India: Insolvency Code - Resolution Of NPAs Vis-À-Vis Defaulting Promoters

Last Updated: 4 December 2017
Article by Seema Jhingan, Neha Yadav and Monica Benjamin

This article has been co-authored by the team of LexCounsel in collaboration with Ms. Sangeeta Gulati, CFO, Kanodia Technoplast Ltd.

Massive expansion and investments, primarily funded through bank loans (despite a weak promoters' equity base), has given rise to companies which have overleveraged their balance sheets. Coupled with the economic slow-down, industry conditions and global financial crisis in the past, this led to these companies becoming financially stressed. While, certain companies were able to sustain themselves through swapping loans, many have already reached a point where they have financially broken down. Bhushan Steel, Lanco, Essar Steel, Kingfisher, Monnet Ispat and Alok Industries, are just a few reported examples of such broken down stories.

The rise in the number of non-performing assets ("NPAs") was therefore an inevitable consequence. The past decades have seen various legislations and schemes being introduced from time to time to deal with the issue of debt recovery from corporates such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI"); the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA"), the insolvency/winding up process provided under the Companies Act, 1956 and later Companies Act, 2013; and the Corporate Debt Restructuring Scheme and the Strategic Debt Restructuring Scheme introduced by RBI.

The Insolvency and Bankruptcy Code, 2016 ("Insolvency Code"), enacted to consolidate the laws in India relating to reorganization and insolvency resolution process for all forms of corporate entities including individuals, in a time bound manner, has now become the latest game changer. With the amendments introduced by Banking Regulation (Amendment) Ordinance, 2017, followed by the subsequent Central Government's order dated May 5, 2017, the Reserve Bank of Indian ("RBI") was authorized to issue directions to banks to initiate insolvency resolution process in respect of defaults, under the Insolvency Code, and to issue directions with respect to stressed assets.

This led to the formulation of an Internal Advisory Committee ("IAC") by RBI to advise it on cases that may be considered for reference for resolution under the Insolvency Code. Focusing on large stressed accounts at this stage, the IAC has recommended resolution of all accounts with fund and non-fund based outstanding amount greater than Rs. 5000 crores with 60% or more classified as NPAs by banks as of March 31, 2016, and noted that 12 accounts (aggregating about 25% of the current gross NPAs) would qualify for immediate reference under the Insolvency Code. For other NPAs, the IAC has recommended that banks should finalize a resolution plan within 6 months and if a viable resolution plan is not agreed upon within such period, banks should be required to file for insolvency proceedings under the Insolvency Code. Based on IAC's recommendations, RBI issued directions to certain banks for referring the 12 accounts to initiate the insolvency process under the Code and thereafter followed by a second list of 28 defaulters.

The legislative intent of the Insolvency Code was to streamline the insolvency resolution and liquidation process by providing a consolidated mechanism and platform to ensure smooth and easy debt recovery, which appeared to be a useful tool to address the issue of NPAs. However, an issue which recently came into the limelight was the ability of promoters to bid for their own defaulting companies. This invited criticism on the ground of possible misuse of the insolvency resolution process by defaulting promoters.

Under the Insolvency Code, the insolvency resolution professional is required to "invite prospective lenders, investors, and any other persons to put forward resolution plans". In view thereof, promoters were also able to bid for their debtor companies 'as any other person'. Take for instance the case where the National Company Law Tribunal admitted the insolvency application filed by the debtor company (Synergies-Dooray Automotive Limited) and vide its order dated August 2, 2017, approved the resolution plan of Synergies Castings Limited where the cost of the scheme (i.e. the proposed payments to creditors and insolvency process cost) was Rs. 54 crores while the company owed Rs. 972 crores to the lenders. This has been challenged by its financial creditor, Edelweiss Asset Reconstruction Co. Ltd., before the National Company Law Appellate Tribunal, for alleged fraud by the debtor company as per media reports and is currently pending final adjudication. Another example is that of Essar Steel Limited's insolvency resolution, where reportedly one of its own promoters has also submitted its expression of interest and intends to file its resolution plan.

With bidding for major companies like Essar Steel, Bhushan Steel, Bhushan Steel and Power, Alok Industries Ltd., Monnet Ispat and Energy Limited to apparently start soon as part of insolvency proceedings, the above instances led to big industry players (often those intending to bid for such stressed assets) questioning the credibility of the insolvency process if the existing promoters were able to re-acquire their own defaulting companies with a major haircut.

