HMK FI and Insolvency and bankruptcy code

IBC, Corporate laws

1. Financial Institutions and IBC Ms. Hiral Mehta Kumar Assistant Professor National University of Study and Research in Law, Ranchi

2. Introduction It is a fresh breeze of value – added economic reforms Freedom from the sluggish legal regime of BIFR and SICA Awarded Global Restructuring Review Award for the Most Improved Jurisdiction in restructuring and insolvency regime. Has already witnessed plethora of amendments and judgments in a short span of time.

3. IBC and FIs Provision for Financial Institution: S. 3(14) Financial Service Providers and Financial Services: S. 3(7) and S.3(8) Proceedings cannot be initiated against NBFCs. Reason: to prevent triggering of systematic risks in the financial markets

4. NCLT DLF Phase – IV Commercial Developers Limited and others Ambiguity has been removed by NCLAT by dispensing with the requirement of CoC

5. Pre – Insolvency Process allowed Insertion of Section 12 A by Second Amendment in 2018: allows withdrawal of proceedings, provides a possibility for one – time settlement helping recover more dues.

6. Disparity Done Away With Standard Chartered Bank v. Satish Kumar Gupta, Resolution Professional of Essar Steel & Ors. , the NCLT has held that the financial and operational creditors must be treated similarly, i.e., be given the same percentage of haircut; and discrimination amongst financial creditors on the basis of existing priorities or security interest is not permitted in the resolution plan.

7. Reorganisation The 2019 amendment to the code provides a new Explanation to the definition of resolution plan to clarify that a resolution plan seeking the insolvency resolution of corporate debtor as a going concern may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger . These reorganisation structures will now not fall foul of the ‘going concern’ requirement of the IBC and also enables reorganisation of businesses through schemes for better value maximisation .

8. Arcelor Mittal Case: 14 days directory which further tightens the noose. Another interesting feature of the 2019 amendment is that the insolvency resolution process of a corporate debtor shall not extend beyond 330 days from the insolvency commencement date - such timeline will include the time taken in legal proceedings, in order to prevent undue delays in the completion of the CIRP .

9. If the CIRP is not completed within the timelines, then the corporate debtor will have to be mandatorily liquidated. Another change sought to be introduced is where pending CIRP proceedings have extended beyond 330 days, the same will have to be completed within 90 days. This is, however, in contrast to the 730 days that Essar Steel case has recently completed. It also seeks to protect financial creditors who dissent to the resolution plan, and shall be eligible to be paid at liquidation value of their debt.

10. 2017 amendment The Code allows the insolvency professionals, vide the 2017 amendment, to sell the movable or immovable property of the debtor in case of liquidation.  It prohibits the insolvency professional to sell this property to any person who is ineligible to be a resolution applicant. The 2017 amendment inserted a provision to specify that a person contravening any provisions of the Code, for which no penalty has been specified, will be punishable with a fine ranging between one lakh rupees to two crore rupees.

11. Almost two – thirds of the financial creditors find IBC to be a convenient mechanism for dispute resolution in a survey conducted by PWC. The RBI, on 12 February 2018, ordered lenders to initiate bankruptcy proceedings within 180 days of default on a single payment. ARCs on the all – time highs as defaulting promoters need to fix defaults Personal Guarantors of Corporate Debtors within range w.e.f December 1, 2019

12. The Deterrence Effect Fear of losing companies has pushed promoters into one time settlement under section 12A of the Code. Data from IBBI shows that financial creditors have been able to realize 25% of their claims which has increased to 90% in quarter ending December 2018. The data further shows that 142 cases have been closed and 63 withdrawn for a settlement under Section 12A of the code. Till September 2019, the number has risen to 119 withdrawals. As per the IBBI report, almost 2.02 lakh crores of debt pertaining to 4,452 cases was realized at pre-insolvency proceedings, due to the mere fear of the code. Given this, CRISIL estimates the banking sector’s gross NPA dropped to ~10% by March 2019, as compared to a previous 11.5% at the end of fiscal 2018.

13. The Supreme Court in Dharani Sugar and Chemicals Ltd. vs. Union of India has quashed the RBI circular dated 12 February, 2018, which was meant to speed up the resolution process. This now shifts the onus upon the banks for timely revival of stressed assets, although mechanisms under IBC continue to come to their rescue . This is the process of elimination and requires the financial institutions to beware. Stringent norms, elimination processes and deterrence have led to the success of IBC. The financial institutions must now bring the defaulters to book within timelines, creating a more responsible environment and beneficial for corporate debtors too.

14. Conclusion The legislature has been quick to amend the loopholes and lacunae in the newly founded legislation. The judiciary has also played a key role in rapidly developing the jurisprudence surrounding the code. The code has proven to be true to its spirit of ‘creditor in control’ rather than ‘debtor in possession’. The IBC has been a revelation, both in its original and (current) revised form; it is important to note that the IBC has seen multiple changes since its inception, most of which have been well directed. The fear of IBC has been generating a lot of investor interest. The bankers have not been far behind and many of them have considered portfolio trades or pre-insolvency single asset resolutions (pursuant to the circular dated 12 February 2018) in recent times.

15. In an effort to hasten the resolution of bad loans, the RBI tightened its rules to make banks identify and tackle any nonpayment of loans rapidly. Lenders will identify incipient stress in loan accounts immediately on default, by classifying stressed assets as special mention accounts (SMA). If the principal or interest payment or any other amount is wholly or partly overdue, the account will be categorised as SMA-0 for one to 30 days, SMA-1 for 31-60 days, and SMA-2 for 61-90 days. Lenders  will be required to report defaults on a weekly basis. The regulation provides for a strict 180-day timeline for banks to agree on a resolution plan in case of a default or else refer the account for bankruptcy .

16. The NCLAT has been criticized over allowing the promoters of Sterling Biotech to regain its control upon full payment of dues, which may dilute the importance of the code and suppress the deterrent theory. Financial institutions have gained a greater control over their stressed assets and non – performing assets after the advent of IBC. Sluggish corporate debtors have now been transformed into responsible debtors suddenly. The legislature has for once displayed dynamism with a great support from the Judiciary, although there is a long way to go .

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