The Supreme Court’s decision in K. Sashidhar v. Indian Overseas Bank and Ors.[1]addressed a critical issue in the corporate insolvency resolution process (CIRP) – i.e. the scope of judicial scrutiny over a commercial decision taken by the committee of creditors (“CoC”) to approve or reject a resolution plan. Continue Reading Sashidhar v. Indian Overseas Bank and Ors. – Commercial Wisdom Reigns Supreme
Upon commencement of the resolution process under the Insolvency and Bankruptcy Code, 2016 (Code), powers of the Board of Directors of the company stand suspended and are vested in and exercised by the resolution professional. While the directors are entitled to attend the meetings of the committee of creditors (COC) formed for the company, such directors have no voting rights.
A question arose over whether the directors should be given copies of the resolution plans and other confidential documents that the COC considers during the meetings. Sharing of such documents could be seen as in direct conflict with the obligations of the resolution professional to maintain confidentiality under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and other related regulations. More importantly, it could create positions of conflict between the suspended Board, who often submit resolution plans or are applicants under Section 12A, and the other participants. The Hon’ble Supreme Court in its recent judgment in Vijay Kumar Jain v. Standard Chartered Bank and Others[1] has, with great respect, left some questions unanswered. Continue Reading Supreme Court on the Rights of Suspended Board in Vijay Kumar Jain v. Standard Chartered Bank: Some Implications
The authors instructed Mr. Tushar Mehta, Solicitor General of India, on behalf of the respondent Banks and Financial Institutions in the proceeding before the Supreme Court.
The Supreme Court’s decision in Swiss Ribbons v. Union of India upholding the constitutionality of the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC or the Code) is a landmark in the development of the Code. Continue Reading Swiss Ribbons v. Union of India – The Foundation for Modern Bankruptcy Law
The Indian Real Estate industry is experiencing a major overhaul on account of the strict implementation of the Real Estate (Regulation and Development), Act, 2016 (RERA), the Prohibition of Benami Property Transactions Act, 2016 (PBPT Act) and the Insolvency and Bankruptcy Code, 2016 (Insolvency Code).
While implementation of RERA is gaining momentum across the country with each passing day, the State Real Estate Authorities (Regulator) established under the RERA have emerged as a powerful tool for ensuring proper and effective implementation of RERA by the states across India. This article aims to provide an overview of the powers and functions of the Regulator and how it is using these powers to protect the interests of property buyers in India. Continue Reading Revolutionary in Nature: How State Real Estate Authorities Enjoy Powers Akin to Civil Courts
On June 6, 2018, the Government once again amended certain provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), by promulgating an ordinance[1] (the 2018 Ordinance) which introduces sweeping changes to the both substantive as well as procedural aspects relating to the insolvency process. Some of the key changes are analysed below.
Homebuyers – A New Class of ‘Financial Creditors’
The 2018 Ordinance has amended the definition of ‘financial debt’ to include amounts raised from ‘allottees’ in respect of a real estate project (as defined under the Real Estate (Regulations and Development) Act, 2016 (RERA)). Accordingly, homebuyers will now be entitled to a seat on the ‘committee of creditors’ (CoC) of the corporate debtor. However, given the large number of homebuyers for a project, they will be treated as a class of creditors and be represented in the CoC by an ‘authorised representative’ to be appointed by the National Company Law Tribunal (NCLT).
In its judgment pronounced on May 9, 2018, the National Company Law Tribunal (NCLT), Allahabad, in the case of ICICI Bank Limited v. Mr. Anuj Jain (Resolution Professional of Jaypee Infratech Limited), addressed the issue of the rights of third-party security holders of a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (IBC).
The judgment negated ICICI Bank Limited’s contention that it should be considered a financial creditor of Jaypee Infratech Limited, the corporate debtor. ICICI Bank’s claim was based on the corporate debtor having created mortgages on its property to secure loans provided to Jaiprakash Associates Limited, the holding company of the corporate debtor. The NCLT concluded that there was no financial debt owed to ICICI Bank by the corporate debtor, and so it could not be considered a financial creditor of the corporate debtor.
We consider here the correctness of the judgment and whether the NCLT has considered all the implications of its finding.
The Insolvency and Bankruptcy Code, 2016 (IBC), since its enactment, has been a subject of great discussion and debate, both in the Industry as well as in the legal fraternity. This strong divide continues between those who consider it a necessary step (based on the abysmal rates of recovery of defaulted loans) and those who classify it as a ‘draconian legislation’. Given the division of views, it was expected that the IBC would be subject to legal and constitutional challenges.
This piece relates to one such challenge, and the first such judgement, on the constitutionality of provisions of the IBC.
The Supreme Court says: Do not examine constitutional validity
Interestingly, the Supreme Court, apprehending the largescale consequences of such challenges, advised the High Court of Gujarat in its order dated January 25, 2018 passed in Shivam Water Treaters Private Limited Vs Union of India & Ors[1], not to enter into the debate around the constitutional validity of the IBC. The Supreme Court observed that, “The High Court is requested not to enter into the debate pertaining to the validity of the Insolvency and Bankruptcy Code, 2016 or the constitutional validity of the National Company Law Tribunal.”
Challenge of Constitutional Validity before the High Court at Calcutta
In November 2017, a challenge to constitutionality of provisions of the IBC was initiated before the High Court at Calcutta[2]. After hearing arguments, the High Court reserved its judgement on the issues on December 15, 2017, which was well before the order of the Supreme Court in the Shivam Water Treaters case. The challenge arose consequent to an order of the Kolkata bench of the National Company Law Tribunal, which admitted an insolvency resolution petition filed by a financial creditor (Sberbank of Russia) against a corporate debtor (Varrsana Ispat Limited).
Despite several existing schemes and interventions by the Reserve Bank of India (RBI), the problem of bad debt has plagued the Indian banking system. For years, various high value accounts have undergone restructurings that have not resolved stress or the underlying imbalance in the capital structure, or addressed the viability of the business.
The existing RBI stipulated resolution mechanism included corporate debt restructuring (CDR), strategic debt restructuring (SDR), change in ownership outside the strategic debt restructuring (Outside SDR), the scheme for sustainable restructuring of stressed assets (S4A), etc. All of these were implemented under the framework of the Joint Lenders’ Forum (JLF).
On February 12, 2018, the RBI decided to completely revamp the guidelines on the resolution of stressed assets and withdrew all its existing guidelines and schemes. The guidelines/framework for JLF was also discontinued.
The New Framework
The new framework requires that as soon as there is a default in a borrower entity’s account with any lender, the lenders shall formulate a resolution plan. This may involve any action, plan or reorganisation including change in ownership, restructuring or sale of exposure etc. The resolution plan is to be clearly documented by all the lenders even where there is no change in any terms and conditions.
India has long recognised the right of foreign creditors to participate in the winding up of Indian companies. As early as 1961, the Supreme Court of India, in Rajah of Vizianagaram (AIR 1962 SC 500), clarified that foreign creditors have the same right as Indian creditors in winding up proceedings under Indian law. Given the backlog of cases and resultant timelines for resolving disputes in the Indian judicial system, winding up has been the remedy of choice, albeit mostly as a pressure point, for unsecured creditors including foreign unsecured creditors of Indian companies. Such creditors have taken winding up actions despite the low return (an abysmal 28% as per one source) and pace of insolvency (almost 4.5 years) in the Indian market. At the same time, there have been instances where consensual restructuring of stressed Indian companies has been halted by such actions of unsecured creditors.
The Indian government from time to time provided a specific legal regime for Indian financial creditors to recover their money – for example, debt recovery tribunals (DRT) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). But no additional measures were suggested for non-financial creditors.
Continue Reading IBC- Making “Doing Business in India” Easy for Foreign Trade Creditors?
On August 31st 2017, the Supreme Court of India in the case of Innoventive Industries Limited v. ICICI Bank Limited* delivered its first extensive ruling on the operation and functioning of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code). The Court said that it is pronouncing its detailed judgment in the very first application under the Insolvency Code, so that all Courts and Tribunals may take notice of a paradigm shift in the law.
The Supreme Court dismissed the appeal filed on behalf of Innoventive Industries Limited and confirmed the decision of the National Company Law Appellate Tribunal (NCLAT), which in turn had affirmed the order passed by the National Company Law Tribunal Mumbai (NCLT) admitting the insolvency petition filed by ICICI Bank Limited against Innoventive Industries Limited. Continue Reading Innoventive Industries Limited v. ICICI Bank Limited: Paradigm Shift in Insolvency Law in India