By Vedant Sumant, Law Student, Gujarat National Law University, Gandhinagar
The IBC was a visionary legislation which envisioned increasing the ease of doing business in Bharat but it had its own cons. These cons were magnified due to the restrictions in place put in effect in order to curb the spread of Covid-19. If the very resolution process gets affected then there can be no proper business environment in such a country for which suspension of certain IBC provisions was made. But mere suspension is not going to act as an adequate reform and the supporting actions, various policy initiatives and debate narratives need to be kept in mind in order to restructure the company de-hors the processes mentioned in IBC needs to be focused on. For this purpose analysis of both domestic and foreign policies is necessary in conjunction with the judicial precedents and legislative ordinances in order to create an enactment well suited to the needs of Bharat.
The suspension of Insolvency and Bankruptcy Code, 2016(1) was the direct result of the world being plagued by the Novel Corona virus and its effect on business and the economy. It was effectuated with an aim to fulfil two purposes. It aimed to reduce the burden of cases on NCLAT and to further aid the debtors to restructure and deal with their debt exposure and non performing assets in a way as to mitigate their Covid-19 induced rising insolvency.
Now it can be said that IBC is an ambitious piece of legislation which was legislated by envisioning the promotion of business environment in the country. The entire process of resolution of stressed assets has traditionally been led by a process headed by NCLAT(2). Vested interests, long drawn out litigations and periodic re-interpretations of law have prevented the enactment from expediting the resolution of stressed assets(3). It has become the very monster that it was birthed to destroy. The classic example for this phenomenon is the Essar Steel Insolvency(4). In order to rid us of this anomaly RBI came up with the Prudential Framework for Resolution of Stressed Assets(5) on June 7, 2019. This circular provided for an alternate path of remedy by giving regulated creditors by RBI a way to resolve or restructure the debt outside the code. This circular laid down a flexible way for the lender to formally or informally propose a resolution plan wherein they can resolve the stressed assets under IBC and upon its failure proceed for the liquidation process forthwith.
Further The Companies Act(6) s.230(7) provides for a scheme of compromise and arrangement and backs the essence of the IBC which is not just to provide a tool in the hands of the creditor to liquidate the companies to realise the debt but to expedite and simplify the process of revival of a company(8). This scheme is not allowed to be introduced by undesirable people defined u.s.29A IBC(9) but the NCLAT’s order to preclude promoters from introducing the scheme must be re-interpreted as s.29A only prevents promoters in default (NPA), thus a class of promoters who do not fall under the said definition must be allowed to raise such a scheme, as liquidators have a general power as lex specialis overrides lex generali(10), thus aiding the resolution process in such trying times. Per se s. 230 of the companies act might go against the s. 29A of the IBC but in the decisions of Anil Bafna v. Madhu Desikan and Ors.(11) the promoters have been given a roundabout way to be allowed to file a scheme of resolution if the NCLT orders for a liquidation of the company. Also in the decision of Rasiklal Mardia v. Amar Dye Chem Limited(12) NCLAT clearly held that even the promoter can apply for a scheme of arrangement and interpreted that the liquidator is an additional person and not an exclusive person to have the authority to apply to s. 391(13) of The Companies Act, 2013. Now the approving of a scheme by an adjudicatory authority has to be sent via notice to all the sector regulators like SEBI, RBI, Central government, Income Tax Authorities and the Registrar of Companies and all those who will likely be affected by such a decision. The law makers must legislate a policy keeping in mind the leanings of the judicial precedents as mentioned above, with regards to the promoters rights which decidedly eases the process of resolution in the current ongoing situation of a pandemic and removes the grey area that is currently existing between the aforementioned two sections.
The reform process started with the Sunil Mehta committee proposing the idea of Project Sashakt(14). This report suggested a bank led approach of restructuring loans and resolution of bad debt/ stressed assets which is being followed upon by the recent RBI circulars but the multi-pronged inclusive process aimed at resolving bad loans as suggested in the aforementioned committee was not complied with even after the Indian Banking Association being in full support of it. The government should have made the Sashakt India AMC(15) operational a long time ago. This institution would have been perfect in the effective utilization of the funds that the government has kept aside for the MSMEs according to the its stimulus package as announced by Finance Minister Shri. Nirmala Sitharaman on 11.05.2020(16). Adequate but not excessive regulatory forbearance is required by going through s. 21(17) of IBC, 2016, which lays down that the interim Resolution Professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors who, post meeting the requirements as mentioned in s. 30(2)(18) of the same Act shall pass the resolution plan approved by the adjudicating authority which shall be binding on the corporate debtor, must not be included as a mandatory step within the structure already suggested in reference to the creation of a Steering Committee using a template approach and the creation of a market where banks can offload large exposures/distressed assets and will ensure the quantification of such assets and their exchange leading to a robust outside restructuring process aiding the parties in the matter thereto, to effectively deal with the unique problems that have arisen due to the Covid-19 situation that Bharat is currently suffering through.
