Insolvency Law

Reconciling Stock Exchange Regulations with Insolvency and Bankruptcy Code, 2016: Analysis of Amendments in SAST Regulations and Delisting Requirements. [Ishaan Chopra] Ishaan Chopra is a 3rd year B.A.LLB. (Hons.) student at NLIU, Bhopal Section 30(2)(e) of the Insolvency and Bankruptcy Code stipulates that the resolution plan should be compliant with all the existing provisions of law. Accordingly, the regulations prescribed by Security and Exchange Board Of India (SEBI) need to be adhered to while contemplating and implementing a resolution plan. Where the corporate debtor is a listed entity, certain regulations of SEBI might impose cumbersome obligations upon newly reconstituted entity. The expenses and the time spent in fulfilling such obligations often render the stressed assets investments as economically unviable. This post seeks to analyze the recent amendments in SEBI regulations to make the implementation of resolution plan investor friendly and also suggests further changes in the existing framework to prevent burden upon the restructured entity. Relaxation of Open Offer Requirements Regulation 3 of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011 provides that an entity which intends to acquire any number of shares, which make the entities shareholding 25% or more in the target company, is obligated to make an open offer. Open offer refers to the statutory requirement whereby an acquirer makes an offer for at least additional 26% of the public shareholding. The purpose of SAST regulations is to ensure that substantial acquisitions of shareholdings do not jeopardize the interests of minority shareholders. Accordingly, the regulation seeks to provide a fair exit price to the minority shareholders. For a company facing ‘Corporate Insolvency Resolution Process (CIRP), the shareholders are the bottom of the waterfall prescribed by the IBC for payment preference. Accordingly, the liquidation value due to equity shareholders is less or in most cases nil. This can be portrayed through the recent Electrosteel resolution plan. Vedanta Ltd  invested Rs1,805 crore to get a 90% equity stake in Electrosteel. This results in a valuation of remaining 10% public equity at Rs. 200 crore, less than a third of the company’s existing market capitalization of Rs. 653 crore. SEBI in its discussion paper has noted that the investors acquiring stressed assets would not want to use up capital to buy back from existing shareholders. However, SAST Regulation 3 required a public announcement of open offer of at least 26% of capital when the resolution applicant intended to buy any quantum of shareholding which triggered the 25% threshold. The resolution plan will be compliant with SAST, when payment to all shareholders of target company who have tendered their shares have been made. The capital, which has out flown due to buying back existing shareholdings, could have been effectively used to revive the stressed assets of the reconstituted entity. SEBI via Circular SEBI/LAD NRO/GN/2018/20 [1] has now amended ‘Regulation 3’ of SAST. The amendment provides that any acquisition pursuant to a ‘Resolution Plan’ under section 31 of the IBC will be exempt from the open offer requirements. This gives a lot of flexibility to the resolution applicants/bidders in structuring their resolution plans to take over companies undergoing CIRP. The move is expected to make stressed investments more attractive. Delisting Requirement Prior to the latest amendment an entity which was proposed to be delisted pursuant to a resolution plan approved under IBC, the provisions of SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) needed to be complied with. SEBI’s delisting regulations require price discovery via reverse book building and impose other conditions such as shareholder approval. Reverse book building is the process by which a company that wants to delist decides on the price that needs to be paid to public shareholders to buy back shares. In this process, the tender price by the shareholder needs to be equal or above the floor price notified by the company. The final buy back price is determined by aggregating all the prices received from the shareholder. The latest amendment via circular number SEBI/LADNRO/GN/2018/23 [2] exempts the NCLT approved resolution plans from such delisting requirements. However, the caveat is that the resolution plan should provide either any specific procedure to complete delisting of shares or provide an exit option to existing public shareholders at a price specified in the resolution plan. According to the notification, the exit price will be liquidation value minus the dues that need to be paid as per the priority laid down under the insolvency code. The liquidation value is to be determined as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the order of priority enunciated in Section 53 of the IBC Code is to be followed. As equity shareholders are at the bottom of hierarchy in terms of priority, in most cases the liquidation value due to them will nil. But if the existing promoters or any other shareholders are given an opportunity to exit at a price, that is higher than the price derived from the liquidation value due, it will apply to public shareholders as well. The intention to delist an insolvent company, along with the justification for exit price, will need to be disclosed to the stock exchanges within one day of the resolution plan being approved. Exemption from the cumbersome delisting obligations will make stressed assets investments more viable for investors. The aforementioned amendments have dealt with certain pertinent issues that were raised in the SEBI discussion paper. However, SEBI has not clarified its position on the trading of stocks of the companies undergoing CIRP. Further, the status of reclassified shares for the purpose of restructuring has not been discussed. The following are some suggestions for further reconciliation of the stock market regulations for enhancing resolution of stressed assets. Permitting Stock Exchange Trading SEBI in a recent working paper called for public comments on continuation of trading of entities undergoing CIRP .Continuation of trading in of listed corporate debtor would facilitate transparency and better price discovery and would, therefore, be in the interest of investors. Equity

