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vmls123 · 2 months ago

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Mediation for Operational Creditors: A New Dawn in India's Insolvency Framework

The Insolvency and Bankruptcy Board of India (IBBI) has put forward an innovative plan aimed at streamlining the resolution process for operational creditors (OCs). By allowing pre-institutional mediation before submitting insolvency applications under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, the initiative seeks to promote early dispute resolution, lessen the load on adjudicating authorities, and speed up proceedings. While this concept holds great potential, its success will depend on how well it is implemented and the readiness of stakeholders to adapt to these changes. This development is particularly relevant for professionals and students pursuing an LLB degree course at a law university in Chennai or any of the best law colleges in India, as it represents a significant shift in insolvency law.

Mediation is increasingly seen as a quicker and less confrontational way to resolve disputes. It enables operational creditors and corporate debtors to have meaningful discussions with the help of a trained mediator. Rather than getting caught up in lengthy court battles, both parties can work together to tackle issues, which saves time, money, and effort. In addition to these practical advantages, mediation helps maintain important business relationships that could be damaged by litigation. For companies, collaborating to resolve disputes is much more advantageous than turning into opponents. The importance of this approach is highlighted by data showing that by April 2024, more than 21,000 Section 9 cases were settled before formal admission, while only around 3,800 progressed to full insolvency proceedings. This suggests that most disputes are resolved before they escalate into advanced litigation, emphasizing mediation’s role as an effective pre-litigation strategy. Law students studying at the best private law colleges in India or aspiring for an LLB degree course can gain valuable insights from such mediation strategies in insolvency law.

Under the proposed framework, operational creditors can opt for mediation before filing their insolvency application. Disputes commonly revolve around payment delays, quality of goods or services, or contractual disagreements. A mediator appointed under the Mediation Act, 2023, will guide the discussions between the parties. If the mediation is successful, the dispute is resolved without involving the National Company Law Tribunal (NCLT). However, in case of failure, the mediator will issue a non-settlement report, which the creditor can annex to the insolvency application when initiating formal proceedings. This approach balances the need for efficiency with the flexibility to pursue formal insolvency resolution if required. The growing emphasis on mediation in India’s legal system makes it a crucial area of study for students enrolled in a law college or one of the best colleges for law in the country.

While the benefits of this initiative are apparent, challenges remain. Mediation is voluntary, which means its success depends on the willingness of both parties to participate in good faith. There is also the risk that corporate debtors may exploit mediation as a stalling tactic to delay creditors’ access to formal proceedings. For smaller creditors, the lack of bargaining power could pose additional challenges, particularly when negotiating with larger and more resourceful corporate debtors. Furthermore, the enforcement of mediation outcomes relies on voluntary compliance, and any breach of the agreement could force creditors back into lengthy legal battles, defeating the purpose of the initiative. The practical challenges associated with mediation are an important area of legal study, making it an essential topic for those pursuing an LLB degree course at a law university in Chennai or any of the best law colleges in India.

Despite these concerns, the potential for pre-institutional mediation to reshape India’s insolvency framework is significant. To ensure its success, several measures must be implemented. These include developing a strong pool of trained mediators, increasing awareness among creditors and debtors about the advantages of mediation, and offering support mechanisms such as legal aid for smaller creditors to create a more equitable environment. Furthermore, establishing transparent monitoring systems to track mediation outcomes can promote accountability and enhance the process over time. As alternative dispute resolution methods gain traction, legal education institutions, including the best private law colleges in India, are integrating these concepts into their curricula to prepare future legal professionals.

If executed properly, pre-institutional mediation could serve as a fundamental element of India’s insolvency framework. It provides operational creditors with a faster, more cost-effective method to recover their dues while alleviating the burden on an overloaded judiciary. By encouraging a culture of dialogue and cooperation, this initiative has the potential to foster a more efficient and balanced insolvency ecosystem that benefits all parties involved. For operational creditors, it is not just a means of resolving disputes but also a move towards establishing a fairer and more streamlined process for achieving justice. Law students and professionals from the best colleges for law can look forward to new opportunities in insolvency law and mediation, further expanding their career prospects.

#llb degree course #best law colleges in india #best private law colleges in india

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centrikbusinesssolutions · 5 years ago

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The latest government data shows that how IBC is a huge change brought by the recent government in terms of a speedy redressal for the aggrieved homebuyers.

#speedy redressal for the aggrieved homebuyers #NCLT under IBC for speedy Redressal #NCLT flooded with cases by Homebuyers #IBC for speedy redressal #How to approach NCLT under IBC #homebuyers are moving NCLT to claim the due debt #claiming the due debt from developers

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jhasravi · 5 years ago

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Dated: 25.01.2020

Best SCM Practices to Boost Supplier Innovation

Organize and promote Business Intelligence

Seeking innovation from suppliers involves first to be able to clearly communicate the strategic lines of innovation. This is certainly not to curb creativity, but to guide the proposals towards the strategic priorities of the company (miniaturization, energy reduction, connectivity, CO2 reduction …). The innovation plan or technological road map is a key tool to project and share that vision through a multi-business governance.

Then it is appropriate to map the innovation ecosystem with care. This is not limited to suppliers but includes a more complete set of partners (suppliers, customers, universities, laboratories, start-ups, consumer associations, etc.).

Finally, the areas of innovation can be promoted and shared with the innovation ecosystem stakeholders through various communication channels (strategic meetings, innovation portals, open innovation, forums, etc.).

Identify and select the right suppliers

Too often, companies rely on a traditional model of SRM (Supplier Relationship Management) to identify preferred suppliers for innovation. These models are often guided by a desire to rationalize the number of suppliers and lead to selection of suppliers able to meet all the required criteria.

But, the larger suppliers are not necessarily the most relevant for innovation! Successful innovation comes also from smaller suppliers as they are more agile and able to accompany you in the evolution of your business model (especially guided by the digital revolution).

Select 3 major criteria to identify the right partners:

Skills:technological, quality, industrial, financial…

Ability to cooperate:which is expressed by the strategic alignment and agreement on the main principles of cooperation and governance of innovation projects

Fit:the compatibility of cultures, but especially the desire and commitment of top Management

Share the right information with suppliers

Driving supplier innovation and co-innovation is first knowing to be open and not hesitating to share information deemed sensitive: market visions, consumer developments, innovation plans, key elements of the technology roadmap, etc.! Of course, this must be mutually agreeable.

It is important to conduct strategic reviews with key suppliers (usually twice a year) to ensure the involvement of top management and alignment of the two companies.

Create a climate of trust

A majority of innovations come from the exchange and confrontation of ideas. There are multiple ways to organize this cogeneration: specific meetings, challenges, tech-days, creative sessions, collaborative platforms, etc.

In any case, it is important to agree in advance on a collaboration contract which sets rules for collaboration (particularly in terms of intellectual property, risk sharing, etc.). Many attempts died or were given birth to in pain and frustration because the terms of the collaboration were not clearly defined from the start and the leaders of both companies were not specifically involved.

Structuring idea consideration

Generating ideas is not the most complicated part. It is then required to evaluate and sort ideas easily using rational criteria. This requires the establishment of standard documentation sheets where the factors are described (customer value, differentiation, competitiveness etc …) as well as the level of risk (technological, industrial, etc …). A fluid process must help sort innovations quickly to give quick feedback to discuss with suppliers.

A good practice is often to make the assessment in 2 stages which allows you to quickly rule out invalid ideas to focus on those with a real interest.

