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) 19^th 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.