M&A & Insolvency and Bankruptcy Hotline

A. Revised timelines for completion of resolution process

• The corporate insolvency resolution process (“CIRP”) presently has to be completed within a maximum of 270 days, failing which the corporate debtor is sent to liquidation. However, we see that litigation initiated by promoters, unsuccessful resolution applicants and creditors have extended the timelines much beyond the prescribed 270 days. In order to remedy this situation, the amendment seeks to increase the timeline to 330 days which would most importantly include time spent on litigations and judicial processes. Therefore, if the resolution process including all litigation therein does not end by 330 days then the corporate debtor should be sent for liquidation. This is a welcome change as it could help reduce the inordinate delays and discourage frivolous litigation. However, there might still be certain hurdles which would have to be overcome, like

1. It is unclear how the timelines will function when the matter reaches the Supreme Court on appeal and is remanded back to the Committee of Creditors (“COC”) for re-appreciation by the Supreme Court.
2. It remains to be seen how the prescribed time limit of 330 days will be calculated when the resolution process is stayed by the court during the pendency of litigation.

• Unless these issues are resolved through the amendments, there could be further judicial interpretation on these aspects and modifications to the Code.

B. Emphasis on speedy disposal of matters by NCLT

• The Code had envisaged all applications to be disposed off by the NCLT within 14 days of filing of the application, however, the practical challenges of such a timeline were recognized by the Supreme Court, which deemed this timeline to be directory in nature.¹ Due to the large backlog of matters before the NCLT, applications can take anywhere between six months to a year to get admitted. The amendment seeks to emphasise the need for timebound disposal of applications, however, there isn’t much clarity on how the same is to be achieved.
• One of the ways to expedite disposal of applications would possibly be to increase the number of active benches of the NCLT to hear matters, which would ensure a more manageable distribution of cases.

C. Decisions by a class of creditors

• The Code, by way of its second amendment had introduced the concept of class of creditors like homebuyers or debenture holders or bond holders to participate in the CIRP. However, one of the issues with respect to a class with a large number of members, was the difficulty in procuring their votes for key issues. Many of these members would fail to cast their votes thereby restricting the total voting percentage of the COC from reaching the required threshold of 66% / 51%.
• The amendment seeks to remedy the situation by stating that the decision for each class of creditors would be taken by a majority of 51% of the members present and voting. Therefore, it will not be required for every member of each class to cast their votes to progress with the CIRP.

D. Single Window Clearance Mechanism

• The Code was intended to be a mechanism which would replace the existing, fragmented framework for rehabilitation and recovery of debtors. Most restructuring scenarios involve a change in the existing corporate/business structure in order to accommodate a change in ownership or reallocation of assets. Generally, there are mergers, demergers and amalgamations between the existing corporate debtor and the incoming successful bidder.
• Presently, the Code does not provide for any specific method by which such restructuring can be done at the same time as the approval of the resolution plan by the NCLT. Therefore, although the resolution plans chalk out the process of restructuring, separate applications would have to be filed in order to implement them, adding to the costs and timelines for completion of the resolution process. The amendment seems to change this position by empowering the NCLT to allow such restructuring applications to be approved along with the resolution plan in a single window clearance system. This would thereby negate the requirement for separate applications and expedite the implementation of approved resolution plans.

E. Pay out for dissenting financial creditors and operational creditors

• The Code, did not have a mechanism for making payments to dissenting financial creditors and operational creditors and mandated the IBBI to provide for this mechanism. Therefore, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) provided for this mechanism. However, the NCLAT held that such a mechanism was in violation of the principles enshrined in the Code.
• As per the erstwhile mechanism, these two categories of creditors were to be paid a minimum of the liquidation value. The distribution waterfall for liquidation proceedings gives primacy to secured creditors. Therefore, as per this mechanism if the dissenting financial creditor was secured then it would get a fairly decent payment. Much below in the pecking order would be the unsecured financial creditors. Therefore, any such dissenting creditors would receive a much lower payment. Last in the waterfall would come the operational creditors, therefore irrespective of whether they were agreeable with the resolution plan or not, they would often receive a bare minimum amount or nothing from the resolution plan, as the liquidation value payable to them would be NIL. The NCLAT held this mechanism to be against the principles of fairness and equity, thereby striking it down.
• Consequently, the CIRP Regulations were amended to remove reference to the concept of dissenting financial creditors, and also to the erstwhile mechanism for payment to such creditors and operational creditors.