Promote and structure the internal exchanges

The establishment of a multi-business governance (marketing, R & D, Purchasing …) is a key success factor to organize the promotion and driving of innovation with suppliers or ecosystem partners.

This governance is fundamental to aligning technology roadmaps, procurement strategies and supplier roadmaps. Some companies can significantly transform their organizations. For example, a leading automotive supplier brought together under one organization (“Engineering Procurement”) part of its R & D and Procurement / Suppliers Development teams to drive supplier innovation and ensure alignment with operational roadmaps.

Valuing in-house innovation

Fostering an innovation culture requires the establishment of a change management policy which is based around three axes:

Create the right mind-set:communications, celebration of success, highlighting suppliers, etc.

Demystify:organize industrial visits / labs, share benchmarks, communicate on simple innovations, etc. Innovation is within everyone’s reach!

Create desire:create challenges, incentivize managers on the resources dedicated to innovation, create a synthetic indicator, etc. …

Promote individual involvement in innovation

It must be at the initiative of everyone and the more the better. If communication and promotion of innovation contribute to create this state of mind, this is not enough. It should also be relayed by HR and managerial actions.

Empowering managers:train and coach them so they can relay to the teams; enable them to grant time for innovation

Integrate criteria of innovationin recruitment, assessment, and in newcomer integration programs.

Develop the right skills to capture and retain the value created

Successful innovation with suppliers also requires the know how to develop the right skills:

Develop technical skills:the classic mistake is to focus suppliers innovation to address a lack of internal technological skills! On the contrary, you have to be able to always control innovation from the supplier to be able to capture the fair share of value but also to keep it on time. The mapping of knowledge is an important prerequisite before committing to such an approach.

Develop life skills:the skills required to stimulate and drive supplier innovation are not those traditionally expected of buyers. Functional and technical expertise give way to leadership skills, Business Development, “Intelligent Risk Taker”, etc.

Behaviour Cross Function

Business Accumen – Global Mindset- Intelligent Marketing- Project Management- Champion of Change

Technical & Functional Excellence

Technological Knowledge- Negotiation- Supplier Evaluation- Purchasing Tool- Contract Management- Risk Assessment- Market Knowledge- Cost Monitoring

Behaviour- Leadership

Growth & Customer Focus- Effective Communication- Leadership Impact

Connect for further discussion to re-engineer the Supplier Management Processes

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Boost your Supplier Management with us-Digitally Innovate the SCM Processes Dated: 25.01.2020 Best SCM Practices to Boost Supplier Innovation Organize and promote Business Intelligence Seeking innovation from suppliers involves first to be able to clearly communicate the strategic lines of innovation.

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bigyack-com · 6 years ago

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How tweaks in IBC and partial credit guarantee scheme affect real estate sector - real estate

The Union Cabinet on Wednesday approved key amendments to the Insolvency and Bankruptcy Code (IBC) Bill which may have a direct impact on the country’s real estate sector and its stakeholders.According to one of the amendments, financial creditors will now have to meet an additional threshold to take a company to bankruptcy court. For real estate, the Bill specifically stipulates that insolvency action can be initiated only if 10%, or 100 homebuyers (whichever is lower) or debenture holders, agree to the move.“Additional thresholds introduced for financial creditors represented by an authorized representative due to large numbers in order to prevent frivolous triggering of Corporate Insolvency Resolution Process (CIRP),” a government release said.The amendment assumes significance as a number of cases have been reported in the recent past where a single homebuyer has approached the National Company Law Tribunal (NCLT) invoking provisions of the IBC.In a related development, the Cabinet also approved small but significant tweaks in the partial credit guarantee scheme announced in Budget 2019 to improve liquidity for cash-starved non-banking financial companies (NBFCs) and housing finance companies (HFCs).Public sector banks will now be allowed to buy ‘BBB+’ rated assets of NBFCs and HFCs as well compared with the earlier rule that only ‘AA -rated assets will get the benefit of the partial credit guarantee. Lowering the limit will make more NBFCs and HFCs eligible for funds.The criteria to avail the scheme has been changed to cover NBFCs and HFCs which may have been overdue on their loans by up to 30 days as of August 2018.The scheme will remain open until June 30, 2020, or till assets worth Rs 1 lakh crore are bought. The finance minister has been empowered to extend the scheme by three months.“The proposed government guarantee support and resultant pool buyouts will help address NBFCs/HFCs resolve their temporary liquidity or cash flow mismatch issues, and enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth,” the government said in its statement.The government’s partial credit guarantee scheme covers bonds of up to Rs 1 trillion, with the amount of overall guarantee being limited to first loss of up to 10 per cent of fair value of assets being purchased by the banks under the Scheme, or Rs 10,000 crore, whichever is lower. Read the full article

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juudgeblog · 6 years ago

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Comparative Analysis of the laws on Insolvency before and after the enactment of the Insolvency and the Bankruptcy Code

Written by Saloni Mathur, pursuing Certificate Course in Insolvency and Bankruptcy Code offered by Lawsikho as part of her coursework. Saloni completed her course in Company Secretary and is currently employed with S R Ashok and Associates Pvt. Ltd. as the Manager of Finance and Legal Department.

Introduction

How would you react when I term the history of Bankruptcy laws a mess?

When our Honourable Finance Minister Mr.ArunJaitley, did not fail to miss any opportunity to laud the journey of two years of IBC in one of his many speeches that marked a hopeful beginning of the New Year 2019, it might have left hundreds of people to ponder the structure of the new legal and regulatory regimethat governs the very foundation of the IBC.

Insolvency Resolution Process is the talk of the town and most emerging issue in the history of the bankruptcy in India. This makes us reflect upon the already faded aura of the legal regime governing insolvency prior to the enactment of the Insolvency and the Bankruptcy code. There has been a reservoir of laws on insolvency prior to the IBC that came and went, and which apparently failed to resolve the complex bankruptcy issues. The Non-performing asset crisis surmounted, however no one-stop solution emerged. From Sick Industrial Companies (Special provisions), Act, 1985 to The Provincial Insolvency Act, 1920, The Presidency Towns Insolvency Act, 1909, The Code of Civil Procedure, 1908, and the SARFAESI Act, 2002 the journey has been quick and full of potholes that effusively started, however later failed to stick to the very purpose for which they were established.

This think piece is an attempt to comparatively analyse the laws on insolvency prior to and after the enactment of the IBC and to delve into the history of transition from various other Insolvency laws to the enactment of the IBC.

Governance prior to the Enactment of the IBC

Figure 1.1

Governance prior to the Enactment of the IBC

Sick Industrial Companies (Special Provisions) Act, 1985

The Sick Industrial Companies (Special provisions) Act, 1985 defined the concept of the ‘sick company’ and a ‘potentially sick company’. The provisions under the Act defined the company as sick when there was a complete net worth erosion. The Act defined the sick company as any company that existed for at least five years and the accumulated losses exceeded or equalled net worth of any financial year.

The quasi-judicial bodies under the SICA were the Board for Industrial And Financial Reconstruction and the Appellate Authority for Industrial and Financial Reconstruction as defined under Section 3(b) and 3(a) of The Sick Industrial Companies (Special provisions) Act, 1985.[1] Section 15 of the SICA provided for reference to the Board for Industrial and Financial Reconstruction, had the company become a sick industrial company within sixty days from the date of finalisation of the duly audited accounts of the company. The SICA failed due to its backward approach in dealing with the bankruptcy issues. There was a balance sheet approach to detect a sick unit rather than the prospective cash flow approach. It took a fairly long time for the net worth to erode, and the grave liquidity issues were never addressed.

The Companies (Second Amendment), Act 2002

The companies second Amendment Act, 2002 bought about amendments which directed to replace BIFR and AAIFR with NCLT and the NCLAT as the adjudicating authorities. Section 424A and 424L were introduced in the Indian Companies Act, 1956 to deal with revival, however they were never enforced.

Sick Industrial Companies (Special provisions) Repeal Act of 2003

The sick Industrial Companies (Special provisions) Repeal Act of 2003, [2] dissolved the appellate authority and the Board established under The Sick Industrial Companies (Special provisions) Act, 1985 i.e The BIFR and the AAIFR. However due to the delay in the constitution of the NCLT, SICA repeal Act was never notified.

The Recovery of Debts due to Banks and Financial Institutions Act, 1993(“RDDBFI Act”)

Under this Act, the Tiwari Committee constituted with the objective of solving the problem of recovery by the Banks and the Financial Institutions, proposed establishment of the specialized Tribunals, called the Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals who would assist in unlocking the huge amount of public money and to move towards proper utilization of the funds for the development of the country.

The provisions of this Act did not apply to those Banks and Financial Institutions where the amount due is less than ten lakh rupees. Section 2(g) of the RDDBFI Act, 1993 defined debt which includes any amount claimed by the Bank and the Financial Institution during the course of any business activity whether secured or unsecured, assigned or payable under any decree or order. The RDDBFI Act, 1993 under section 19(19) also gave power to the Tribunals to issue certificate of recovery against the company registered under the Companies Act, 1956, to the recovery officers specially designated under this Act. The various modes of recovery as governed by Section 25 of the Act include:

Attachment and sale of the movable and immovable property

Arrest of the defendant

Appointing a receiver for managing the properties of the defendant

click above

The SARFAESI Act, 2002

The Securitization and Reconstruction of Financial Assets and enforcement of the Security Interest Act, 2002 was established with the purpose of the enforcement of the security interest created in favour of only the secured creditor, in accordance with the provisions of the Act. Section 13 of the SARFAESI Act, 2002 deals with the enforcement of Security Interest by the secured creditor after giving due notice to the parties for the discharge of their liabilities within sixty days of the date of notice failing which the secured creditor can take actions as stipulated under Section 13(4) of the Act. These include:

Taking possession of the secured assets of the borrowers.

Taking over the management of the business of the borrower

Appoint any person to manage the secured assets of the borrower.

The major drawback of the SARFAESI Act, 2002 was there were no rights available to the unsecured creditors under this legal regime.

The CDR and SDR mechanisms

The corporate debt restructuring mechanism was first issued in 2001 for implementation by the banks. The CDR mechanism was only limited to the banks and the financial institutions that had an aggregate exposure not exceeding 10 crore rupees. The mechanism was a non-statutory voluntary system or agreement entered between the creditors and borrowers for restructuring of the debt.

Strategic Debt restructuring was announced by the RBI on June 8, 2015 and the main objective of the scheme was the change in the management of the company to deal with the stressed assets. The number of cases that were resolved by such schemes turned out to be few in number and the desired results could not be achieved.

The route to the IBC

The insolvency and the bankruptcy code enacted in May, 2016 was a more holistic approach to dealing with the stressed assets. The code is a unified force that clubs the relevant provisions on all the laws that deal with the bankruptcy. The code is more creditor friendly, while it seeks to promote the interests of all the stakeholders of the corporate debtor. It has been designed in such a way that it unites the provisions of the SARFAESI, The RDDBFI, theCode of the Civil Procedure etc

Comparative Analysis on the Laws of Insolvency prior and after the enactment of the IBC

S.No Basis of differentiation SICA RDDBFI SARFAESI Restructuring Mechanisms IBC 01. Trigger Amount 1.Company existed for at least 5years

2.Accumulated losses >= net worth for any financial year

Default is Rs.ten lakh or more than ten lakh Amount of Default as owed to a secured creditor Aggregate exposure not exceeding ten crore rupees Minimum default amount of Rs.1,00,000 to file an application. 02. Objective Rehabilitation and revival of sick industrial units Establishment of specialised Tribunals called the Debt recovery Tribunals and other Appellate Tribunals to recover money due to banks and financial institutions Enforcement of security interest over the property of the borrower and establishment of asset reconstruction companies Change in the existing terms and conditions of the debt. Maximisation of the value of the assets 03. Adjudicating Authorities BIFR and AAIFR Debt Recovery Tribunals( DRT) and Debt Recovery Appellate Tribunals Assistance in recovery of dues by Chief Metropolitan Magistrate and Chief District Magistrate. Any party aggrieved by the action of Bank or financial Institution may file appeal to Debt Recovery Appellate Tribunal. RBI Regulations and inter-se voluntary agreement between creditors National Company Law Tribunal and National Company Law Appellate Tribunal 04. Time-line 1-2 years for further investigation of sick companies More than two years 1-2 years Ongoing process Model time line prescribed for corporate Insolvency Resolution process post which company goes into liquidation. The period ranges between 180 to maximum 270 days 05. Types of creditors covered Secured and unsecured Secured and unsecured Secured secured Operational as well as financial creditors which include the secured and the unsecured creditors 06. Pillars of the legal regime The adjudicating authorities The specialised Tribunals established under the Act Public Auction and enforcement of the security interest RBI regulations The Insolvency and the Bankruptcy Board of India( IBBI), The Information Utilities, The National Company law Tribunal and the Insolvency Professionals

Table 1.1

Status of the Laws on Insolvency after the Enactment of the IBC

Moratorium

It is needless to say that the Insolvency and the bankruptcy code has unified the law relating to the enforcement of the statutory rights of the creditors. It has acted as a means of consolidation of all the existing laws relating to the insolvency of the corporate entities and the individuals into a single transaction.

Section 14 of the Insolvency and the Bankruptcy code stipulates the moratorium provisions imposed on the corporate debtor once the corporate insolvency resolution process starts against the defaulting company. Section 14(1) of the IBC bars following activities against the corporate debtor:

The institution of suits or any proceedings against the defaulting company including execution of any judgement, decree or order in the court of law, Tribunal or the Adjudicating Authority.

Any Action to enforce any security interest against the corporate debtor under the SARFAESI Act, 2002.

Thus any proceeding pending under the various existing Insolvency laws comes to a halt during the corporate insolvency resolution process of the companies. However there have been rulings where the Honourable High Court and the Supreme Court have prosecuted on any proceedings during the moratorium, and which have apparently been kept out of the purview of the moratorium.

No jurisdiction of civil courts under the code

Further section 63 of the Code stipulates that the civil court shall not have any jurisdiction to entertain any suit or proceedings in respect of any matter on which the NCLT has jurisdiction.

Choice of liquidation under the IBC

Once the company is under Corporate Insolvency Resolution Process, the existing laws on insolvency have almost no interplay. If the resolution plan submitted by various resolution applicants are accepted, the company has to follow it and all previous applications filed under existing insolvency laws are back to square one.

If no resolution plan is approved, the company automatically goes into liquidation. The creditors under Section 52 of the Code are given a choice of pursuing liquidation on their own or as a part of collective liquidation proceedings. If the existing SARFAESI applications are revived after CIRP, they have a later priority of payment as compared to Secured financial creditors under the normal ‘waterfall mechanism’ prescribed under Section 53 of the IBC.

Conclusion

One can aptly say that the Laws on Insolvency in India have been a complete conundrum. There has been a rise and fall of an insolvency regime, where each came to replicate the other, hardly bringing anything new with them. The IBC came as a one-stop solution that followed a prospective cash flow approach having sturdy pillars for its support, surpassing the existing insolvency regime.

The Code can more aptly be defined as a ‘Unified mechanism’ covering the bright sides of every failed Insolvency regime’. The model time line, the role of the adjudicating authorities, the IBBI, and the balancing approach with which the code has established itself, has really been a landmark moment.

Further if one analyses the status of all the existing Insolvency laws after the enactment of IBC, there seems almost a lost connection. All prior regimes started with a good energy, however failed to maintain the cohesiveness. It is and hopefully shall only be the IBC to bring a much needed reform.

Reference

[1]https://indiacode.nic.in/admin/view-casepdf?type=repealed&id=AC_CEN_2_2_00031_198601_1517807326263

[2]http://legislative.gov.in/sites/default/files/The%20Sick%20Industrial%20Companies%20%28Special%20Provisions%29%20Repeal%20Act%2C%202003.pdf

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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supervidyavinay · 5 years ago

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MUMBAI: The road towards changing the Insolvency & Bankruptcy Code (IBC) is less simple than it seemed a fortnight ago when the finance minister announced a suspension of fresh IBC proceedings in the wake of Covid-19 pandemic.The government, it is widely felt, will have to involve the Reserve Bank of India (RBI), large lenders, and some of the other stakeholders to deal with questions that have cropped up in considering an ordinance: How to differentiate borrowers hurt by Covid from those impacted by other factors? How to link the definition of default to Covid-19? Will there be a cut-off date to identify borrowers for whom IBC may still apply? Will self-insolvency continue? Should IBC include partnerships and personal bankruptcy to cover smaller businesses?“Pulling the shutters down on IBC may not be the best solution. There is no logic in restraining a debtor, which is struggling, from commencing insolvency. In any case, suspending provisions without changing the RBI Circular of June 2019 will not help. A proper consultation with RBI and other stakeholders should be initiated,” said Sumant Batra, managing partner at the law firm Kesar Dass & Associates.Just as financial and operational creditors can initiate the IBC process on a company, the code allows the corporate debtor to opt for self-insolvency. 76146626RBI’s Say on Definition of DefaultAccording to RBI rules, banks have to review the borrower within 30 days of the first default and implement a resolution plan within the next 180 days, failing which they have to make extra provisioning (which eats into their profits and capital).RBI, according to banking circles, is likely to insist that it should have the final say on any change in the definition of default in IBC in the context of the pandemic. RBI has given a six-month moratorium beginning March 1 on interest servicing and loan repayment. “Should IBC continue for borrowers which defaulted before March 1? Should it be for those where banks have reached an inter-creditor agreement (during the 30-day review post default)? Should the moratorium period be considered under the IBC framework?” a senior banker asked.“While the moratorium and lockdown happened in March, there are borrowers who suffered due to supply chain disruption in February or January,” said a senior official of a large PSU bank. All these issues will have to be dealt with before the government finalises an Ordinance for amending IBC to take care of stress caused by Covid-19.According to Ashish Pyasi, Associate Partner at Dhir and Dhir Associates, if the amendment is intended only to exclude default to operational creditors then consultation with RBI may not be required. “However,” said Piyasi, “suspension of all provisions is not the best solution. If financially stressed companies are stopped from approaching the NCLT then they are forced to carry the dead wood. It would worsen their stress as debts will rise and the value of assets will be depleted.”More than 80% small and medium enterprises are partnerships or proprietorships. “I wonder how IBC can help them without first operationalising the part of IBC relating to individuals. And that part needs a major overhaul before it is fit for implementation as the government has indicated earlier. We are talking about a large number here,” said Batra. At present, the issue of individual insolvency in IBC is connected with invocation of corporate guarantee. “On this matter, consultation with state governments would be needed as personal bankruptcy is a subject on which states can also legislate,” he said.While IBC is considered as a full-fledged resolution mechanism compared to other laws which largely focus on recovery, many lenders, particularly state-owned banks, are not in a hurry to initiate IBC proceedings as long as the regulator gives them leeway in restructuring loans. “IBC may mean a distress sale of business in the present environment. But if IBC is deferred and a one-time loan restructuring window is not offered, then there will be no meaningful resolution path left,” said another official of a private sector bank. from Economic Times https://ift.tt/3ey1ts6

#News #Economy #COVID19

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legalseat · 7 years ago

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Essar Steel Case: Supreme Decodes Section 29A of the IBC

Background

In its ruling in ArcelorMittal India Private Limited v. Satish Kumar Gupta, the Supreme Court has laid down the much-needed jurisprudence involving section 29A of the Insolvency and Bankruptcy Code, 2016. Section 29A was inserted in the Code with effect from 23 November 2017 and has been the subject matter of at least two rounds of amendments thereafter. The provision makes ineligible several categories of persons from bidding for companies and their businesses that are the subject matter of insolvency under the Code. Not only has it been a controversial provision but it has also been riddled with considerable complexity that the Court was called upon to unpack.

The facts are rather too detailed, but the crux of the matter is that there was a bidding war for the insolvent company Essar Steel India Limited between ArcerolMittal India Private Limited and Numetal Limited. At the resolution stage, the resolution professional disqualified both ArcelorMittal and Numetal. ArcelorMittal was found to have been the promoter or exercised control over two companies, Uttam Galva Steels Limited and KSS Petron Limited, which owed dues to banks and financial institutions that remain unpaid. In the case of Numetal, it was found that the company was established in the lead up to the resolution of Essar Steel and that it was essentially controlled by Rewant Ruia, who is the son of Ravi Ruia (one of the promoters of Essar Steel). The National Company Law Tribunal (NCLT) affirmed the resolution professional’s disqualification of both bidders. On appeal, however, the National Company Law Appellate Tribunal (NCLAT) agreed with ArcelorMittal’s disqualification, but came to a different conclusion regarding Numetal because Rewant Ruia had by then divested his Numetal interests in favour of VTB, a Russian entity. It was against this decision that ArcelorMittal approached the Supreme Court.

In its elaborate ruling that addresses various aspects of section 29A and extends to broader areas of the law such as lifting the corporate veil and defining corporate control, the Supreme Court found that both bidders were ensnared within the confines of the disqualification in the provision. Exercising its powers under Article 142 of the Constitution of India, the Supreme Court ordered that both bidders need to clear the dues owed in respect of other companies forming part of their group if they wish to submit fresh resolution plans, which they must do within two weeks.

More important for our purposes are the principles of law laid down by the Supreme Court, which this post will focus on.

Corporate Veil

In a somewhat curious manner, the Supreme Court invoked the principle of lifting the corporate veil in interpreting section 29A. The provision begins with the wording that a “person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person” is subject to the various disqualifications set out later in the provision. The Court begins by clarifying that a purposive interpretation (based on the Heydon rule) must inform the outcome of application of the statutory provision. It observes:

29. The opening lines of Section 29A of the Amendment Act refer to a de factoas opposed to a de jureposition of the persons mentioned therein. This is a typical instance of a “see through provision”, so that one is able to arrive at persons who are actually in “control”, whether jointly, or in concert, with other persons. A wooden, literal, interpretation would obviously not permit a tearing of the corporate veil when it comes to the “person” whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as Section 29A, alone governs. For example, it is well settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A Salomon and Co. Ltd.[1897] AC 22 will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan. as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A Salomon and Co. Ltd. [1897] AC 22 will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan.

The Court then goes on to discuss the jurisprudence regarding lifting of the corporate veil, and concludes on the point:

34. It is thus clear that, where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole.

While it would be hard to argue against the conclusion of the Supreme Court, the reasoning is, with respect, questionable. It is understandable that the Court supplied a purposive and rather expansive interpretation of section 29A, but it could have arrived at the same conclusion without relying on the principles of lifting the corporate veil. Section 29A, by its very text, refers not just to the resolution applicant but to also include “any other person acting jointly or in concert with” the resolution applicant. This is even clearer when one reads the definition of “persons acting in concert”, for which one has to rely on regulation 2(1)(q) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. To that extent, this decision ought not be taken as influencing the Indian jurisprudence on lifting the corporate veil despite the space the topic has occupied in the Supreme Court’s judgment.

Management and Control

One of the specific disqualifications is contained in section 29A(c). It provides that a person is ineligible to bid for an insolvent company if it has an account, or is in management or control, of a corporate debtor whose account has been classified as a non-performing asset (NPA) for a period of at least one year from the date of such classification until the date of commencement of the corporate insolvency resolution process. Here, it is necessary to establish that the bidder is either in “management” or “control” of such a corporate debtor whose account has been classified an NPA. The Supreme Court was called upon the interpret the scope of both these expressions.

As regards “management”, the judgment cursorily states that the expression “would refer to the de juremanagement of a corporate debtor. The de jure management of a corporate debtor would ordinarily vest in a Board of Directors”. It is on the element of “control” that the Court engaged in a detailed analysis after examining section 2(27) of the Companies Act, 2013. It noted:

47. The expression “control” is therefore defined in two parts. The first part refers to de jure control, which includes the right to appoint a majority of the directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control”. A management decision is a decision to be taken as to how the corporate body is to be run in its day to day affairs. A policy decision would be a decision that would be beyond running day to day affairs, i.e., long term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.

While the distinction between de jureand de factocontrol is understandable, the dichotomy between management decision relating to the day-to-day affairs of the company and policy decision being long-term in nature remains unsubstantiated and somewhat artificial.

The more helpful analysis of the Court relates to whether “control” refers to positive control or whether it also includes the power to block special resolutions of a company. Readers will recall this debate that first emanated in the Securities and Appellate Tribunal (SAT) ruling in Subhkam Ventures (I) Private Limited v. Securities and Exchange Board of India where SAT held that the expression “control” for the purpose of SEBI’s takeover regulations covers only a proactive power and not a reactive power. The weight of this ruling has been in doubt, an aspect that has since not been clarified by SEBI. In the present decision, the Supreme Court, referring to Subhkam Ventures, observed that the SAT’s “observations are apposite and apply to the expression ‘control’ in Section 29A(c)”. It also applied a similar analysis to section 29A and noted:

50. Section 29A(c) speaks of a corporate debtor “under the management or control of such person”. The expression “under” would seem to suggest positive or proactive control, as opposed to mere negative or reactive control. This becomes even clearer when sub-clause (g) of Section 29A is read, wherein the expression used is “in the management or control of a corporate debtor”. Under sub-clause (g), only a person who is in proactive or positive control of a corporate debtor can take the proactive decisions mentioned in sub-clause (g), such as, entering into preferential, undervalued, extortionate credit, or fraudulent transactions. It is thus clear that in the expression “management or control”, the two words take colour from each other, in which case the principle of noscitur a sociis must also be held to apply. Thus viewed, what is referred to in sub-clauses (c) and (g) is de jure or de facto proactive or positive control, and not mere negative control which may flow from an expansive reading of the definition of the word “control” contained in Section 2(27) of the Companies Act, 2013, which is inclusive and not exhaustive in nature.

In arriving at its conclusion, the Court examined the specific usage of the expressions “management” and “control” in sections 29A(c) and (g), which were found to be narrower (and applicable only to positive control). However, one aspect in the Court’s reasoning is confounding, as it states that the usage in these specific sections of the Code are narrowed than section 2(27) of the Companies Act, 2013, which is inclusive and may cover negative control as well. The reasoning is contradictory because on the one hand the Court affirms SAT’s ruling in Subhkam Ventures limiting the definition of “control” under SEBI’s takeover regulations to positive control, but on the other hand notes (in the passage extracted above) that the definition of the expression in the Companies Act is wider to include negative control. The difficulty arises because of the identical nature of the definition of “control” under the SEBI takeover regulations and the Companies Act. Given these outstanding issues, it remains to be seen whether the Supreme Court’s ruling in any way at all resolves the “control” debate from a SEBI perspective.

Other Aspects of Section 29A

Payment of Overdue Amounts

The ineligibility under section 29A(c) can be removed only if the bidder submitting a resolution plan clears any overdue amounts with interests on its NPAs beforesubmitting such a plan. The Supreme Court refused to accept argument of counsel that the payments could be made before a plan is accepted and implemented, so that any hardships and difficulties may be avoided. It found that a plain, literal interpretation of the provision “is also in line with the object sought to be achieved, namely, that other corporate debtors who are declared as NPAs, whose debts may never be cleared in full, are required to be cleared as a condition precedent to submission of a resolution plan under the Code.”

Rearrangement of Affairs

The Court was concerned with a situation where parties may rearrange their affairs in the run up to submitting a resolution plan such that the revised position complies with section 29A, while the previous one does not. The Court frowned upon such a rearrangement of affairs and found it to be contrary to the objective of the provision. It noted:

56. Since Section 29A(c) is a see-through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor for whom such resolution plan is made, do not come back in some other form to regain control of the company without first paying off its debts. …

57. … If it is shown, on facts, that, at a reasonably proximate point of time before the submission of the resolution plan, the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debts of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan, or otherwise both the purpose of the first proviso to sub-section (c) of Section 29A, as well as the larger objective sought to be achieved by the said sub-clause in public interest, will be defeated.

On these aspects, it is clear that the Court preferred a strict interpretation of section 29A in line with its object.

Timelines under the Code

Compliance with strict timelines is the essence of the Code. This has been the subject-matter of judicial decision-making, including by the Supreme Court (hereand here). In the present case, the situation arose because the parties had to seek extension of the stipulated timelines in the Code due to the bidding war and the consequent appeals preferred by both parties. Here, the Court examined the detailed timelines prescribed under provisions of the Code and relied upon the its own jurisprudence laid down in Innoventive Industries Limited v. ICICI Bank and the preparatory work of the Bankruptcy Law Reforms Committee. It found that the consequence of failure to adhere to the timelines was severe, namely that the corporate debtor would be liquidated.

The Court the elaborated on various steps in the insolvency process. One relates to the role of the resolution professional in examining the plans. Here, the role of the professional “is only to “examine” and “confirm” that each resolution plan conforms to what is provided in Section 30(2)”. The resolution professional is not required to take a decision but to merely place the proposals before the Committee of Creditors after providing a prima facieopinion whether the plan does not contravene the provisions of the Code, including section 29A. However, if the Committee of Creditors finds that a plan contravenes section 29A, then the NCLT (and thereafter NCLAT) can determine the question quasi-judicially.

On the question of whether the adjudicatory and appellate process will be excluded from the timelines, the Court observed:

83. … A reasonable and balanced construction of this statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation ought to be excluded. This is not to say that the NCLT and NCLAT will be tardy in decision making. This is only to say that in the event of the NCLT, or the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees and workers.

Conclusion

Applying the above principles to the facts of the case, the Supreme Court found that both plans submitted by ArcelorMittal and Numetal were hit by section 29A(c) and therefore both bidders were disqualified from submitting resolution plans. Although this would have normally been the end-point of this round of litigation, the Court nevertheless exercised its powers under Article 142 of the Constitution in order to do complete justice to give one more opportunity to the bidders “to pay off the NPAs of their related corporate debtors within a period of two weeks from the date of receipt of this judgment, in accordance with the proviso to Section 29A(c).” It also noted that if no plan was found worthy of acceptance by the majority of the Committee of Creditors, the company would be put into liquidation.

In all, the present judgment is important as it interprets section 29A for the first time, and provides guidance towards its implementation. As we have seen, the import of the judgment extends beyond the Code to matters such as corporate veil and the concept of control, but it also leaves some open questions. Section 29A is perhaps the most hotly debated provisions in the Code, and the present judgment is likely to pave the way for swifter corporate resolutions.

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vmls123 · 3 months ago

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Mediation for Operational Creditors: A New Dawn in India's Insolvency Framework

Mediation is increasingly seen as a quicker and less confrontational way to resolve disputes. It enables operational creditors and corporate debtors to have meaningful discussions with the help of a trained mediator. Rather than getting caught up in lengthy court battles, both parties can work together to tackle issues, which saves time, money, and effort. In addition to these practical advantages, mediation helps maintain important business relationships that could be damaged by litigation. For companies, collaborating to resolve disputes is much more advantageous than turning into opponents. The importance of this approach is highlighted by data showing that by April 2024, more than 21,000 Section 9 cases were settled before formal admission, while only around 3,800 progressed to full insolvency proceedings. This suggests that most disputes are resolved before they escalate into advanced litigation, emphasizing mediation's role as an effective pre-litigation strategy. Law students studying at the best private law colleges in India or aspiring for an LLB degree course can gain valuable insights from such mediation strategies in insolvency law.

Under the proposed framework, operational creditors can opt for mediation before filing their insolvency application. Disputes commonly revolve around payment delays, quality of goods or services, or contractual disagreements. A mediator appointed under the Mediation Act, 2023, will guide the discussions between the parties. If the mediation is successful, the dispute is resolved without involving the National Company Law Tribunal (NCLT). However, in case of failure, the mediator will issue a non-settlement report, which the creditor can annex to the insolvency application when initiating formal proceedings. This approach balances the need for efficiency with the flexibility to pursue formal insolvency resolution if required. The growing emphasis on mediation in India's legal system makes it a crucial area of study for students enrolled in a law college or one of the best colleges for law in the country.

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centrikbusinesssolutions · 5 years ago

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To, start with the most common problem that as homebuyers you might have is delayed possession or no construction in the project.

#status of homebuyers as financial creditors under section 2 of rera #Rights of the Buyers #Relief under RERA #refund of the amount paid along with interest #How to file claim under RERA #How to file claim as homebuyers #How to Approach RERA #How to approach RERA before NCLT #execution of the builder buyer agreement as per RERA rules #financial creditor under the IBC #Delay in Possession #Execution of RERA #execution of RERA order under IBC #execution of RERA orders

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loyallogic · 5 years ago

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Prior Period Claims After Approval of Resolution Plan, Not Allowed under IBC

This article is written by Varun Akar. The article talks about how the Prior period claims after approval of the resolution plan are not allowed under IBC.

As per Section 5(26) of the Insolvency and Bankruptcy Cody, 2016 (hereinafter, IBC or Code) a resolution plan is the proposed plan by a resolution applicant to the resolution professional for restructuring and reviving the stressed assets of the Corporate Debtor. Resolution Plan is the revival route for a corporate debtor which frees the former of its past liabilities and dues if paid in accordance with the approved plan. The plan of the successful resolution applicant once approved takes the form of a binding contract. Rajasthan High Court in the recent case of Ultra Tech Nathdwara Cement Ltd., (formerly known as Binani Cements Ltd.) v. Union of India through the Joint Secretary, Department of Revenue, Ministry of Finance & Ors., held that no demands can be raised once the resolution plan is successfully implemented by the successful resolution applicant for a period that was before the approval and finalization of the resolution plan.

Brief Facts

An application under Section 7 of the IBC was filed by the financial creditor before the NCLT, Kolkata for the resolution of Binani Cement Company which suffered huge losses and was not able to repay the amount taken as debts. Ultra Tech being one of the creditors submitted the resolution plan, which was approved by the Committee of Creditors (hereinafter, COC). The plan was also approved by the Adjudicating Authority under Section 31 of the Code which had taken care of all the requirements of Section 30 of the IBC.

The claims of all the creditors were collated including that of the operational creditor and the claims of GST Department were verified, who were also one of the respondents in the present case, and calculated the liabilities and dues to the tune of Rs.72.85 crores to be paid in lieu of Excise duty and Service tax. The joint claims of the operational creditors were more than the liquidation value of the debtor which was Rs.2300/- crores and thus, the liquidation value available to the operational creditors including the respondent Department would be zero as the liquidation value will firstly be used for settling the claims of the Financial Creditors.

Receiving the approval of the resolution plan having been approved by the NCLAT and later by the Supreme Court on the appeal, the Petitioner took over the management and operations of the corporate debtor and subsequently renamed the company to Ultra-Tech Nathdwara Cement Ltd. After this, all the payments were made as per the approved resolution plan to all the creditors inclusive of the statutory creditors.

Later, the GST Department, one of the operational creditors, raised demands concerning the amount from the Petitioner, before taking up the company and after finalization of the resolution plan, i.e., of the period from April 2012 to June 2017. This amount was claimed along with an interest up to 25.7.2017. The Petitioner addressed the demands raised by the GST Department through a letter dated 26.11.2018 that all the dues have been met out and all the payments have been made as per the approved resolution plan. Further, in the letter Petitioner also cleared this point that all the remaining dues and proceedings will stand extinguished once the resolution plan was approved and payments were made thereof. The Petitioner company after getting no response from the Respondent approached the Rajasthan High Court through the writ petition under Article 226 of the Indian Constitution for seeking the appropriate relief as discussed above.

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Arguments Raised

Petitioner

It was contended from the Petitioner’s side that once the COC approves the resolution plan and it attains its finality, the same can’t be questioned in a court of law.

Another set of arguments raised was that since the financial creditors are given preference over the operational creditors under the IBC while the resolution plan is being made, the statutory dues of the operational creditors have to be sacrificed.

Lastly, the Petitioner argued that since the plan was approved by both the Supreme Court and the NCLAT, the GST Department assumes no jurisdiction to raise the demands from the Petitioner for the period prior to the date on which the corporate debtor was taken over by the Petitioner.

Respondent

The Respondent raised an argument stating that the COC didn’t hear the claims of the GST Department and hence the latter is not bound by the approved resolution plan.

They further contended that mere rejection of the SLP will not bar the Department’s right to raise its valid demands from the successful resolution applicant with respect to a resolution plan.

Decision

The High Court of Rajasthan stated that the issue revolves around a simple question, whether the approved resolution plan is binding on the department or not. The court held that Section 31 of the IBC mandates that the approved resolution plan shall be binding on the Central Government, State Government, or any other local authority to whom a debt is owed. The objective of IBC is to ensure the maximisation of the value of the assets of the corporate debtor and to ensure its revival, and this objective could only be achieved through the route of a resolution plan. Once approved, the same shall be binding on all stakeholders including the statutory dues holders who are operational creditors having no right to be in the COC when the resolution plan is made. Hence, the approved resolution plan shall be binding to the GST Department.

Further, the court took into consideration the decision given by the Supreme Court in the case of Committee of Creditors of Essar Steels India Limited Through Authorised Signatory v. Satish Kumar Gupta and Others, which stated that the financial creditors have to be given preference, in the payment as per the resolution plan, over the operational creditor. The court also noted that for achieving the purpose of the Code, there should be an evaluation of all the existing dues and liabilities of the corporate debtor which should be revived with the approval of the COC. The Tribunals are left with minimal grounds judicial review of the resolution plan approved by the COC.

The court further went on to say that there are two remedies under the IBC, firstly, the revival of the company, which should primarily be the concern of the resolution professional, and if this is not possible then secondly, sending the company for the liquidation. Given the factual matrix of the present case, the Court dismissed the claims of the operational creditors who filed an appeal in the NCLAT as well as in the Supreme Court with a specific plea that their claims have not been considered in the resolution plan by the COC. The Court observed that from the two situations possible, the respondents will gain significantly in the former because if the company goes into liquidation their claims will be assessed as nil as against the liquidation value of the assets of the corporate debtor. In the former case, where the company is being revived, they’ll receive the payment of Rs.72 crores, which had already been deposited by the successful resolution applicant in favour of the GST Department.

The Rajasthan High Court subsequently quashed the demand for claims relating to the prior period after the approval of the Resolution Plan and stated that the Respondents will be acting in an illegal, unreasonable, and unjust manner if they continue to raise their demands.

Analysis

The Rajasthan High Court is justified in its judgement for not allowing the claims raised by the GST Department. Three important issues have been lightened in the judgement, firstly, the treatment of prior period claims, secondly, statutory dues to be considered as operational debt and thirdly, priority in the treatment of financial creditors with respect to operational creditors.

Prior Period Claims After Approval of Resolution Plan

The question which arises after reading of the judgement is that if the claims of a creditor are brought before the resolution professional after the approval of the Resolution Plan, then what are the remedies available to him? The answer to the same is given under Section 31(1) of the Code which runs as, “If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan.” The above-said section didn’t include the phrase “including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” from the initiation of the Code. The explicit inclusion of the same by the legislature should be seen as a sense of assurance for the people who are implementing the resolution plan that no one, even the Government also, will not have the power later to pop up, once the resolution plan is approved.

Hence, from the above provision and discussion, it is crystal clear that once the resolution plan is finalized and approved, it shall be binding upon all the stakeholders and nobody shall have the power to change it. Even the Adjudicating Authority will not have a binding say on the approval of the resolution plan or on the commercial wisdom of the COC. The dues and liability as mentioned in the resolution plan as on the commencement of the Corporate Insolvency Resolution Process (CIRP), which is the day on which the application is accepted by the Adjudicating Authority, shall be binding on every stakeholder and the resolution applicant shall be bound to pay only those which are mentioned.

Also, the reason for invitation of the claims as on the date of commencement is that the claims of any of the creditors are not left out in the making of the resolution plan and hence claiming of the money after the passing of the resolution plan seems unjustifiable and unreasonable as sufficient opportunity has already been provided to submit the claims earlier.

This was done to ensure that no further such of this kind of dispute would arise in the future. Hence, in a situation where the claims submitted by the creditors, inclusive of the operational creditors, have been duly met by the Petitioner, no such question of reclaiming the full amount or a part of it or some different amount arises which pertains to a period prior to commencement of CIRP.

Further, Section 32A of the Code grants immunity to a corporate debtor from the liabilities arising out of the acts committed prior to the CIRP once the resolution plan is approved. Hence, drawing an analogy, one can very well presume that the restructured company will not be forced or liable for paying out the dues of the period prior to CIRP which have already been taken care off in the resolution plan. This will make the revamped company do its business effectively and efficiently and will achieve the objective for which the Code was enacted.

Statutory Dues to be Considered as Operational Debt

The NCLAT’s case of Pr. Director General of Income Tax (admn. & tps) v. M/s. Synergies Dooray Automotive Ltd. & Ors., substantiate on this point. The brief facts of the case are that an appeal was filed by Pr. Director General of Income Tax, Hyderabad & Mumbai and Sales Tax Department, Maharashtra against the various orders given by Hyderabad & Mumbai NCLT bench for the non- payment or short-payment of Income Tax, Sales Tax, and Value Added Tax as per the Resolution Plan approved under section 31 of IBC which is prejudicial to the interest of the Appellants. Further, they contended that they were not intimated about the CIRP and the meeting of COC.

The Appellate Tribunal concluded that the statutory dues shall be considered as operational debts and the authorities to whom such dues are entitled will be treated as operational creditors under section 5(20) of IBC. Further, the NCLAT is justified in its ruling to categorise the statutory liabilities under the head operational debt as the same has the direct nexus with the operations of the company since these debts arise only when the company is a going concern. Further, the authorities to whom such debt is owed such as the Central or the State Government or any department of the Government are considered as operational creditors for the reason that they are entitled to the dues arising out of the existing laws.

Priority in Treatment of Financial Creditors with respect to Operational Creditors

The Hon’ble Supreme Court in the Essar Steels case negated the impugned order of National Company Law Appellate Tribunal (NCLAT) which deviated from the settled position of law by treating the operational creditors on an equal footing with the financial creditor and also by not recognising the class within a class of secured and unsecured creditors under the class of financial creditor. The Apex Court by quashing the impugned order held that the principle of equity plays a fundamental role in determining the treatment to be given to a different class of creditors. The court further opined that by treating equally different classes of creditors having different bargain capacities as done by the NCLAT has severely resulted in distorting the well-settled law and the doctrine given under Article 14 of the Indian Constitution, i.e., equals should be treated equally, unequal should be treated alike.

The Court held that:

“Indeed, by vesting the Committee of Creditors with the discretion of accepting resolution plans only with financial creditors, operational creditors having no vote, the Code itself differentiates between the two types of creditors. Quite clearly, secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors in S. No. 5 of paragraph 7 of statutory Form H. Thus, it can be seen that the Code and the Regulations, read as a whole, together with the observations of expert bodies and this Court’s judgment, all lead to the conclusion that the equality principle cannot be stretched to treating unequals equally, as that will destroy the very objective of the Code-to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.”

Conclusion

The fact that the operational creditors are put below the financial creditors at the time of resolution of the company and are not a part of COC and yet are bound by the decisions of the COC as held in the Essar Steel’s case is now the settled position of law. This judgement leaves no holes in the wall in maintaining the position of law and also in validating that once a resolution plan is made, it cannot be changed. Further, the very purpose of the Act is to ensure that the revival of the company can be done effectively. Thus, if the demands of such nature as discussed above are raised again and again, this would lead to an effect in the successful resolution of the company. Also, it will defeat the purpose of the Code, if the creditors approach the Tribunals again and again for their prior period claims. Hence, the Rajasthan High Court is justified in quashing the demands of the Respondents.

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loyallogic · 6 years ago

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Comparative Analysis of the laws on Insolvency before and after the enactment of the Insolvency and the Bankruptcy Code

Introduction

How would you react when I term the history of Bankruptcy laws a mess?

Governance prior to the Enactment of the IBC

Figure 1.1

Governance prior to the Enactment of the IBC

Sick Industrial Companies (Special Provisions) Act, 1985

The Companies (Second Amendment), Act 2002

Sick Industrial Companies (Special provisions) Repeal Act of 2003

The Recovery of Debts due to Banks and Financial Institutions Act, 1993(“RDDBFI Act”)

Attachment and sale of the movable and immovable property

Arrest of the defendant

Appointing a receiver for managing the properties of the defendant

click above

The SARFAESI Act, 2002

Taking possession of the secured assets of the borrowers.

Taking over the management of the business of the borrower

Appoint any person to manage the secured assets of the borrower.

The major drawback of the SARFAESI Act, 2002 was there were no rights available to the unsecured creditors under this legal regime.

The CDR and SDR mechanisms

The route to the IBC

Comparative Analysis on the Laws of Insolvency prior and after the enactment of the IBC

S.No Basis of differentiation SICA RDDBFI SARFAESI Restructuring Mechanisms IBC 01. Trigger Amount 1.Company existed for at least 5years

2.Accumulated losses >= net worth for any financial year

Table 1.1

Status of the Laws on Insolvency after the Enactment of the IBC

Moratorium

The institution of suits or any proceedings against the defaulting company including execution of any judgement, decree or order in the court of law, Tribunal or the Adjudicating Authority.

Any Action to enforce any security interest against the corporate debtor under the SARFAESI Act, 2002.

No jurisdiction of civil courts under the code

Further section 63 of the Code stipulates that the civil court shall not have any jurisdiction to entertain any suit or proceedings in respect of any matter on which the NCLT has jurisdiction.

Choice of liquidation under the IBC

Conclusion

Reference

[1]https://indiacode.nic.in/admin/view-casepdf?type=repealed&id=AC_CEN_2_2_00031_198601_1517807326263

[2]http://legislative.gov.in/sites/default/files/The%20Sick%20Industrial%20Companies%20%28Special%20Provisions%29%20Repeal%20Act%2C%202003.pdf

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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loyallogic · 6 years ago

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How to protect the interest of the creditors

Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company.

Introduction

In recent times, it has been seen that creditors can pose stiff opposition to M&A deals if their concerns are not addressed. They do this by seeking criminal action and some kind of government intervention when the firm has failed to pay their dues.

I would like to talk about the impact it has on the interest of the creditors and how they can be protected in this article. Firstly, it would be done by invoking Section 230 of the Companies Act, 2013 which talks about the power to compromise or make arrangements with creditors and members. Further, Section 230 as a whole gives out a mechanism for an institutional dispute settlement between the creditors and the company.

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Creditors mostly consist of banks, bondholders, and various suppliers.They lend monies to the companies for an exchange for a fixed return on their debt capital, usually in the form of interest payments. Companies, in principle, agree to pay back the principal amount also. The interest is typically higher than other sources of capital for the company as companies have a higher risk of defaulting on their interest payments and principal as compared to others.

Further, lenders typically require which is in consonance with the risks associated taken with the individual company by lending them money. Hence, a steady company will borrow money cheaply which means that they will have lower interest payments every month, however, a risky business will have to shell out more money for higher interest payments.

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How to protect these interests

Companies after the amendment of the IBC can issue their shares at a discount to its creditors when their debts have been converted into equity in the pursuance of a resolution plan given under the IBC. Further, the companies who have defaulted in the payments of dues to any bank or an NBFC or any of the secured creditors will now have to take the prior approval of such lender before giving out managerial remuneration. There can be a cash flow monitoring by the creditors also.

Creditors meeting

Meeting of creditors is used to define a meeting which has been set up by the company to formulate a scheme for an arrangement with the creditors. The Companies Act, 2013 gives out the power of the company to negotiate with the creditors and the mechanism by which it can be done.

The creditors and the company can both approach the NCLT, with different propositions in mind. The company would approach the bankruptcy court for any kind of relief in which they can settle dues with the creditors. However, the creditors approach the NCLT under the Insolvency and Bankruptcy Code, 2016. This is when the creditors take the defaulting company to court under the IBC, 2016, a committee of creditors take over the management of the company and a resolution professional is appointed.

Furthermore, a resolution professional comes up with a resolution plan in the case of IBC. In the case of the company approaching the NCLT, the management comes up with a plan to settle with the creditors. An informed decision would be when a company can predict that the creditors will approach the NCLT and the company approaches the NCLT under section 230 whereby the management can retain control on the company.

Tribunal can also dispense with the meeting of creditors or a class of creditors under Section 230(9) which states that such creditors or class of creditors, having at least 90% value and have agreed by the way of an affidavit, to the scheme of compromise or arrangement.

Corporate Debt Restructuring (“CDR”)

CDR is a mechanism where the lenders to the concerned corporate can come together and form a forum to restructure the debt. The lenders see the company’s business model and try to see if the problem being faced by them is temporary or permanent. Further, the banks take the help of specialists to help them assess the market and how that particular company is positioned. Post these forensic audits and analysis, they restructure the corporate debt lent to the company by rescheduling the payments so that the company gets a breathing space to sort matters out or give a top or an additional loan for stabilizing the operations of the company. All these activities form part of CDR.

Any scheme of corporate debt restructuring has to be consented by more than 75% of the secured creditors in value. Further, the plan has to be given with the safeguards for the protection of other secured and unsecured creditors. Report by the auditor that the fund requirements of the company after the said restructuring shall conform to the liquidity test based upon the estimates provided by the board. Companies also have to give a statement to the effect, if they are proposing to adopt the corporate debt restructuring plan specified by the RBI.

Furthermore, as seen in the case of Jet Airways, SBI who is the leader of the consortium of banks whose loan the airways have recently defaulted upon. They have agreed to give an additional Rs. 1500 crore loan to the airways even after having a risk exposure of Rs. 1600 crores, already. This was done after they had ‘satisfactorily’ completed a forensic audit of the books and accounts of the airlines. The bankers are also expected to reassure the creditors where it will be shown that the airways have a repayment plan which they will share with the creditors and are working towards secure funding

Conclusion

Recently, the Reserve Bank of India’s latest Financial Stability Report makes the important point that creditors as a whole, have been empowered by the bankruptcy code to recover the debt. The report highlights the power given to operational creditors which comes from the enactment of the IBC. These kinds of creditors were never served by the previous restructuring mechanisms.

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.

The post How to protect the interest of the creditors appeared first on iPleaders.

How to protect the interest of the creditors published first on https://namechangers.tumblr.com/

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loyallogic · 6 years ago

Text

How to protect the interest of the creditors

Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company.

Introduction

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Click Here

How to protect these interests

Creditors meeting

Corporate Debt Restructuring (“CDR”)

Conclusion

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.

The post How to protect the interest of the creditors appeared first on iPleaders.

How to protect the interest of the creditors published first on https://namechangers.tumblr.com/

0 notes

loyallogic · 6 years ago

Text

How to protect the interest of the creditors

Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company.

Introduction

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Click Here

How to protect these interests

Creditors meeting

Corporate Debt Restructuring (“CDR”)

Conclusion

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.

The post How to protect the interest of the creditors appeared first on iPleaders.

How to protect the interest of the creditors published first on https://namechangers.tumblr.com/

0 notes

loyallogic · 6 years ago

Text

How to protect the interest of the creditors

Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company.

Introduction

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Click Here

How to protect these interests

Creditors meeting

Corporate Debt Restructuring (“CDR”)

Conclusion

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.

The post How to protect the interest of the creditors appeared first on iPleaders.

How to protect the interest of the creditors published first on https://namechangers.tumblr.com/

0 notes

loyallogic · 6 years ago

Text

How to protect the interest of the creditors

Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company.

Introduction

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Click Here

How to protect these interests

Creditors meeting

Corporate Debt Restructuring (“CDR”)

Conclusion

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.

The post How to protect the interest of the creditors appeared first on iPleaders.

How to protect the interest of the creditors published first on https://namechangers.tumblr.com/

0 notes