Breaking Down the Process of Securitization & Asset Reconstruction. [Deepanshu Guwalani] The author is a 5th year B.A.LLB (Hons.) student of ILS Law College, Pune. Introduction To facilitate the early resolution of Non-Performing Assets (NPAs) of banks and financial institutions, the government of India enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for the extensive use of Securitisation Companies (SCs) or Asset Reconstruction Companies (ARCs). Securitization Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, education loans etc. which generate receivables and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). The sellers here are called Originators. Securitisation thus follows a two stage process. In the first stage there is sale of single asset or pooling and sale of pool of assets to a ‘bankruptcy remote’ special purpose vehicle (SPV), in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradeable debt securities. The SPV needs to be ‘bankruptcy remote’ which means that the bankruptcy of the Originator will not have any bearing on the financial obligations of the SPV. For example, in 1991, Citibank[1] sold its car loan portfolio comprising of 1,358 cars to a Special Purpose Vehicle (SPV).  Debentures carrying a coupon rate of 15.5 per cent per annum worth around INR 20 crores were issued by the SPV named as Peoples Financial Services Limited.  These debentures were backed by the car loan portfolio of Citibank.  Several institutional investors and mutual funds picked up these debentures. The SPV made monthly payments to debenture holders out of the inflows from the car loan portfolio.  The payments to these debenture holders included both interest and the principal component. At the end of 27 months the debentures extinguished and by then the SPV had paid out the entire principal and interest. These debentures were also tradeable on National Stock Exchange. Process of Securitization Step 1: The originator i.e. a bank, financial institution or an NBFC sells or assigns its assets which are in the form of receivables, housing loans, leases etc., to a SC/ARC. The sale must be a true sale as defined under RBI guidelines.[2] Step 2: The SC/ARC, which needs to be mandatorily registered with RBI and needs to have securitisation / asset reconstruction as its objective in its Memorandum of Association respectively, buys these assets by incorporating a SPV in the form of a private trust of which it is a trustee. Different SPVs are formed for different categories of assets or under different schemes by the same SC for smoothing the process of returns. The SPVs also need to be in compliance with the RBI guidelines issued in this regard.[3] Step 3: The SC/ARC (through the trust) raises funds, by issuing different classes of Security Receipts (SRs), to buy the aforementioned assets, only from Qualified Institutional Buyers (QIBs) i.e. insurance companies, Mutual Funds and Banks, etc. as they have the skill and expertise to assess risk in such a volatile market. The issue is through private placement only to protect naive retail investors and transfer or assignment of such SRs shall be in favour of other QIBs only. QIBs are issued SRs which are securities under Securities Contract (Regulation) Act. The trust shall hold and administer the financial assets for the benefit of the QIBs. Every SC/ARC needs to adhere to RBI guidelines[4] issued under the SARFAESI Act and also to revised guidelines (w.r.t. banks[5] and NBFCs[6]) issued by RBI regarding assets eligible for securitisation, Minimum Holding Period (MHP), Minimum Retention Requirement (MRR) etc.The SRs are usually in the form of Pass Through Certificates (PTCs) which can be compared to securities like bonds and debentures. The only difference being that they are issued against underlying securities. The interest that is paid to the issuer (SC/ARC) on these securities is directly passed to the investor (QIBs) in the form of a fixed income. It is different from Pay Through Securities wherein the SPV invests the receivables somewhere else for the benefit of the QIBs. Step 4: Administrative functions relating to the cash flows of the underlying assets (collection of principal and interest payments on the loans in the underlying pool of assets) are carried out by Service Providers (usually banks or originators) on behalf of the SCs/ARCs. Banks also provide credit enhancements (extra securities or guarantees to protect QIBs) and can also act as underwriters for the issue of SRs by the SCs/ARCs. Step 5: As cash flow arise on the assets, these are used by the SPV (SC/ARC) to repay funds to the QIBs. Asset Reconstruction In 1998, the 2nd Narasimham Committee Report highlighted that the huge backlog of NPAs was continuing to exert pressure on the banking sector and had severely impacted profitability. The report also recommended the creation of an asset recovery fund which would acquire and recover stressed assets and enable banks to focus on their core business. Pursuant to this and the enactment of the SARFAESI Act, many ARCs were formed in India, with ARCIL being the first. These ARCS were set up as private entities, mostly with the support of banks and as on November 2017, there were 24 operating ARCs.[7] According to s. 2(1)(b), asset reconstruction means acquisition by any SC/ARC of any rights or interests of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance. Therefore, asset reconstruction is much broader term than Securitization. Assets are classified into the following:[8] Standard Assets; NPAs; NPAs are further classified into the following: Substandard Asset; Doubtful Asset; Loss Asset; ARCs usually deal with the second type of assets and acquire them through securitisation post which the process of asset reconstruction is carried out. SARFAESI Act provides some measures

The Insolvency and Bankruptcy (Amendment) Ordinance, 2018: A Practitioner’s Perspective. [Mr. Anshul Jain] The author, Partner at Luthra & Luthra Law Offices in the General Corporate and Regulatory Practice group identifies in this update the key changes and briefly comments wherever appropriate from a practitioner’s perspective. On 06 June 2018, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) was promulgated by the President exercising his powers under Article 123 (1) of the Constitution of India. The need for the Ordinance was felt, as the gazette noted, to “balance the interests of various stakeholders … especially interests of home buyers and micro and small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants”. Home buyers/ Allottees under a real estate project A “financial creditor” means any person to whim a financial debt is owed. Section 5 (8) of the IBC defines “financial debt”. This includes, per sub-clause (f) of section 5 (8), “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”.  The Ordinance inserts an explanation to this sub-clause providing that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing”. This is intended to cover home buyers/allottees under a “real estate project” [as defined by the Real Estate (Regulations and Development) Act, 2016]. This amendment does not clarify if the customers of a real estate project will be treated as secured or un-secured creditors. Even if they are provided a voice in the Committee of Creditors (“CoC”), it would hardly provide any benefit to them as they would be one of many creditors sitting in the CoC and their impact would be limited only to the extent of their claim out of the total claim of financial creditors against the company. Depending on the value of their claim, they can easily be voted out by other secured financial creditors. Even if they are heard, the secured creditors can easily assert that they have a higher claim and thus should be paid first and whatever is left after them getting repaid can then be distributed to unsecured creditors. Furthermore, this amendment does not deal with the means to fully protect their investment in the real estate project. At best, the amendment’s impact would be to provide them some amount of recovery on their claim against the company. What the customers really want is either the money or the homes/units back. This is presently not addressed. A more effective way to tackle the problem could have been to (i) put the home buyers in the waterfall structure prior to the financial creditors, or (ii) inserting a specific obligation on the incoming resolution applicant to build and deliver the units. One may also witness situations where no resolution plan is approved and the company goes for liquidation, and in which case the secured creditors can easily use Section 52 of IBC and seek a specific enforcement of their security interest. In a real estate company, the main security interest offered to lenders is the underlying land. So if the secured lenders choose to specifically enforce their security and take away the land from the liquidation waterfall, the customers will be left with nothing to realise from the CIRP. These concerns will, hopefully, soon be addressed in the impeding CIRP Regulations. CIRP period Extension: The CIRP period can be extended from initial 180 days by obtaining 66% of voting shares of the CoC (instead of earlier 75% of voting shares) Withdrawal: The Adjudicating Authority may allow the withdrawal of application filed for CIRP by approval of 90% voting share of CoC. It would be interesting to see if the CIRP regulations define the ‘applicant’ as the one who originally filed the CIRP application or anyone who of 90% votes in the CoC. It would also be interesting to see how, in a case where the CIRP application was filed by him, an operational creditor would be bound by the decision of the CoC unless his claim is been settled. Moratorium: The principle of ‘moratorium’ shall not apply to a surety in a contract of guarantee to a corporate debtor. This is a huge relief to the lenders who were earlier barred by latest NCLAT order in the matter of SBI v. V. Ramakrishnan and Vessons Energy Systems [Company Appeal (AT) (Insolvency No. 213 of 2017] to invoke guarantee giving by the promoters to secure the loans. With this amendment, the concept of moratorium shall not apply to contracts of guarantee provided to a corporate debtor. This is now in line with the recommendations of Eradi Committee as well. Compliance during CIRP: The IRP/RP shall now be responsible for complying with the requirements under any law for the time being in force on corporate debtor. This amendment now makes it amply clear that IRP/RP is required to comply with all applicable laws including but not limited to compliances under the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements). A mere plea that the company is under CIRP and thus no compliances are necessary will not be tenable hereon. This is also line with the amendments brought by the SEBI a few days before the Ordinance. Representation in the CoC and related party: A new proviso has been inserted under section 21(2) which exempts the financial creditor, which is regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to insolvency commencement date. This provides relief to banks, ARCs, NBFCs, etc. who were otherwise considered as related parties due to their shareholding in the corporate debtor. Representation in the CoC—other aspects: A new sub-section 6A has also been inserted u/s 21 to

