The Insolvency and Bankruptcy Code (IBC) was notified in December last year and it has been in operation for nearly 10 months now. The legislative scheme of IBC was to see whether corporate debtors can be put back on their feet within a stipulated time frame to starve off liquidation. While the intent was praiseworthy, let’s do an ex-post analysis to see whether the intent has been given credence by the practical realities?
The judicial intervention and interpretation had a far-reaching bearing on the outcome of IBC. The Supreme Court has unequivocally held that IBC is a paradigm shift in business model to a creditor in possession model during the insolvency process where the entrenched management are not allowed to continue in management if they cannot pay their debts. The Court has, time and again, stressed on the importance of time-lines under IBC and this message has clearly been transmitted to the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) where insolvency cases are taken on priority in their cause list. Based on policy intentions and unique principles of insolvency law, the strict adherence to time-lines is a must, as inordinate delays would result in diminution in the value of assets. As of now, most cases pending before judicial authorities are on admission stage and the Court has laid down key principles of admission, like process of admission for financial and operational creditors and what is dispute for an operational creditor? There is a legal question pending before the Supreme Court with respect to foreign operational creditors and whether the certificate to be annexed along insolvency petition has to be a certificate of Indian bank or a notified financial institution or it can be a certificate of a foreign bank too? This decision will have ramifications for foreign operational creditors providing goods or services in India. This case must be decided in the light of exchange control laws too.
Post the admission, the creditor or debtor, which has filed the application, becomes functus officio and the operations of the company are then run by the IRP along with the committee of creditors. The IRP takes over the management of the company and the powers of the existing board of directors are suspended. Further, the duty of the IRP is to manage the operations of the corporate debtor on a going concern basis. Under the Companies Act, the director has a fiduciary duty towards the stakeholders of the company, and since the powers of the directors are given to the IRP, the same standard of fiduciary duty and conflict of interest provision should be applicable to the IRP too. As such, recently, the Insolvency and Bankruptcy Board of India (IBBI) amended its regulations to the effect that a resolution plan should include a statement as to how it has dealt with the interests of all the stakeholders, including financial creditors and operational creditors, of the corporate debtor. This would go a long way in addressing the concerns of all the stakeholders in the industry. The operational creditors would also heave a sigh of relief since their role in the entire resolution process is minimal.
During the resolution process, a committee of creditors is formed which becomes the driving force behind the resolution process since a majority of the decisions taken by the IRP/RP have to be approved by 75% of the creditors forming part of the committee. A herculean task is to first form the committee; IBC provides that all financial creditors would form part of the committee, irrespective of the amount of financial debt the company owes to them. Apart from being a time-consuming process of forming the committee and identifying the financial creditors, it becomes an operational issue of getting a consensus of 75% on a given matter. This issue came to the fore in a recent case where there was a deadlock—NCLT has opined that, in case of deadlock, preference must be given to the decision taken by the financial creditor which has the highest vote share. It would be interesting to see whether this case stands the appellate judicial scrutiny because this would have huge ramifications on the resolution process and to the role of minority creditors. Perhaps it may be a good time to re-look at the fact whether IBC should have classes of creditors?
There have been limited resolution plans that have been approved by NCLT to date. While there are issues still pending before NCLAT with respect to a transaction inter se between creditors and its effect on other creditors, a key issue that comes to the fore is that a resolution plan must contain the liquidation value and not enterprise value. This may have an impact on bids from potential bidders since the liquidation value may not take into account future realisable revenue and cash streams that the company may receive as a going concern. For example, if a corporate debtor holds an IPR and it has licensed the same to various licensees, the royalty payment to be received from the licensees may or may not be factored in the liquidation value. This aspect may require a re-look by IBBI.
While this has been a great start in terms of interest, the real success would depend on the viability of resolution plans and how much haircut would the financial creditors have to take and also whether buyers can provide some sweetheart deals to save the company.
By Abir Roy, Partner, Lakshmikumaran & Sridharan