What followed was the passing of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 by the Government on November 23, 2017 ("Ordinance"). This Ordinance primarily disqualifies a person from submitting a resolution plan if such person, or any other person acting jointly with such person, or any person who is a promoter or in the management or control of such person:

  • is an undischarged insolvent;
  • has been identified as a wilful defaulter in accordance with RBI guidelines;
  • whose account is classified as an NPA and a period of 1 year or more has lapsed from the date of such classification and who has failed to make payment of all overdue amounts with interest thereon;
  • has been convicted for any offence punishable with imprisonment for 2 years or more;
  • has been disqualified to act as a director under the Companies Act, 2013;
  • has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities market;
  • has indulged in preferential transaction, undervalued transaction or fraudulent transaction in respect of which NCLT has passed an order under the Insolvency Code;
  • has executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor under the insolvency resolution process or liquidation under the Insolvency Code;
  • where any connected person in respect of such person meets any of the criteria specified in the above categories.1
  • has been subject to any disability corresponding to the aforesaid categories under any law in a jurisdiction outside India.

This Ordinance is being touted by the Government as means to curb instances of fraud being perpetuated through abuse of the process under the Insolvency Code. However, this move is also being criticized by many as reducing the competitiveness of the bids (since promoters who could have upped the bidding have been taken out of the equation, which would ultimately result in lower proceeds for the lenders). In fact, as per certain analysts, this may even lead to a consolidation of power in the hands of few players (especially in the steel sector where various steel companies are being put under the auction hammer soon).

So, has the Government, in a knee-jerk reaction to prevent further controversies, oversimplified this issue by introducing blanket disqualifications as opposed to following a process of case to case determination by NCLT on credibility of resolution plans/bids submitted by the promoters?

The actual ramifications of this Ordinance would become clearer once the bidding results are out and the insolvency resolution plans are implemented. However, in the meanwhile, it is pertinent to note that the prohibition under the Ordinance is not limited to promoters who are wilful defaulters, but also includes within its purview, persons who have executed enforceable guarantees in favour of creditors in respect of the debtor company under the insolvency resolution process, and all of their connected persons. Therefore, even promoters who are not classified as wilful defaulters may be disqualified from submitting a resolution, and lose out on the opportunity of restructuring their company which may have been just a victim of adverse industry conditions. Debt resolution of small and medium enterprises may also become more challenging as there may not be many bidders, besides promoters, who would be interested in such companies. Valuations may in fact be lower as other bidders would tend to place lower bids and purchase the assets at the cheapest cost possible (as opposed to promoters who may have driven up the bid numbers given their personal attachment to the companies).

In addition to the recent developments under the Insolvency Code, the Government has also recently, announcing its approval of a recapitalization plan for infusing capital into public sector banks to the extent of Rs. 2,11,000 crores over the next 2 years, inter alia with the objective of cleaning up of NPAs. However, while this recapitalization may be a welcome move for the banks, one cannot resort to recapitalization alone to resolve the issue of NPAs.

Are there therefore other options that can be examined to address the looming issue of NPAs being faced by the banking sector? According to Ms. Sangeeta Gulati, CFO, Kanodia Technoplast Ltd., "The reason why corporate debt restructuring and strategic debt restructuring failed to a certain extent earlier, was because companies wanted capital infusion to run while banks, who were already suffering, refused to further lend money to such companies which led to these companies being unable to come out of the self-sustaining / revival packages earlier provided by the Government. Some resolutions which can therefore be examined are:

  • Introduction/Reinforcement of self-sustaining/revival package by the Promoters: One such example can be schemes such as the "5/25 refinancing scheme", which provided for longer gestation periods for repayment loans with promoters being at the helm of the company's affairs. In these schemes, promoters can be given the chance to seek for maximum amortisation period say up to 20-25 years, depending upon the nature of industry and viable business model. Although such schemes do not require intervention of the NCLT, however, routing the scheme through the NCLT as part of the insolvency resolution mechanism, may render such schemes more viable and enforceable as both promoters and banks / lenders would be required to adhere to certain haircuts, funded interest, moratorium period, new funding, etc. which may be agreed to before the NCLT and any non-compliance would be strictly dealt with.

    Waiving off / changing management might also be helpful for certain companies but the same cannot be uniformly applied to all companies.
  • Promoters' personal guarantee: The above can be coupled with promoters' personal guarantee wherein all the assets of promoters, whether in India, abroad, in trust, with family including children, shall be applied if the promoters are still defaulters.
  • Involvement of Asset Reconstruction Companies: Extending/allowing asset reconstruction companies to control sick companies and banks to involve/sell distressed assets, can be another viable option".

By appropriately implementing the aforesaid measures, the Government may be able to improve the conditions of debt ridden companies and the overall economy by adequately dealing with the issue of NPAs. While, it remains to be seen whether the Government's attempt to implement these measures is going to be successful in adequately addressing the growing problem of NPAs, however, a positive and firm start has definitely been made in the right direction.

Footnote

1. The term "connected person" means (i) any person who is promoter or in management or control of the resolution applicant, (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during implementation of the resolution plan, or (iii) the holding, subsidiary or associate company or related party of a person referred in the first two categories.

Disclaimer: LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Seema Jhingan
Neha Yadav
Similar Articles
Relevancy Powered by MondaqAI
S.S. Rana & Co. Advocates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
S.S. Rana & Co. Advocates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions