1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The present legal framework in India to deal with the Insolvency and Bankruptcy situation is legislated in the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016 or the Code).
The provisions of the Code are focused on a 'Creditor in Possession' regime wherein from the admission of the application by the Adjudicating Authority (AA) until the time a resolution plan is sanctioned by the AA, the creditors of the Corporate Debtor, through their appointed Resolution Professional (RP), remain in custody and control of the assets of the Corporate Debtor.
The Company continues to be run and controlled by the Resolution Professional until a resolution plan is sanctioned by the AA or a liquidation order is made to that effect by the AA. For making any decision during the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor, the consent of members of Committee of Creditors (COC) with 75% or more of the voting share is mandated under the Code. The voting share is deduced on the basis of the admitted claims of the respective member of CoC. The Code further provides that, upon the liquidation order being passed, the Resolution Professional continues to perform the duties of a liquidator for the sale of the liquidation estate of the Corporate Debtor and distribution of proceeds thereof amongst the creditors in a manner as provided in the Code.
As such, it can be safely concluded that the present legislation in our country, to deal with the Insolvency and Bankruptcy of corporate/noncorporate entities, is a creditor friendly jurisdiction.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The legislative framework in India presently provides only for formal restructuring and insolvency proceedings. However, until recent times, there have been several nonstatutory informal mechanisms led by: Bilateral Restructuring; Corporate Debt Restructuring (CDR); Joint Lenders' Forum (JLF); Flexi Restructuring Scheme; Change of Management through a Strategic Debt Restructuring (SDR); Change of Management outside of SDR and Scheme for Sustainable Structuring of Stressed Assets (S4A), which were based on various circulars and guidelines issued by the Reserve Bank of India (RBI), the banking regulator which laid the modalities and requisites to carry out the restructuring of debts.
These non-statutory informal mechanisms of restructuring were widely prevalent in India and were used as a tool for restructuring the debt of a Corporate Debtor before proceeding to the formal mechanism. However, with a view to harmonise and simplify the framework for the resolution of stressed assets, the RBI vide its recent circular dated 12.02.2018, has withdrawn the non-statutory informal mechanisms and has directed the commercial banks to identify the stress in the account and classify it as Special Mention Accounts (SMA).
At the same time, RBI has also given a window of 180 days to these commercial banks to formulate and agree on a resolution plan which may include any actions/plans/ reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities/investors, change in ownership, or
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Under the IBC 2016, the Resolution Professional appointed by the Adjudicating Authority at the time of admission of the application filed by the Financial Creditor or Operational Creditor or the Corporate Debtor for initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor is, inter alia, obligated to manage the affairs of the Corporate Debtor and to collect all information relating to the assets, finance and operations of the Corporate Debtor and the financial and operational payments for the previous two years.
If during the course of verification of the transaction it comes to the knowledge of the Resolution Professional or if he is of the opinion that the Corporate Debtor has undertaken certain preferential transactions or entered into an undervalued transaction or extortionate credit transaction or any other transaction which may have the effect of defrauding the creditors, during the relevant time (a period of two years in case of transaction with related parties and a period of one year in other cases), the Resolution Professional may approach the Adjudicating Authority with an application seeking appropriate orders, including reversal of such transactions.
Transactions as defined in the Code include: transfer of property or an interest thereof of the Corporate Debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the Corporate Debtor which has the impact of putting such creditor or a surety or a guarantor in a more beneficial position than it would have been in the event of a distribution of assets; gifts to a person; and undervalued transactions and extortionate credit transactions.
In addition, once a secured creditor issues a notice under Section 13(2) of the SARFAESI Act, there is a suo moto restraint on transfer of the secured assets by sale, lease or otherwise and any attempt to enter into transactions in respect of the secured assets of the company can be annulled by the appropriate court of law.
Any other transaction entered into by a company, in financial difficulty, to carry out its normal course of business or activities is otherwise not susceptible to any limitation in the absence of any restraining order.
3. Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
As stated in question 1.2 above, it is possible to implement an informal mechanism of restructuring. Prior to the circular issued by RBI on 12.02.2018, the restructuring was done based on one of the restructuring tools such as Bilateral Restructuring, CDR, JLF, Flexi Restructuring Scheme, Change of Management through a SDR, Change of Management outside of SDR and S4A.
However, all these non-statutory informal mechanisms have been withdrawn by the Regulator and it has directed the lenders to have distinct policies approved by their respective Boards in respect of resolution of the stressed assets including the timelines for the resolution. Further, it has directed the lenders that as soon as there is a default by the borrower entity, necessary steps shall be initiated to cure such default. The resolution plan may involve any actions/plans/reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities/investors, change in ownership, or restructuring.
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Originally published in The ICLG to Corporate Recovery & Insolvency 2018 Edition
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.