This post has been written by Founding-Editor Mallika Sen.
In 2018, the Insolvency and Bankruptcy Code, 2016 (IBC) completed two years of its operation. Long-hailed as a major reform targeted at India’s worrying non-performing asset (NPA) crisis- as 2018 draws to a close, it is time to take a close look at how effective this landmark legislation has actually been in changing the landscape of insolvency law in India for the better.
The National Company Law Tribunal (NCLT) has, using the IBC recovered over ₹3 lakh core worth of unpaid corporate loans of bankrupt companies since the legislation came into effect in 2016. The recovery figure for 2018 is estimated to be around ₹80,000 and this figure is expected to cross Rs. 1 Lakh crore in 2019. This is because several high-profile cases are currently pending and are due to be heard in early 2019, such as the controversial Essar Steel case, which alone involves unpaid loans worth Rs. 80,000 crore.
While these numbers seem encouraging and appear to spell out a success story for the IBC, in reality, the results are mixed. Long delays, high pendency before the NCLT, control-hungry promoters and numerous failed bids have marred the successful implementation of this legislation. In this 2018 year-end review, this post aims to cover and analyse two of the main developments that took place in the Indian insolvency and bankruptcy sphere in 2018. These are- the June 2018 amendment to the Code, and the changes brought in regarding cross-border insolvency provisions. The post also looks to the future, analysing the upcoming proposal for pre-packaged resolution plans, in terms of whether this is the best fit for the Indian scenario. Finally, the post looks at the possible hurdles that 2019 may bring and the road ahead for speedy, efficient and successful corporate insolvency resolution in India.
I. Major Changes in 2018: The June 2018 Amendment to the IBC
The most substantial changes to the IBC in 2018 were made through the June 6, 2018 amendment ordinance to the code. This post briefly recaps the two most important changes that the amendment brought in.
Section 29A of the IBC, which sought to exclude promoters from bidding for their own companies was amended so as to create a carve-out for MSME companies. This was primarily done as external bids are usually low for smaller companies, and allowing promoters to bid is likely to ensure that more such companies go through the insolvency resolution process, rather than just go into liquidation.
The other notable change was that the June amendment classified homeowners as creditors of real estate companies, allowing them to bring a claim under the IBC. A more detailed analysis of the changes brought in by the June amendment and its impact on the general framework of insolvency law in India can be found in an earlier post on this blog.
II. Major Changes in 2018: Cross-Border Insolvency- India Recommends Adoption of the UNCITRAL Model
Another major buzzword in the insolvency and bankruptcy sphere in India in 2018 has been- ‘cross-border insolvency’. On 20th June, 2018, the Government of India released a draft chapter on cross-border insolvency, which was to be included in the IBC. This chapter essentially provided for the adoption of the UNCITRAL Model Law on Cross-Border Insolvency by India, with certain modifications. The Insolvency Law Committee (ILC) submitted its 2nd Report on Cross-Border Insolvency on October 22, 2018, wherein it too recommended adoption of the UNCITRAL model.
The emerging focus on cross-border insolvency is a welcome move. This is because, several Indian companies now have a global presence, and cross-border insolvency regulation is absolutely essential to ensure that first, assets of corporate debtors located in foreign jurisdictions can be brought within the fold of the corporate insolvency resolution process (CIRP) and second, that the claims of foreign creditors are also adequately met.
The IBC, in its present form, is silent about the rights of foreign creditors to approach the NCLT to initiate the corporate insolvency resolution process. However, the Supreme Court of India, in the case of Macquiarie Bank Limited v. Shilpi Cable Technologies laid down that foreign creditors will have the same rights as available to a domestic creditor to initiate and participate in CIRP under the IBC. This is noteworthy, as in effect it expands the definition of a ‘person’ under the IBC to include persons not resident in India.
It is not that cross-border issues find no mention in the present IBC. Section 234 and 235 of the IBC provide for cross-border operation of NCLT orders. However, these sections are yet to be notified, so at present, they have no effect. No order passed by the NCLT or the NCLAT in India will have any effect or force in a foreign jurisdiction, and the Indian Government would have to follow up with the concerned foreign government on a case-to-case basis. This is both inefficient, and far from ideal. Thus is it is imperative that these sections are notified by the Government at the earliest, so that cross-border insolvency proceedings (as shall inevitably arise, inter alia on account of several Indian companies having a global presence, foreign investors having large stakes in Indian business) are conducted more efficiently and in a systematic manner.
As for the UNCITRAL Model itself- the model is widely considered to form international best practice in insolvency law, with 44 countries across the globe having adopted it. The ILC has also recommended certain changes and modifications so as to bring the Model Law in consonance with the IBC. All in all- the focus on resolving and harmonising cross-border issues in insolvency law has been a welcome and much-needed change in the Indian insolvency framework in 2018.
