India’s Insolvency Law May Soon Get A Makeover: BQ Exclusive

Four years, five rounds of amendments and four ordinances—few economic legislations have seen as many frequent changes in such a short amount of time as the Insolvency and Bankruptcy Code. And more changes might be underway since the Prime Minister’s Economic Advisory Council has reached out to stakeholders for consultation on IBC reforms, BloombergQuint has learnt.

The government had, last week, extended IBC’s suspension till December.

This window has given an opportunity to the government to assess if the bankruptcy law requires any significant changes, especially to prepare it for the surge in cases once the suspension is lifted. BloombergQuint’s request for a comment on the scope of changes being considered was declined by Bibek Debroy, chairman of the Economic Advisory Council.

By one estimate, as of September last year, of the 13,000 insolvency applications filed, more than 10,000 are pending admission. Covid-19 has only compounded this issue as National Company Law Tribunals saw a 95% decline in case hearings. Even prior to the pandemic, delays in resolution process and endless litigation have marred the efficacy of the insolvency law.

While several legal and consulting firms have submitted their suggestions, three people from such firms spoke to BloombergQuint on the condition anonymity.

The key changes proposed by the people cited earlier revolve around making interim finance less risky for lenders, introducing free standing moratorium provisions, empowering National Company Law Tribunals and insolvency professionals to adjudicate on creditors’ claims, and ensuring that the various government departments or agencies adhere to the spirit of IBC.

Tweaks To Interim Finance

In the order of payment hierarchy, interim finance is right on top—as it’s debt raised by the resolution professional during insolvency. The existing definition also gives government the power to include any other debt within the scope of interim finance.

One of the suggestions is to consider including emergency credit lines extended to companies impacted by Covid-19 under it as well. This will encourage existing creditors to provide interim finance to support businesses and avoid a liquidity crisis. It will save companies the time and effort to scout for interim financers and existing lenders will get priority if these borrowers end up facing insolvency.

Free-Standing Moratorium

The second suggestion is to borrow the free-standing moratorium provision from the U.K.’s insolvency law. In June, in light of Covid-19, the U.K. allowed companies facing financial difficulty to use this provision to restructure or refinance without the fear of creditor action. This is intended for companies who are temporarily cash-flow insolvent and need a breathing space to come up with a rescue plan.

U.K.’s Bankruptcy courts have been empowered to grant such companies moratorium during which no legal action can be taken without the court’s permission. During this period the directors continue to remain in charge but the process is overseen by a monitor—or resolution professional.

The directors can apply to court with a statement that it’s likely the company would be unable to pay its debts. Further, a statement from a licensed monitor that the moratorium is likely to result in the company maintaining its going concern status also needs to be submitted. This moratorium can last for up to 40 days without creditors’ consent and up to 12 months with their consent.

Once granted, it gives a company under stress a payment holiday for old and ongoing debts. Section 14 of the IBC—that allows NCLTs to grant a moratorium once an insolvency application is admitted—may be amended to introduce free-standing moratorium, according to one of the representations to the Economic Advisory Council. This would be especially beneficial for ailing MSMEs, it has said.

Empowering NCLTs And RPs

The suggestion comes in light of NCLTs being burdened with cases where creditors’ claims are in dispute. To deal with this, IBC could be amended to say that each NCLT can set up a committee of three resolution professionals who would adjudicate on such disputes. And only if there is a dissent note by one of the three, would the dispute go to the NCLT bench.

The recommendation is similar to the bankruptcy process in Australia, where the administrator has the power to decide on such disputes. Only in cases it is unable to conclude, it can refer the dispute to the bankruptcy court.

Government As A Litigant

Resolution proceedings of Aircel Ltd. and Reliance Communications Ltd. are held up because of differences between the telecom department and Ministry of Corporate Affairs, leaving banks waiting for $5.7 billion in payments.

The successful bidder in Aircel’s case—UV ARC Ltd.—is also fighting another battle. This one’s with the Reserve Bank of India, which has taken a view that asset reconstruction companies cannot act as resolution applicants as part of insolvency proceedings.

The fate of JSW Steel Ltd.’s acquisition of Bhushan Power and Steel Ltd. hangs in balance as the Enforcement Directorate is seeking to attach the latter’s assets. The ED is seeking to recover from Bhushan Power an amount equivalent to funds that have been diverted by the company’s erstwhile promoters. And even though, the IBC was amended in March this year to grant corporate debtors immunity from any offences committed before the initiation of insolvency and while the process is on, the enforcement agency continues to litigate the issue before the Supreme Court. It even raided the offices of Bhushan Power’s resolution professional alleging that goods belonging to the company were removed in an unauthorised way, both prior and during the insolvency proceedings.

And then there’s the Securities Exchange Board of India that’s litigating before the Supreme Court in HBN Dairies and Allied Ltd. case. Creditors took the company to insolvency but the regulator is seeking to sell its assets to return investors their money.

These are only a few instances where bickering among different ministries, enforcement agencies litigating even after specific amendments, and regulators seeking supremacy over IBC is causing delays, creating confusion. Government entities litigating against a law passed by the parliament doesn’t inspire investor confidence, and the suggestion is to direct them to follow the principles of IBC. Where interpretations vary, the suggestion is, Ministry of Corporate Affair’s view should prevail rather than have government agencies litigate before courts.

Besides these, the representations have also urged the government to fill the vacant posts at NCLTs to address the delays in orders once the hearings are concluded. They have also proposed an expedited introduction of pre-pack arrangements which will allow stressed companies to negotiate sale of their assets with potential buyers before insolvency is formally initiated.

And finally, one of the representations has suggested better enforcement against avoidance transactions. The proposal is to allow resolution professionals or creditors’ committee to assign to third parties the right to litigate against the promoters who have indulged in fraudulent transactions.