resolution plan in
180 days or make reference of the asset to the NCLT. As a part of Project
Sashakt, the government is currently looking into instituting an Asset
Reconstruction Company (“ARC”) and an Asset Management Company (“AMC”)
and is on the lookout for possible investors who would be willing to fund the
AMC.
A collation of the
ideas and implementation respectively for Project Sashakt and the Circular is
expected to bring in substantial improvement with regard to debt recovery in
compliance with expedited timelines.
CASES WHICH HAVE MADE
AN IMPACT
a) Bhushan Steel Limited
Bhushan Steel Limited (the company has been renamed as Tata Steel BSL
Limited) and Bhushan Power and Steel Limited have been a significant part of
the resolution process under the IBC. Bhushan Steel Limited was one of the
first major companies to achieve resolution and was acquired by Tata Steel
Limited. Bhushan Power and Steel Limited is currently undergoing the resolution
process, with its three bidders – Tata Steel Limited, JSW Steel Limited and
Liberty House. Bhushan Power and Steel Limited has undergone two rounds of
bidding. In the first round of bidding, Liberty House submitted its bid after
the proposed deadline, and filed before NCLT an application seeking consideration
of its bid. The NCLT subsequently directed the CoC to consider Liberty House’s
bid, resulting in Tata Steel Limited appealing before the NCLAT to discount
Liberty House’s bid from being considered on account of non-adherence to the
procedure.
The NCLAT, however,
asked the CoC to reconsider Liberty House’s bid. With a number of appeals filed
by both Liberty House and Tata Steel Limited based on several issues,
eventually the NCLAT asked lenders to consider the three bids submitted by Tata
Steel Limited, Liberty House and JSW Steel Limited in a second round of
bidding. Reports state that currently JSW Steel Limited is the H1 bidder for
Bhushan Power and Steel Limited after Tata Steel Limited refrained from
revising its bid.
b) Essar Steel Limited
The ongoing
resolution process of Essar Steel Limited has significantly led to the
developments which have taken place in section 29A which sets out the
ineligibility criteria of resolution applicants. ArcelorMittal and Numetal
Limited have been engaged in a competitive bidding process for more than a year
in order to procure one of the largest steel companies in India.
This led to the
eligibility of both the companies to be re-examined in light of the amendment,
with the Resolution Professional declaring both the prospective resolution
applicants as ineligible. A number of applications were filed by both the
companies pertaining to the ineligibility of the other company on account of
their association with non-performing assets. The orders passed by the courts
in this matter have dealt in detail with issues concerning management and
control in addition to lifting of the corporate and several other aspects of
section 29A. Subsequently, both
companies were asked to clear their non-performing assets (“NPA”) within
two weeks from the order passed by the Supreme Court on 4th
October,2018.
ArcelorMittal has offered to pay Rs. 42,000 crore for Essar Steel
Limited. ArcelorMittal has already made a payment of Rs. 7,469 crore in order
to clear the outstanding liabilities on account of NPAs, Uttam Galva Steels
Limited and KSS Petron Limited in keeping with the order of the Supreme Court.
However, in a last attempt to save their flagship company, the promoters of
Essar have offered to pay back all dues, amounting to Rs. 54,000 crores. Even
though ArcelorMittal has been declared as the H1 bidder, a number of creditors
have challenged the decision before the adjudicatory authorities claiming that
the plan does not address the interest of all stakeholders sufficiently. The
outcome of this case will play a significant role in determining the future of
a number of NPAs.
c) Jaypee Infratech Limited – Jaiprakash
Associates Limited
The case concerning Jaypee Infratech Limited – Jaiprakash Associates
Limited has been instrumental in helping home buyers to secure their rights as
financial creditors in the CoC, and participate in the resolution process.
The courts have
gone out of their way to ensure that the rights of home-buyers are not
compromised as far as possible and have accorded home-buyers the status of
financial creditors in order to render them a voice with regard to major
decisions to be undertaken by the CoC.
Jaypee Infratech
Limited provided an upstream guarantee to its parent company, Jaiprakash
Associates Limited. However, subsequently both companies have become NPAs.
During the first attempt for resolution, the CoC for Jaypee Infratech Limited
had decided to liquidate the asset on account of unviable proposals. However,
the liquidation proceedings were stayed by the Supreme Court, whilst NCLT asked
Jaiprakash Associates Limited to return 760 acres of land to Jaypee Infratech
Limited on account of the transaction being deemed undervalued and fraudulent.
Through subsequent court hearings, the Supreme Court asked Jaiprakash
Associates Limited to pay Rs. 1,000 crore, which was subsequently reduced to
Rs. 650 crore.Since liquidation would not
serve the purpose of recovering the dues of the creditors, the Supreme Court
opted to restart the resolution process and included home buyers as a class of
financial creditors in the CoC. The insolvency process for Jaypee Infratech
Limited has commenced, with the home-buyers voicing their opinions with regard
to the selection of the resolution professional already.
CONCLUSION
In a short span of two years, the IBC has managed to stabilise the
economy to a considerable extent. By establishing an efficient ecosystem of
dedicated organisations and individuals with experience in the field of
insolvency and bankruptcy, the market has witnessed a turnaround with regard to
NPAs in multiple sectors. Credit must be given to the lawmakers and
adjudicatory authorities for the efforts they have made to address the best
interests of all stakeholders to the best of their capacities.
It must also be
duly noted that with defaulters being held accountable for their financial
irresponsibility under the IBC, the managements responsible for companies, such
as promoters, are proactively engaged in ensuring that their companies do not
convert into NPAs.
In cases where
companies have defaulted, attempts are being made to convince their creditors
to accept out-of-court settlements. Alternatively, by means of IBC, distressed
asset fund investors are being provided with multiple opportunities for
investment and to ensure the turnaround of NPAs. This is gradually reflecting
positively on the fiscal health of the economy. In the course of another year,
the impact that IBC has made as a path-breaking law will be clearly evident as
a number of approved resolution plans will be implemented to a substantial
extent.