Cross-Border Insolvency under the Insolvency and Bankruptcy Code 2016: Opportunities and Challenges. [Ishita Das] The author is an LL.M. Candidate at the West Bengal National University of Juridical Sciences, Kolkata Introduction Increasing international trade and commerce is one of the results of globalization where countries are dependent on one another for several goods and services. Therefore, in a scenario where a multinational corporation undergoes insolvency, such proceedings will naturally have ramifications in several jurisdictions, involving stakeholders such as foreign creditors. There are three situations broadly associated with cross-border insolvency: (a) where foreign creditors have claims over the assets of the corporate debtor in another jurisdiction and the insolvency proceedings have been initiated there; (b) where the corporate debtor has multiple branches or places of business and as a result, different assets in jurisdictions apart from the place where the insolvency proceedings have been initiated; and (c) where the corporate debtor is subjected to multiple proceedings in concurrent jurisdictions. In this regard, it is crucial to underscore the rights and claims of the foreign creditors vis-à-vis that of the domestic creditors.[i] Recognition and enforcement of insolvency proceedings are extremely crucial. There are three schools of thought in this regard, globally. First, territorialism, wherein the effect of insolvency is limited to the jurisdiction where it has been initiated. Second, universalism, wherein there is recognition of a single insolvency proceeding in all relevant countries. Third, modified universalism, wherein a court takes the ‘main’ lead in the insolvency proceedings and the other ‘non-main’ courts provide cooperation and assistance.[ii] The Model Law drafted by the United Nations Commission on International Trade Law (“UNCITRAL Model Law”) embodies the third school of thought. With regard to India, the Insolvency and Bankruptcy Code, 2016 (“IBC”) is touted to be a major step towards improving the system of financial laws and enhancing the ease of doing business in the country. Further, as evidenced by the recent World Bank rankings, wherein India jumped from 130 in 2016 to within 100 in 2017, it seems to be a move in the right direction.[iii] However, as pointed out by ASSOCHAM-EY in their joint study, the Code does not maintain any distinction between the domestic and foreign creditors, therefore, leading to the assumption that the two categories of creditors would be treated in an equivalent manner.[iv] The two sections that deal with cross-border insolvency under the IBC are inadequate and do not lay down a comprehensive framework to deal with the problems arising from transnational proceedings. According to a recent Economic Times report, cross border insolvency is on the agenda for the Insolvency and Bankruptcy Board of India (“IBBI”) and expansion of the IBC to cover the transnational insolvency proceedings might be a reality very soon.[v] The report of the Bankruptcy Law Reforms Committee (“BLRC”) while dealing with the need for an effective domestic framework highlighted the need for adopting provisions dealing with the issue of cross-border insolvency in their report.[vi] The Joint Parliamentary Committee on the Code then incorporated two enabling sections in the IBC to ensure that the code was not incomplete.[vii] Sections 234 and 235 embody the opportunities for the inclusion of a detailed cross-border insolvency regime under the new Code. However, there are several challenges that need to be addressed urgently. Cross-border Insolvency under the IBC and the Challenges Section 234 of the IBC deals with agreements entered into with foreign countries. It provides that the Indian government may enter into an agreement with a government of another country for enforcing the provisions of the Code. The Indian government may direct that the application of the provisions of the IBC, as regards the assets of the corporate debtor or debtor, located in a country outside India with which reciprocal arrangements have been made, shall be subject to the conditions as may be specified from time to time.[viii] The IBC, therefore, emphasizes on reciprocity as observed in the insolvency regimes of countries such as South Africa. However, there are certain problems associated with this provision. First, as the Indian government needs to enter into bilateral agreements with different countries, it may not be practically feasible to negotiate such agreements which could be long-drawn and time-consuming. Second, there is a possibility that each country may choose to incorporate different provisions in their bilateral instruments, which would only lead to fragmentation of India’s cross-border insolvency regime. Last, this could lead to multiplicity of litigations in cases where a corporate debtor has assets in more than one foreign jurisdiction, wherein the countries would fall back on their separate bilateral agreements to raise claims in connection with the insolvency proceeding. At the same