IBC “insolvency & bankruptcy Code” as “GOLDEN SWORD” For Banks & NBFCs – financial creditors
IBC “insolvency
& bankruptcy Code” as “GOLDEN SWORD” For Banks & NBFCs
– financial creditors
SHORT SUMMARY:
In this Flash
editorial, the author begins by referring the provisiosn of Insolvency &
Bankruptcy Code, 2016. Since the code come into effect from December 2016 all the
applicants/ creditors have begun to file applications under the Code. The main
thrust of the article, however, is upon the“ How this code is beneficial to Banks, NBFC’s,
and other Financial Creditor in recovery of Debt including Interest from the
Corporate Debtor”
In this editorial
author will discuss provisions relating to financial creditors only. Provisions
relating to Operati0nal Creditor shall be discussed separately in further
editorials.
This is article no. 230 of the
series of editorials written by the author on corporate laws
{Including Companies Act, 2013,
SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
INTRODUCTION:
The Insolvency and Bankruptcy Code, 2016 (IBC) is an important financial reform for India.
This code protects creditors against defaulting borrowers. Section 6 of the IBC
empowers all kinds of creditors
- financial and operational, bank and non-bankto initiate corporate insolvency
cases. Any creditor can initiate an IRP (Recovery Process)under Regulation
7 to 9 of IBC, 2016.
The code could
ensure quicker resolution of NPA problems, especially in PSU banks. Indian
banks held about $105 billion in gross nonperforming loans as of Sept. 30,
according to the Reserve Bank of India.The time-bound insolvency resolution
process would definitely help the financial services industry function better.
This code positive for Indian banks because they will act as an incentive for
corporate borrowers to avoid loan default and improve the recovery of assets. Banks
can now recover more from their bad loansapproximately in 180 days.Earlierbanks
take as long as 15 years in certain cases to recover their money, which
substantially erodes the value of the assets
Terms
used under this Article:
Corporate Debtor: As per
regulation 2(8) of IBC “corporate debtor” means a Corporate Person who owes a debt to any person;
Corporate Person: means
a Company as defined in clause (20)
of section 2 of the Companies Act, 2013, a Limited
Liability Partnership, as defined in clause (n) of sub-section (1) of
section 2 of the Limited Liability Partnership Act, 2008, or any other person
incorporated with limited liability under any law for the time being in force
but shall not include any financial service provider;
Financial Creditor:means
any person to whom a financial debt
is owed andincludes a person to whom such debt has been legally assigned or
transferred to;
Financial Debt: means
a debt alongwith interest, if any, which is disbursedagainst the consideration
for the time value of money and includes—
(a) Money borrowed against the payment
of interest;
(b) Any amount raised by acceptance under any acceptance
credit facilityor its de-materialised equivalent;
(c) Any amount raised pursuant to any note
purchase facility or the issueof bonds, notes, debentures,
loan stock or any similar instrument;
(d) The amount of any liability in respect of any
lease or hire purchasecontract which is deemed as a finance or
capital lease under the Indian AccountingStandards or such other accounting
standards as may be prescribed;
(e) Receivables sold or discounted other than
any receivables sold on nonrecoursebasis;
(f) Any amount raised under any other
transaction, including any forwardsale or purchase agreement, having the
commercial effect of a borrowing;
(g) Any derivative transaction entered into in
connection with protectionagainst or benefit from fluctuation in any rate or
price and for calculating thevalue of any derivative transaction, only the
market value of such transactionshall be taken into account;
(h)Any counter-indemnity obligation in respect
of a guarantee,
indemnity, bond, documentary letter of credit or any other
instrument issued by a bank orfinancial institution;
(i) The amount of any liability in respect of
any of the guarantee or indemnityfor any of the items referred to in
sub-clauses (a) to (h) of this clause;
Provisions
under the code
A.
When Corporate Insolvency
Resolution Process (Recovery Process) can be initiated?