Recently in most bank led resolution processes it has been insisted upon for raising the funds from HFCs and the NBFCs to create a scheme on the designs of a one-time restructuring of loans mainly focusing on the 50-100 bad load category of accounts in order for the debtors to renegotiate loan terms to extend the repayment cycle and to cut the loan rates. The extension of such a moratorium period can only be possible if there is a policy directive from the RBI with respect to this though on proper analysis it can be deduced that such a moratorium is a last ditch attempt to save sectors which have been highly affected due to the ongoing pandemic therefore such a benefit must be provided in a piece-meal method where only certain sectors like hospitality and tourism must be afforded this scheme of resolution which have been the hardest hit.
Even after a lot of economists suggesting the setting up of a bad bank and the Sunil Mehta Committee specifically being told to consider the setting up of a bad bank in India, I observe that the concept of a Bad Bank is not necessary, especially when we have institutions like National Investment and Infrastructure Fund(19) and ARCs like Arcil Ltd.(20) which is already promoted by banks which ensure that instead of buying bad loans and illiquid holdings of another financial institution, the assets will be sold down to strategic buyers over a period of time.
In order to to fine tune the policy framework we must have a look towards The UK(21) Corporate Insolvency and Governance Act, 2020(22) which is transparent and unambiguous. It’s s.12(23) stipulates the exclusion of wrongful trading which to an extent with certain conditions applicable over the categories of the companies mentioned therein, removes the liability from a person for the worsening of the financial condition of a company during the relevant period so mentioned. Whereas Schedule 9(24) lays down the arrangements and reconstructions for companies in financial trouble in which it is pertinent to note that it envisions both a present scenario and a future one in 901A(2)(25). In s. 901G(26) of the same act there is a requirement of 75% of creditors for the acceptance to a compromise arrangement in case of dissent by one or more classes of creditors which according to me is a bit higher and acceptance standards for Bharat must be kept at 66% as has been recently amended via the IBC ordinance promulgated(27). This particular enactment also provides for special cases in several provisions and for the powers of a bank under proceedings mentioned in Financial Services (Banking Reform) Act 2013(28) u. s. 124A(29) which will be inserted after s. 124(30) which will be an amendment in The Companies Act 2006(31), part 26(32).
The policy analysis of this act leads me to believe that Bharat’s government must refer to the said schedule before drafting a policy in reference to the suspension of IBC and the strengthening of an outside restructuring process as independent moratorium and the prevention of their misuse has precisely been drafted which will suit the needs of our country. As stated above regarding regulatory forbearance, the scheme for resolution must be allowed to be proposed by the court and must be made binding on the dissenting class of creditors if such classes of creditors would be no worse-off under the proposed restructuring plan than in the most likely outcome if the restructuring plan were not to be approved. Such powers of the court have been well enumerated in 901J(33), the amendments to the Financial Services (Banking Reform) Act 2013 etc.
Inference must be drawn from the UK Act before formulating policy decisions in India as various provisions of that enactment ensure ease of business and smooth transition in this period of confusion and chaos.
In conclusion to the analysis and the criticism so highlighted while providing suggestions on the other hand it must be kept in mind that in no way must the financial or monetary policy decisions be in the nature of an umbrella legislation/ordinance. It must propose amendments suited to the specific needs of the specific sectors of the economy in the specific acts that regulate those sectors in order to be precise and to garner to the needs that lead to their proper redressal. The policy changes need to redefine the very actions that constitute an offence while properly defining the moratorium period and to whom does it apply and the criteria for the same. Effective economic and monetary policy can only be achieved if the equilibrium between the interests of the creditors and the interests of the debtors in this situation of force majeure is maintained. There must be appropriate cohabitation of economics and law in order to achieve a comprehensive enactment which will propel Bharat’s economy forward.
1. The Insolvency And Bankruptcy Code, 2016 (NO. 31 OF 2016), (India).
2. NCLT, (18.09.2020; 17:40 IST), https://nclt.gov.in/case-type/insolvencyibc.
3. N. S. Venkataraman, South Asian Journal, India: Insolvency And Bankruptcy Code – Urgent Need To Quicken The Process, (18.09.2020; 17:40 IST), http://southasiajournal.net/india-insolvency-and-bankruptcy-code-urgent-need-to-quicken-the-process/.
4. Essar Steel Ltd. v. Satish Kumar Gupta & Ors. 2019 SCC Online SC 1478; “most financial creditors are secured creditors and most operational creditors are unsecured creditors”.
5. RBI, (18.09.2020; 17:40 IST), https://rbidocs.rbi.org.in/rdocs/notification/PDFs/PRUDENTIALB20DA810F3E148B099C113C2457 FBF8C.PDF.
6. The Companies Act, 2013, (India).
7. The Companies Act, 2013, S. 230, (India).
8. IBBI, (18.09.2020; 17:40 IST) https://www.ibbi.gov.in/uploads/whatsnew/e4e03c8ac9dc4441c79718f12283e8c8.pdf.
9. IBC, 2016, S. 29, (India).
10. R.S. Raghunath vs State Of Karnataka And Anr., [1992 AIR 81; 1991 SCR Supl. (1) 387].
11. Anil Bafna v. Madhu Desikan and Ors., Company Appeal (AT)(Insolvency) No. 757 of 2018, (18.09.2020; 17:40 IST), https://nclat.nic.in/Useradmin/upload/3205510565c188557048cc.pdf.
12. Rasiklal Mardia v. Amar Dye Chem Limited, Company Appeal (AT) No. 337 of 2018, (18.09.2020; 17:40 IST), https://nclat.nic.in/Useradmin/upload/10915932945cac29f794003.pdf.
13. The Companies Act, 2013, s. 391, (India).
14. Standing Committee On Finance (2017-18) Sixteenth Lok Sabha Ministry Of Finance (Department Of Financial Services) Banking Sector In India-Issues, Challenges And The Way Forward Including Non-Performing Assets/Stressed Assets In Banks/Financial Institutions Sixty-Eight Report, (18.09.2020; 17:40 IST), http://22.214.171.124/lsscommittee/Finance/16_Finance_68.pdf.
15. PIB, Committee formed to examine setting up of Asset Reconstruction Company / Asset Management Company for faster resolution of stressed assets of Public Sector, (18.09.2020; 17:40 IST), https://pib.gov.in/PressReleasePage.aspx?PRID=1534930.
16. PIB, Finance Minister announces Government Reforms and Enablers across Seven Sectors under Aatma Nirbhar Bharat Abhiyaan, (18.09.2020; 17:40 IST), https://pib.gov.in/PressReleasePage.aspx?PRID=1624661.
17. IBC, 2016, S. 21, (India).
18. IBC, 2016, S. 30(2), (India).
19. NIIF India, (18.09.2020; 17:40 IST), https://niifindia.in/.
20. ARCIL Co., (18.09.2020; 17:40 IST), http://www.arcil.co.in/.
21.UK Legislation, (18.09.2020; 17:40 IST), https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted/data.htm.
22. Corporate Insolvency and Governance Act, 2020 (c. 12), (United Kingdom).
23. Corporate Insolvency and Governance Act, 2020, S. 12, (United Kingdom).
24. Corporate Insolvency and Governance Act, 2020, Schedule 9, (United Kingdom).
25. Corporate Insolvency and Governance Act, 2020, S. 901A(2), (United Kingdom).
26. Corporate Insolvency and Governance Act, 2020, S. 901G, (United Kingdom).
27. PIB, President Approves Promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, (18.09.2020; 17:40 IST), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1534497.
28. Financial Services (Banking Reform) Act 2013.(United Kingdom).
29. Financial Services (Banking Reform) Act 2013, S. 124A, (United Kingdom).
30. Financial Services (Banking Reform) Act 2013, S. 124, (United Kingdom).
31. The Companies Act 2006.(United Kingdom).
32. The Companies Act 2006, Part 26, (United Kingdom).
33. Corporate Insolvency and Governance Act, 2020, S. 901J, (United Kingdom).