From an investor's standpoint, a robust and effective bankruptcy regime is a prerequisite for the development of the corporate debt market. However, the existing insolvency and bankruptcy framework is highly fragmented, which has led to complex issues on how to reconcile various statutes with one another.
Further, the existing framework has proved to be time consuming and cumbersome. As per the World Bank Group's data, resolving insolvency proceedings in India takes approximately 4.3 years on average, whereas it takes six months in Japan, eight months in Singapore, one year in Malaysia and the United Kingdom and 18 months in United States.(1)
In order to resolve this serious issue, the government recently enacted the Insolvency and Bankruptcy Code 2016, which essentially consolidates the existing legal regime for insolvency and bankruptcy proceedings in India.
Debenture and bondholders' right to initiate proceedings
The insolvency resolution process under the Bankruptcy Code can be initiated by:
- a financial creditor;
- a operational creditor; and
- the corporate debtor.
The term 'financial creditor' is defined under the Bankruptcy Code as any person to which the financial debt is owed. In turn, the term 'financial debt' includes any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.(2)
Therefore, a holder of debentures or bonds will be considered a financial creditor for the purpose of the Bankruptcy Code and will be entitled to initiate the insolvency resolution process. Although the Bankruptcy Code has not yet to be notified, the enactment alone has created a positive outlook for the bond market in India, as this will allow holders of debentures and bonds to initiate the insolvency resolution process in the most efficient manner.
Trustees' right to initiate proceedings
The existing provisions for winding up a company under the Companies Act 1956 provide (in no uncertain terms) that debenture holders and their trustees will be treated as creditors and can thus present a petition for winding up a company.(3) However, the Bankruptcy Code grants no authority to the trustees of bonds or debentures to initiate the insolvency resolution process. While the term 'financial creditor' includes debenture holders and bondholders as stated above, the Bankruptcy Code does not specifically entitle trustees to initiate the insolvency resolution process.
Although this may create confusion in situations where the trustee is entrusted with powers to seek enforcement of bonds, keeping in mind various court precedents on trustees' authority to initiate winding-up proceedings on behalf or at the instructions of holders under the existing regime, the courts are likely to interpret the term 'financial creditor' to include a trustee of the holders.
The measures taken by the government – in particular, in the legal regime and, most importantly, the enactment of the Bankruptcy Code – will go far in creating a healthy and conducive environment for the corporate bond market in India. Similarly, given the peculiar financial restraints being faced by the banking sector due to the increase in non-performing assets, it is paramount for India to find a better balance between bank-based and market-based finance, and to create a more comprehensive corporate bond market.
(2) Section 5(8) of the Insolvency and Bankruptcy Code 2016.
(3) Section 439 (2) of the Companies Act 1956:
"A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause (b) of sub-section (1)."
This article was first published in the July 2016 issue of the International Law Office's Insolvency & Restructuring – India Newsletter.
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