The Upcoming 2019 Agenda: Pre-Packaged Insolvency Resolution Plans
The big game-changer in 2019 is likely to be pre-packaged insolvency resolutions. At present, there exist no pre-packaged insolvency options under the IBC. A pre-packaged insolvency resolution (pre-pack) is a situation wherein a restructuring plan is formulated and agreed to by the creditors prior to the company even declaring bankruptcy. Such plans are quite common the United Kingdom and the USA.
In the UK, pre-packs gained prominence post the passage of the Enterprise Act in 2002. Given that administration is the most dominant insolvency procedure followed in the UK, in the case of a pre-pack the costs of trade and administration can be avoided. Similarly, in the US, the ordinary course of bankruptcy is a filing under Chapter 11 of the United States Bankruptcy Code. When such a filing is undertaken, the company (or debtor) does not retain control of the formulation of the insolvency plan, and the plan may be created by a creditor or creditor group (analogous to the ‘Committee of Creditors’ under the IBC). In the case of a pre-pack- the company itself may come up with the resolution plan that can be implemented provided that it is approved by 2/3rd of the creditors of the company.
The Government is considering introducing pre-packs within the IBC, not as an alternative to the existing framework, but as a complementary solution within it. From what is currently known (largely from comments made by Injeti Srinivas, the Corporate Affairs Secretary), the proposed framework will still allow for creditors to opt for CIRP under IBC, if they do not want to negotiate with the debtors prior to the process and appointment of IRP. The final plan reached would be placed before the NCLT for approval.
The primary benefit of pre-packaged plans is swift and speedy resolution of bankrupt companies, with creditors also receiving higher amounts because of saving of trading costs. This is especially important in the Indian context, where it has been seen that a majority of cases that have entered the CIRP under the IBC have not been able to complete the same within the prescribed 270 day deadline, with several big-ticket cases such as that of Essar Steel still pending.
There are numerous factors that impact this delay- one of which is laxity on the part of the tribunals itself. Given that the Indian legal system is historically prone to long delays and multiple adjournments/ appeals, a pre-packaged insolvency resolution programme may greatly help speed up the corporate insolvency resolution process. Moreover, given that in the case of a pre-pack, the final plan would already have been agreed to all involved parties, therefore it would be able to bypass several levels of interventions before the NCLT, reducing both litigation costs and delays. Given the immense pressure on the nascent NCLT, this will also help to de-congest the NCLT.
However, there are some fundamental issues with pre-packs that have emerged in jurisdictions such as the UK and USA which the Government should keep in mind before choosing to introduce it in the Indian context. First, given that speed and secrecy are two important components of a pre-pack scheme, often the interests of the management and the secured creditors are favoured over that of the unsecured creditors, with unsecured creditors often remaining in the dark about a large part of the process. Second, there exist concerns that this process does not allow for the best realisation of the value of the business on account of the fact that there is no ‘open marketing’. The CIRP process under the IBC allows for bidding, which is largely considered to be the best strategy to maximise asset value of an insolvent company.
Third, and possibly most importantly in the Indian context, pre-packs allow for the earlier management (and promoters) to continue to have control over the enterprise. Given that the last two years have shown a determined focus of the Government and the NCLT to restrain the rights and powers of promoters (as seen through the introduction of Section 29A), allowing the promoters and existing management to control the insolvency plan appears contrary to the established goals of the current insolvency framework. There has been a lot of emphasis on keeping the promoters of a sick entity out of the insolvency process to the largest extent possible due to the understanding that the promoters themselves (in their self-interest) may have had a hand to play in the bankruptcy of the company. Thus, pre-packaged insolvency schemes, while may help greatly in cutting costs and delays come with several other concerns which the Government should note and seek to adequately address.
Conclusion: The Way Forward in 2019
The true mettle of the NCLT and the NCLAT will be tested in 2019, as high-profile cases like Essar Steel, which have remained amongst the most controversial cases under the IBC, finally head to resolution. Successful resolution herein, will not only help ease a huge burden of NPAs off the Indian economy, but serve as a shining example of the success of the IBC.
A large part of the inefficiency of the IBC is on account of the under-staffed NCLT benches. The appointment of more judicial members, at least in the more busy benches such as the Mumbai, Delhi and Ahmedabad benches will go a long way in ensuring speedy resolution such that the prescribed time limits under the IBC are met.
If the various issues that pre-packaged insolvency schemes bring in are adequately addressed by the Government, pre-packs may well turn out to be the magic pill for addressing delays in insolvency cases. Most importantly, it is expected that the cross-border insolvency framework will finally come into force in 2019, with all requisite provisions and chapters being notified. This will be a much needed move by the Indian government towards building a world class insolvency regime in India.
In conclusion- the IBC has come a long way in changing the face of how India Inc. deals with bad loans. The Government seems focused on remedying and updating the law, as is evident from the creation of the ILC and the weight given to its recommendations. There is a strong focus on plugging all loopholes in the existing framework and working towards implementing international best practices, thus it appears that 2019 will be an eventful, and successful year for the Insolvency and Bankruptcy Code, 2016.