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Will The Insolvency Law’s Latest Avatar Make It More Resilient?

A new definition of related party, narrower disqualification criteria, breather for financial creditors, revision of voting thresholds—the latest avatar of the Insolvency and Bankruptcy Code comes with all these changes and more to promote the resolution of stressed companies over liquidation.

To understand if these changes will result in a more robust and resilient insolvency law, BloombergQuint’s weekly law and policy show, The Fineprint , spoke with Siby Antony, chairman of Edelweiss Asset Reconstruction Company, and Nilang Desai, an insolvency law partner at AZB.

What is your overall assessment of the changes to the insolvency code?

Antony: Most of the amendments are welcome. It makes the law very strong and smoothens the process. But some changes may become problematic for bidders. For instance, the amendment that gives a successful resolution applicant one year to get all the statutory approvals.

The whole insolvency process is compressed in 270 days. To give a one-year window for statutory approvals amounts to some dilution of the law. If you give more time, more time will be taken for that approval. I think this time should be compressed to three to six months. Three months should be ideal because even the competition regulator’s approval is coming very fast. Like this, all the approvals under IBC should come very fast. As a resolution applicant, why should I make my payment until I get all the approvals. It should not delay the process. The one-year time period is too long.

Desai: The fact that real estate allottees, including commercial property allottees, will be treated as financial creditors may pose some complex issues. Take the example of Jaypee Infratech. Now, you will have a representative of the homebuyers on the creditors’ committee, but this representative can’t take individual action. He has to get prior consent of each of these homebuyers and real estate allottees before he takes a vote which means in any creditors’ committee, he needs to have prior voting from them. Decision-making will become a lot less dynamic and a lot more influenced by these guys. That will create a little chaos in the system in terms of how you resolve these large complex cases. People who are not used to restructuring a large company like this—all they did was advance payment for a home—will vote on the capital structure, what haircut to take, whether you should take cash and move on, or take convertibles or you should get a house, which bidder to go for—the Jaypee promoter is good, or should we go with the Adanis? These are very complex questions which I am not sure even the members of creditors’ committee always understand. So, I’m not sure how a homebuyer, who has given a small advance, will make such decisions. So, we will see struggle in the process.

Also read: Homebuyers As Financial Creditors: An Inelegant Solution?

The government has accepted the proposal of the insolvency law committee and made way for withdrawal of an insolvency application once it has been admitted. But it can be done only if the expression of interest hasn’t gone out. What do you see as the impact of this?

Antony: It is a good move that will require the approval of 90 percent of the creditors’ committee. They’ve said the withdrawal can be before the expression of interest is issued. This facility should be available at any point of time for the creditors. If 90 percent of CoC agrees, you should be able to withdraw at any point. The expression of interest just gives you 30-40 days from the time an application is admitted. It’s only a small window. The CoC should have given the freedom to withdraw at any point of time. All the stakeholders—whether they are operational creditors or employees—will be taken care of even if you withdraw at a later stage. When 90 percent of CoC approves, then there is a plan for the company to run. If you look at the cement company which we have been running, in between there was a proposal that promoters will come and pay off everything which means company could run, every stakeholder will be taken care of. That was totally going out of the IBC process. If every stakeholder is taken care of and company runs as it is, I don’t see why withdrawal can’t be allowed at a later stage.

Desai: In my view, a balance should be struck between two or three things. IBC is not a recovery mechanism—to allow someone to bring in an IBC process, start it and then pull out—just makes it look like a recovery mechanism. This is an insolvency resolution process. If you want to do a recovery mechanism, go to the courts or the debt recovery tribunal. But at the same time, it is an effective route. Sixty-seventy percent of applicants in the first six months were operational creditors. Even today close to half of the applications are by operational creditors. There is a whole business being run, helping operational creditors to throw in IBC applications and recover the money. If they are getting the money, then it is a good thing. But at the same time, don’t inconvenience a large company whose key constituents i.e. financial creditors are okay with coming out of the IBC process. Let the large creditors come together and pull the company out if they think this is not in the best interest of the company.

But you do it before the commercial process hasn’t begun. If you allow them to come at any time, what’s the sanctity of the process? The bidders coming in, never knowing that the money, time effort putting in is worth it or not. Because after six months, you can change your mind. Let’s say, there is an uptick in the business cycle and creditors don’t think they need to go through with the process, we will run with the existing promoters and we are happy with them. I think it is a little tough on various bidders who put in so much money.

There’s a new definition of related party in relation to an individual. What was the need for this new definition? And given that the definition is quite broad – for instance, it says a related party in relation to an individual can be a person on whose advice, directions or instructions, the individual is accustomed to act – what could be the implications of this?

Desai: When you are looking for related party there was one that was defined in relation to the corporate debtor and not one for individual. So, there was confusion as to what happens when you look at connected persons of an individual and this is plugging that absence.

In terms of application, you look at the resolution applicant, you look at persons who are the promoter, or in management or control of the applicant. You look at persons who are the promoter or in management or control of the corporate debtor on a going forward basis. Once you look at these people, you look at their connected persons and then you look at all these definitions. And then you look at related parties of this individual. The idea is that what you can’t do directly, you shouldn’t be able to do it indirectly. So, you don’t just want to apply the ineligibility criteria to the person who is making the bid himself; you want to apply it to that person’s spouse, person’s spouse’s brother who may be in control of an NPA company. The thinking is that you shouldn’t be able to come out of a disqualification simply by using a relative. Is it going to catch more people than was intended? Possibly.

There have been several changes to Section 29A that lays down the ineligibility criteria for resolution applicants. For instance, applicants were barred if they were in management or control of an NPA. Now, entities will be disqualified only if they are in management/control of an NPA at the time of submission of a resolution plan. Further, regulated financial entities will not become related parties merely on conversion or substitution of debt to equity. How are viewing these changes?

Desai: If you fix the NPA problem before you apply as a resolution applicant, then you should be allowed to participate. As for financial entities, the thinking is that as part of their business, you invested in companies, as equity or debt, which is in stress. If that is part of your business and is very likely to be a part of business of many financial entities, either intentionally or unintentionally, then why should we be punishing them for their business model. If you’ve run a company to the ground, then it is a different matter but if that is your business then it shouldn’t disqualify you. It is merely a reflection of looking at what is happening in market, realising that you are disqualifying entities which you didn’t mean to disqualify and taking them out of the net.

Antony: This will be useful for asset reconstruction companies, alternate investment funds, banks regulated foreign funds, etc. I think it is great move which has happened, and it was requested for. It was an unintended impact earlier. Though even NBFCs have equity but they’ve not been given this exemption.

For Desai and Antony’s views on the amendment that late bids won’t be accepted, resolution applicants will need to submit an eligibility affidavit, three-year exemption period for resolution applicants from applicability of Section 29A, watch the accompanying video.