It can be initiated where the minimum amount of
default is one lakh rupees.
Default: means
non-payment of debt when whole or any part or installment of the amount of debt
has become due and payable and is not repaid by the debtor or the corporate
debtor, as the case may be.
B.
Who can file application for
Recovery Process (IRP)?
The following persons could
initiate the corporate insolvency resolution process (in short recovery
process), on the commission of a default by the corporate Debtor:
·
A Financial
Creditor (Bank/ NBFC’s/Lenders)
·
An Operational Creditor
·
The Corporate Person itself
However, to initiate the process against
corporate debtor creditor should check that (i) there should be defaultand (ii)
Amount of default should be at leastRs. 1 lac.
Admitted Cases:
Approx 50 cases have has been admitted under
Section 7 of the Code; which deals with Initiation of corporate insolvency
resolution process by financial creditor
How
the code will work AS “GOLDERN SWORD” for Banks or NBFC’s.
1. Expedition of Recovery Process:
Earlier,
Banks
took as long as 15 years in certain cases to recover their money. The main
reason for the delay in the bankruptcy process in India has been the existence
of multiple laws governing insolvency. Hence, by the time the recovery
proceedings can be initiated by the bank, the value of these receivables/
inventories or assets tend to depreciate significantly in value, leading to
poor recovery for the banks under the existing system.
Comparatively,
under IBC, The Corporate insolvency resolution process shall commence from the
date of admission of the application and it shall be completed within a period
of 180
days (one hundred and eighty days) from the date of admission of the
application.
Admission of
Application: A financial creditor either by itself or
jointly with other financial creditors may file an application for
initiating corporate insolvency resolution process against a
corporate debtor before the Adjudicating Authority when a default has occurred.
The Adjudicating Authority shall, within fourteen days of the receipt of the
application shall accept the application or reject the application.
The IBC offers a time-bound resolution
process aimed at maximizing the value of a distressed business. This will
benefit not just the creditor, but also the debtor companies and the overall
economy because capital and productive resources will get redeployed
relatively quickly. To meet the objectives of timeliness and value maximization,
the IBC set-up comprising four critical pillars:
1. A
robust and efficient adjudicating authority to hear the cases.
2. A
regulated profession of insolvency professionals (IPs) to manage the insolvency
and bankruptcy cases.
3. A
regulated competitive industry of information utilities (IUs) to reduce
information asymmetries in the insolvency resolution process.
4. A
regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform
legislative, executive and quasi-judicial functions with respect to the IPs,
and IUs and draft regulations for the resolution procedures under IBC.
2. Powers of the financial Creditors – Committee
Meeting:
In this code, after admission of
application “insolvency resolution process (recovery process)” shall start. IRP
shall prepare a resolution plan for payment of creditors. The resolution plan
shall be approved by the Committee of Creditors.
Therefore, The Insolvency Resolution
Professional shall constitute a committee of creditors. The committee of
creditors shall comprise all financial creditors of the corporate debtor. All
decisions of the committee of creditors shall be taken by a vote of not less
than 75%
(seventy-five percent) of voting share of the financial creditors.
Thus, major power vested in the
hands of the Financial Creditor to repay all the debts of Corporate Debtor. In
other words, resolution professional acts mainly on behalf of the financial
creditors.
3. Priority Over Other Operational Creditors
The code provides the priority list,
on the basis of which proceeds can be distributed following the liquidation of
the company as below:
i.
Insolvency resolution cost and liquidation cost
|
ii.
workmen’s dues (for 24 months before commencement) and debts to secured
creditor (who have relinquished their security interest)
|
iii.
Wages and unpaid dues to employees (other than workmen) (for 12 months before
commencement)
|
iv.
Financial debts to unsecured creditors and workmen’s dues for earlier period
|
v.
Crown debts and debts to secured creditor following enforcement of security
interest
|
vi.
Remaining debts
|
vii.