time on contrary, a one-size-fits-all approach, where a model bilateral insolvency agreement (on the lines of the model bilateral investment treaty brought by India) is favoured by India might prove to be counterproductive for a variety of reasons. First, there could be a high possibility that countries will not agree to such a uniform agreement, and second, any such mechanism which paints different canvases with the same brush i.e. tries to harmonize different examples and situations unique to each jurisdiction, tends to be flimsy and hardly effective. The best way out of this mess could be a model insolvency agreement, built on the lines of the Model Law; in which the contentious issues can be deliberated and modified by countries according to their unique requirements – thereby retaining the best of both methods. While the IBC has provisions for imposing moratorium on all suits and proceedings against the corporate debtor in India during the insolvency resolution period, a creditor or contract counterparty can initiate proceedings in another jurisdiction. Further, even though Section 234 of the IBC has been already notified, no such bilateral agreement has been entered into by India yet. Section 235 of the IBC deals with letter of request to a country situated outside India in certain cases. It lays down that if during the pendency of the insolvency resolution process, or liquidation, or bankruptcy proceeding, the resolution professional,

Out of Court Settlement of Claims after Commencement of Insolvency Process under IBC, 2016. [Kunal Dey] The author is an Advocate practicing in the Calcutta High Court.. A plea for settlement of claims after commencement of insolvency process has now become a key strategy for many corporate debtors since they feel that they would be left in a better position to continue their business post settlement rather than after the completion of the insolvency process. The rationale behind the same lies in the fact that the corporate insolvency resolution process is predominated by the creditors and enumerates a limited role on the part of the corporate debtor in the Committee of Creditors. Thus, a settlement being a mutual decision is much more favourable to both the parties in cases where they regard the same to be feasible and permissible. The intention of the Hon`ble Supreme Court to allow for out-of-court settlements to take effect even after the commencement of insolvency process can be traced back to the case of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP,[1] where the Hon`ble Supreme Court while exercising its special powers under Article 142 of the Constitution of India, allowed the out-of-court settlement of disputes between the parties. This line of decision-making was reiterated by the Hon`ble Supreme Court in the case of M/s Sysco Industries Ltd. v. M/s Ecoplast Ltd.[2] However, the decision of the Hon`ble Supreme Court in the above two cases lies in stark contrast to its decision in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmachem,[3] where the Hon`ble Supreme Court has observed that since Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the National Company Law Tribunal (NCLT) under Rule 11 of the NCLT Rules, 2016, the relevant Rules must be amended by the Competent Authority in order to incorporate such inherent powers. The Hon`ble Supreme Court had also opined that such a measure was necessary in order to prevent unnecessary appeals from being filed before the Apex Court against any out-of-court settlement or comprises amongst/between the parties. This decision therefore warrants an observation of Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) which states that:- “(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company law Tribunal shall have jurisdiction to entertain or dispose of- any application or proceedings by or against the corporate debtor or corporate person; any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.” The intention of the Legislature to provide a larger scope to the powers of the National Company Law Tribunal is also evident from the perusal of Section 31 of IBC which states that:- “(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. (2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.” The different use of terminology by the Legislature in the two above-mentioned provisions indicate that the National Company Law Tribunal can exercise its powers which has been conferred upon it by the Legislature under the NCLT Rules, 2016 and it must not be restricted to only the powers which has been provided to it by under the Code including through the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 while determining any application pertaining to the out-of-court settlement of insolvency process unlike that of determining the authenticity of a resolution plan. Therefore, even though Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the NCLT under Rule 11 of the NCLT Rules, 2016, the IBC, itself provides for an alternate route for invoking the same. The issue for allowing out-of-court settlement of insolvency matters once the proceedings have commenced before the ‘Adjudicating Authority’[4] is therefore a persisting one since neither the Code nor its Rules clearly specify the procedure for executing it which manifests the need of an amendment in the Code and its Rules to incorporate the same in accordance with the decision of the Hon`ble Supreme Court in Uttara Foods and Feeds Private Limited v. Mona Pharmachem.[5] [1]http://www.ibbi.gov.in/LokhandwalaKatariaConstruction9279of2017.pdf [2] https://indiankanoon.org/doc/58757679/ [3] https://indiankanoon.org/doc/80652506/ [4] Section 5(1) of the IBC. [5] Supra note 3.

Pre-packaged bankruptcy arrangements in the Indian context. [Priyadarsini T P and Vishnu Suresh] The authors are 3rd year students pursuing B.A.LLB(Hons.) from National University of Advanced Legal Studies, Kochi. Introduction The Insolvency and Bankruptcy Code, 2016 was enacted to overhaul the erstwhile haphazard legal framework to govern the matters of bankruptcy in India.  It has been observed to be creditor-friendly. The corporate insolvency resolution process envisaged under the Code involves enormous participation of the adjudicating authority. It does not leave any scope for any out of court settlement of bankruptcy. Such an approach has been taken under the notion that the Indian market is not matured enough for an informal bankruptcy resolution. This is in stark contrast to countries such as U.S.A where bankruptcy resolution through out of court procedures is prevalent. Further, U.S.A and many other jurisdictions have also recognized a semi-informal arrangement known as pre-packaged bankruptcy or pre-pack. Pre-packaged bankruptcy is a quasi-formal arrangement that combines the aspects of a private workout and legal bankruptcy. In a conventional bankruptcy case, the debtor files a bankruptcy petition, then negotiates a reorganization plan and solicits votes. In a pre-packaged plan, the applicant negotiates a plan and solicits votes before filing of a petition.[1]  In U.S.A, the Bankruptcy Reform Act of 1978[2] provides that a debtor may file a plan for reorganization simultaneously with a petition for a voluntary bankruptcy case. The court’s role is limited to setting a date for approval of the reorganization plan. The creditors before entering into negotiations enter into agreements such as waiver or forbearance agreements to modify or waive their rights to collect debts. This is to avoid any creditor from initiating formal bankruptcy proceedings amidst the negotiations.In U.K, pre-packs have gained momentum as a result of the reforms introduced by Enterprise Act 2002and include a system of out-of-court entry into administration and simpler exit routes.[3] Benefits of Pre-packaged arrangements Pre-packs are a result of the promotion of rescue culture as opposed to debt collection during insolvency. Distressed companies may resort to pre-packs for the following reasons: 1.Decreased costs and increased speed: A pre-pack will minimize the time the company will have to spend in insolvency and thus increase the chance of rescuing its business.[4] They open up the scope for debt restructuring at a stage when the company’s business may still be viable. 2.Role of Existing Management:The Code entirely excludes the management of the corporate debtor once the insolvency resolution professional takes over.  This may not be ideal in cases where the distress of the company cannot be attributed to the management and they may actually be able to play a role in the revival. Moreover, increased role of management would decrease the role played by insolvency professionals and thereby bring down the insolvency resolution process costs as well. 3.Prevents undue depreciation in value of assets:There is a stigma attached to insolvency which often plummets the value of whatever assets that may be remaining, especially of those businesses that are heavily dependent on reputation. This is not the case in pre-packs, as the plan of revival is drawn up in secrecy by way of negotiations between the management and creditors. Indian Scenario The interim bankruptcy law reforms committee, in its report debated on the viability of pre-packs in India. However, it was opined that the Indian market is currently not sufficiently developed to allow sales with zero intervention by the NCLT. Although, the report pointed out the possibility of allowing such arrangements after getting approved by NCLT within 30 days of filing. [5] Further, the Supreme Court, in its decision in Lokhandwala Kataria Construction (P) