The Insolvency And Bankruptcy Process In India: BQ Explains
A quick guide to the insolvency and bankruptcy process that 12 large companies will undergo.
What Happened On Tuesday?
An Independent Advisory Committee appointed by the Reserve Bank of India (RBI) decided to refer 12 companies to insolvency and bankruptcy proceedings. They are among India’s top defaulters and account for 25 percent of the gross non-performing assets in the Indian banking system. While their names have not been revealed yet, it is fair to assume they are large companies.
So what does it mean to refer companies for proceedings under the Insolvency and Bankruptcy Code (IBC)?
The Insolvency And Bankruptcy Code, 2016
In 2016, Parliament enacted a new law for the “reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets...”
The law lays down specific provisions for creditors to initiate an insolvency process that may result in resolution or liquidation.
How Will It Work?
The RBI will now instruct banks regarding which 12 companies or NPA accounts are to be referred to initiate the insolvency and bankruptcy proceedings.
Once the banks receive the names of the companies shortlisted by the regulator, the lead bank in the respective joint lender forums (JLFs) will admit the case to the National Companies Law Tribunal (NCLT).
As the case of default has already been established through the RBI’s selection, the NCLT will admit the cases. Moreover, the regulator has also requested the tribunal to accord priority to these cases, when they get admitted.
When a case is admitted to the NCLT under insolvency proceedings, an interim insolvency resolution professional is appointed to the case.
The case is also placed under a moratorium, whereby no other legal proceedings can be initiated against the company involved.
Once the interim insolvency professional is appointed, the board of the company loses control over its affairs, and is suspended till the entire resolution process is completed.
The insolvency professional creates a committee of creditors involved in the case. They may be banks and bondholders, among others.
The committee of creditors will appoint the final insolvency resolution professional to work on a resolution plan. This could be the interim insolvency professional, or a different person.
The resolution plan needs the approval of the committee of creditors (75 percent of the votes) within 180 days, and then approval from the NCLT.
If the committee is not able to agree upon a plan at the end of the 180-day period, the law provides a grace period of an additional 90 days. If there is no approved resolution plan at the end of the 270-day period, the company goes into liquidation.
Under liquidation, the company is stripped of its assets, which are then sold to bidders and the earnings are distributed according to a hierarchy of creditors. Creditors, labourers and government agencies are all paid out under the waterfall scheme as prescribed under the insolvency and bankruptcy code.
Why Hasn’t This Been Tried Before?
While lenders have been using the insolvency process to resolve smaller cases in recent months, they are yet to do it in any large corporate account.
Lenders have largely stayed away because the RBI hasn’t clarified how provisioning on accounts would work when they are under the insolvency process. In its statement on Tuesday, the banking regulator clarified that it would issue specific guidelines on provisioning under such a situation.