Preference shareholders
|
viii. Equity
Shareholders or partners
|
As per the above stated list, later
than the payment of workmen dues and wages of employee, financial creditor’s
falls at place four. They are entitled for repayment of debt prior to the
operational creditors. Financial Creditors have the priority over all other
creditors of the Company.
C.
What are the forms to be
used for Application to be filed before National Company Law Tribunal (NCLT) by
Financial Creditor, Operational Creditor and Financial Debtor?
The form in which the application is
to be preferred is provided in the Application to Adjudicating Authority Rules
as follows:
·
Financial
Creditor – Form 1
·
Operational
Creditor – Form 5
·
Corporate
Debtor – Form 6
Punishment:
Any financial creditor who knowingly
furnishes information in the application made under Section 7 (Initiation of
corporate insolvency resolution process by financial creditor) which is false
in material particulars or omits any material fact, such person shall be
punishable with fine which shall not be less than one lakh rupees but may
extend to one crore rupees.
Case
laws:
NCLT Mumbai Bench
Edelweiss Asset Reconstruction Co. Ltd
(Financial Creditor) Vs. Murli Industries Ltd (Corporate Debtor) 5th April,
2017 amount in Default- Rs. 1365.40Cr
The Corporate debtor entered into a master
recon structuring agreement with Bank of Baroda and other Lender Banks. The
corporate debtor requested the lenders for debt restructuring as the project
under implementation has come under strain due to various internal or external
reasons. BOB issued a notice to the Corporate debtor under SARFAESI Act for
recovery of 1365.40 crore. Auditor report of the company stated that Corporate
Debtor has defaulted in repayment of dues to the financial institutions and
banks.
The edelweiss asset reconstruction company
limited in its capacity as financial creditor filed this petition for
initiation of corporate insolvency resolution process. As the petition was in
ambit of section 7 of the IBC. The NCLT admitted the petition and appointed an
Interim Resolution Professional.
NCLT Ahmedabad Bench
Hero Fincorp. Ltd (Financial Creditor) Vs. Steel
Konnect (India) Pvt. Ltd. (Corporate Debtor) 19th April, 2017 amount
in Default- Rs. 6.63Cr
On the basis of Master Facility Agreement
entered between the Financial Creditor and the Corporate Debtor, a loan
amounting to Rs. 7 crore was advanced. As per the agreed terms, installments
were required to be paid through ECS by way of Equated Monthly installments.
The Corporate Debtor defaulted in making installments and from November 2016 it
had completely stopped making payments. The Corporate Debtor disputed that the
claimed amount was not correct but could not deny the default or the loan
agreement.
From the material placed on record, this
adjudicating Authority is satisfied that a default has been committed by the
Corporate Debtor in repayment of the loan amount. The petition was therefore
admitted and IRP was appointed.
Conclusion:
There are many other benefits to
financial creditors under IBC Code like: Less interventions of Government, Time
bound process, reduce in the cost of lending, less risk etc. This code shall serve as a useful tool for
creditors and investors, both domestic and international by enabling a better
and faster debt recovery mechanism. It would also improve the ease of doing
business, as the new Code will eventually lead to more investments bringing
about higher economic growth and development.
The new bankruptcy law is aimed at cleaning up the nation’s
mountain of debt, making it easier to dissolve a company and recover money. In
India, where parties can drag out bankruptcies for years, the law has an
important feature requiring a bankruptcy to be completed within 180 days in the
event of default.
(Author – CS Divesh Goyal,
GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and
can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire
contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the
preparation. Although care has been taken to ensure the accuracy,
completeness and reliability of the information provided, I assume no
responsibility therefore. Users of this information are expected to refer
to the relevant existing provisions of applicable Laws. The user of the
information agrees that the information is not a professional advice and is
subject to change without notice. I assume no responsibility for the
consequences of use of such information. IN NO EVENT SHALL I SHALL BE
LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING
FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.
|
Comments
Post a Comment