The Top Seven Recommendations Of The Insolvency Law Panel
The 14- member Insolvency Law Committee has made several suggestions to the Ministry of Corporate Affairs. The suggestions include addressing the situation of homebuyers, expanding the pool of potential bidders, making recoveries easier for lenders, and expediting the decision-making process by creditors.
Here are the top seven recommendations that the committee has made:
Home Sweet Home
The Committee has recommended that homebuyers should be treated as financial creditors due to the unique nature of financing in real estate projects. It has pointed out that the non-inclusion of homebuyers within either the definition of ‘financial’ or ‘operational’ creditors deprives them of (a) the right to initiate the insolvency process, (b) the right to be on the committee of creditors and (c) the guarantee of receiving at least the liquidation value under the resolution plan.
And so, it has suggested that the law should be amended to clarify that amounts raised under a real estate project will qualify as financial debt.
Honey, You Shrunk The Pool
Section 29A of the Insolvency and Bankruptcy Code lays down the ineligibility criteria for submitting a resolution plan. Any person acting jointly or in concert with an inelgible person is barred from submitting a resolution plan. Any person who is connected to a person who is not eligible to submit a resolution plan is also barred. The committee has noted that it’s not clear whether connected person applies to only the resolution applicant or even “persons acting jointly or in concert with such person”.
If the latter interpretation is considered, this provision will apply to multiple layers of persons who are related to the resolution applicant even remotely. For instance, asset reconstruction companies, banks and alternate investment funds which are specifically excluded from the definition of ‘connected person’ may come under ‘person acting jointly or in concert with such person’. This interpretation may shrink the pool of resolution applicants, the committee has pointed out.
And so, the committee has recommended that the ineligibility criteria should be applicable to the resolution applicant and its connected person only.
Few Good Men
The committee noted that the provisions of the insolvency code that lays down the ineligibility criteria for resolution applicants may have unintended consequences for asset reconstruction companies, scheduled banks, alternate investment funds, overseas financial institutions, investment vehicles, registered foreign institutional investors, registered foreign portfolio investors and foreign venture capital investors. Such entities, the committee noted, due to the nature of their business are likely to be related to companies that are classified as non-performing assets.
The committee concluded that such pure play financial entities must be exempt from Section 29A of IBC which debars persons who have an NPA account, or control or are promoters or in the management of a corporate debtor that is classified as an NPA account from being resolution applicants.
The Not-So-Sweet Sound
The insolvency code provides for a moratorium or a stay on initiation or continuation of any legal proceedings against a company (and its assets) facing insolvency proceedings. Whether this stay extends to the assets of guarantors of the corporate debtor as well has become one of the most litigious area under the insolvency law.
The committee has noted that guarantors’ assets are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by actions against guarantors.
And so, it has suggested that contractual principles of guarantee must be respected and the moratorium should not be extended to guarantors.
The Price For Peace
The insolvency law doesn’t envisage a situation where an insolvency application can be withdrawn once it has been admitted.
To address such a situation, the insolvency law committee has suggested that withdrawal of insolvency application post admission should be permitted if the creditors’ committee approves of such action with a vote share of 90 percent.
The Binani Cement Ltd. is an example of the implications of the lack of such a provision. While parent Binani Industries Ltd. wants to repay all creditors, the committee of creditors is hesitant to settle the matter outside of the bankruptcy process since the insolvency process is already underway. But will the committee’s proposal be applicable to such situations?
It is quite clear that once the insolvency process has begun and the procedure in terms of the information memorandum, bidding documentation, request for proposal etc has been set in motion, this power of withdrawal is not meant to be exercised, Shardul Shroff, a member of the insolvency law committee and managing partner, Shardul Amarchand Mangaldas told BloombergQuint.
This power is to be used at a stage where nothing has happened in the insolvency process but only an admission of the application has been made or where post constitution of the creditors’ committee, there is a proposal to withdraw. So this proposal is admitting these two limited circumstances.Shardul Shroff, Member, Insolvency Law Committee
The insolvency code says that all decisions of the creditors’ committee shall be taken by a vote of not less than 75 percent of the voting share of the financial creditors. After factoring in the experience of past restructuring laws in India and international best practices, the committee has concluded that to promote resolution, the voting share for approval of resolution plan and other critical decisions may be reduced from 75 percent to 66 percent or more of the voting share of the financial creditors.
No Strings Attached
The committee pointed out that currently, several financial creditors such as banks and asset reconstruction companies fall within the ambit of ‘related party’ in relation to the corporate debtor. As a result, such creditors are debarred from participating, being represented or voting in any meeting of the committee of creditors.
And so, it has suggested that regulated financial creditors who become related parties solely on account of conversion or substitution of debt into equity shares before the initiation of insolvency process shall not be considered related parties.
(Updates an earlier version to include the comments of Shardul Shroff, member, Insolvency Law Committee)