The present amendment seeks to reintroduce a mechanism for payment to these two categories of creditors in the following manner:

1. The mechanism only provides a minimum amount/floor price that would have to be mandatorily paid;
2. There is no formula/waterfall mechanism to provide for the actual amount payable;
3. The minimum amount should be equal to either i) the amount payable under the resolution plan if the same was to be distributed as per the distribution waterfall applicable in liquidation proceedings (as per Section 53 of the Code) or ii) the amount payable if the liquidation value was to be distributed in liquidation proceedings (as per Section 53 of the Code), whichever is higher.

The present mechanism again provides a base value which is connected to the liquidation value. Therefore, if the proposed payment to these creditors is unfair then the NCLT/NCLAT can still strike it down and mandate a re-distribution of the resolution proceeds, where a better payment is provided to these creditors. This amendment is much like old wine in a new bottle, instead, the amendments could have provided a CIRP-specific distribution mechanism for these creditors linking the payout to the fair value rather than the liquidation value.

F. Power of COC to determine the manner of distribution of resolution proceeds

• The Code mandates the COC to ensure that a resolution plan complies with the requirements under the Code and that the interest of all stakeholders have been dealt with. While doing so, the COC may negotiate with the resolution applicant to either change the terms of resolution or the amount offered under the resolution plan. However, the NCLAT, in the judgment of Essar Steel,² has said that the COC cannot determine or suggest a change in the manner in which resolution proceeds are to be distributed amongst the various creditors of the corporate debtor. This judgment of the NCLAT has been appealed and is currently before the Supreme Court.
• The amendment intends to provide the COC with the power to change the distribution of resolution proceeds based on commercial considerations. It seems that before a verdict has been delivered by the Supreme Court, a pre-emptive measure has been adopted through the proposed amendment to ensure that the verdict does not offend the intentions of the government.
• Although this amendment will clothe the COC with the requisite powers, it is not clear if the COC can exercise such powers in any manner that it deems fit, as long as the exercise is based on commercial considerations. Given that the COC comprises of the custodians of the corporate debtor, who are entrusted with the duty of ensuring equitable treatment of all stakeholders, the powers of the COC must be exercised in a manner which is not manifestly against the interests of any of the categories of creditors.

Further, if the proposed amendments are affected, it remains to be seen whether NCLT can quash a decision of the COC which is against the principles of the Code, given the Supreme Court’s recent ruling that the NCLT cannot overturn or reverse a commercial decision of the COC.³

G. Clarity on binding nature of resolution plans on governmental authorities

• The Code states that a resolution plan approved by the NCLT would be binding on all stakeholders. However, there have been many instances where governmental/regulatory authorities refuse to accept the terms of a resolution plan and insist on following the process provided in their respective rules and guidelines. With this amendment, we can have a more expeditious implementation of resolution plans where no objections are raised by governmental/regulatory authorities. Further, payments provided under a resolution plan in respect of dues owed to government authorities, have been challenged in the past. However, post this amendment, treatment of contingent or future liabilities to the state can also be treated as binding.

H. Clarity on ability to liquidate companies without completion of resolution process

• There are many instances where a company does not have any substantial assets or any possibility of resurrection, however, the company still goes through the entire CIRP. With this amendment, we have a clarification on the ability of the COC to send such a company into liquidation. This will free bandwidth for the relevant resolution professional and COC while taking the company to its logical end with going through unnecessary procedural requirements.