The latest amendments to the Insolvency and Bankruptcy Code, 2016 were passed by the Rajya Sabha on Monday. The changes promise to restore the creditor hierarchy, ensure speedy resolution of cases, open up structuring possibilities in resolution plans, and make them binding on the government and local authorities.
On BloombergQuint’s weekly show, Insolvency Diaries, Nilang Desai, partner at law firm AZB & Partners and Sudipta Routh, partner at law firm IndusLaw weighed in on the implications of the key changes.
Resolution Plans: Structuring Possibilities
IBC has been amended to clarify that resolution applicants can now propose restructuring of the corporate debtor, including by way of a merger, amalgamation or a demerger. This was always a possibility and there have been resolution plans which have a draft scheme attached to them, Routh said.
So, what’s different now? Routh pointed out that resolution applicants and creditors’ committees had certain doubts about how approval for schemes has to be sought—for instance, will the approval of the resolution plan by the NCLT mean whitewashing the entire process under Companies Act, 2013?
“The answer is no—you put in whatever steps you can into the resolution plan. It’s then for the CoC (committee of creditors) to evaluate its feasibility and viability,” he said.
It could mean that the National Company Law Tribunal —which has jurisdiction over IBC and company law issues—can wear both hats at the same time and approve a scheme of arrangement that’s being proposed, Desai pointed out. It doesn’t mean, he said, that you can wish away the approvals or process mandated under company law for schemes, but you can run both the processes—IBC and approval for scheme—in parallel and seek the court’s approval in one go.
Resolution plans have so far envisaged schemes as something they would do but not as a one-stop-shop for both IBC and company law approval. The timing and feasibility of running both the process together will need to be looked at. I think what the law is saying is put in the provision over here as well in the same court, try and get both consensuses together, which will be difficult given the practicalities of it, but certainly the possibility is there.Nilang Desai, Partner, AZB & Partners
Credit Hierarchy: Essar Steel Order Fix
The amounts that operational creditors should get under resolution plans has been a subject matter of dispute before courts. Most recently, in the Essar Steel case, the NCLAT held that the credit hierarchy provided for in the IBC has to be applied if the insolvent company is facing liquidation. At the resolution plan stage, the NCLAT laid down, there cannot be any discrimination between secured, unsecured or operational creditors. The appellate tribunal had also said the CoC has no role in distribution of claims from the resolution plan, and it can only decide on the viability and feasibility of the bid.
The latest amendments to the IBC seek to fix this upset by prescribing the minimum threshold for payment to operational creditors and empowering the CoC to determine distribution of claims while taking into account the priority and value of the security interest of secured creditors.
It has stated that payments to operational creditors for their debt would be in a manner specified by the Insolvency and Bankruptcy Board of India but shall not be less than:
- The amount to be paid to such creditors in the event of liquidation of the corporate debtor, or
- The amount that would have been paid to such creditors if the distribution was done based on the priority under section 53(1), whichever is higher.
Section 53(1) lays down the order of priority of creditors at the liquidation stage—insolvency process costs, dues of workmen, secured creditors, unsecured creditors, statutory dues and then operational creditors.
Both Desai and Routh lauded these amendments, relieved that the law would now explicitly reflect the common understanding of the process among stakeholders. To be clear, before the Essar Steel judgment this was broadly how resolution plan distributions were done.
In a way, they have set the floor for what operational creditors must get under resolution plans, Desai explained about the IBC amendment.
So, in a situation where the liquidation value of the company is Rs 1,000, fair value is Rs 3,000, and the bid is Rs 10,000. If you apply the waterfall (mechanism) under IBC, then it may be that secured creditors get Rs 8,000. Then you go down the waterfall and give some more money (than what they would’ve got if the company was being liquidated) by way of resolution amount to operational creditors.Nilang Desai, Partner, AZB & Partners
Yet, an explanation to the section that specifies the threshold for payment to operational creditors is a cause of concern, according to Routh.
The explanation reads:
“For the removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.”
Routh’s concern is the use of “fair and equitable” and its interpretation.
Should one read it as that if you apply these thresholds for payment to operational creditors, it will be a fair and equitable treatment; or are they saying that apply these thresholds in a fair and equitable manner?Sudipta Routh, Partner, IndusLaw
It’s a problem if it’s the latter, he pointed out.
According to him this will pave the way for litigious claims on “fair and equitable. There is no place to consider crudities and inequities in economic legislations, Routh said.
Desai agreed. It would have been clearer if the provision said distribution as per thresholds laid down in law would be considered fail and equitable. Instead, the current language implies that — the distribution of the resolution plan amount should be as per thresholds in the law, and also fair and equitable, he added.
Can Resolution Plans Embed Tax Waivers?
The IBC amendments also clarify that that resolution plans will be binding on central and state governments and local authorities.
This essentially reiterated that crown dues are equated with operational debt and they rank lower in the credit hierarchy, Routh said. There are several government authorities who believe that their claim against the corporate debtor would be alive after it has come out of IBC—this clarification puts to rest such interpretations, he said.
The clarification, however, gives rise to an interesting question—what if the tax authorities decide to not submit their claims at all in the fear that they may not get anything via the resolution plan? If that’s the case, bidders and resolution professionals would need to actively engage with the tax department to get any tax demands included in the list of claims, Routh explained.
And what about outstanding tax claims that the corporate debtor might be contesting—will bidders or resolution professionals now specify in the plan’s tax claims under litigation, agree to the tax department’s demand, include those claims and propose waivers?
So, it’s like, I admit everything you (tax department) say but I am going to pay nothing. Sure. Yes, that is a strategy.Nilang Desai, Partner, AZB
IBC Timelines: When Does The Clock Stop Ticking?
The final change to the IBC will address the delays in the resolution process. Most of the first 12 cases that were referred by banks to insolvency resolution in June 2017, on the directions of the Reserve Bank of India, continue to face litigation and process delays.
Presently, the IBC provides the insolvency process has be to be completed within 180 days, extendable by up to 90 days. Through jurisprudence, courts have laid down that the time spent in litigation must be excluded from this 270-day period. The amendment Bill has proposed that the insolvency process has to be completed mandatorily within 330 days from the insolvency commencement date, including any extensions and the time spent in litigation.
But Desai is not sure this will ensure speedy disposal of cases.
The insolvency period must end in this (330-day) timeline and the corporate insolvency resolution period ends when the resolution plan is approved by the adjudicating authority or the NCLT. This means after its approved and there is ongoing litigation, the 330-day diktat may not curtail it.Nilang Desai, Partner, AZB & Partners
As long as the NCLT approval comes within 330 days, it should be fine. The fact that the plan is then challenged before NCLAT or the Supreme court, shouldn’t be an issue, Desai added.
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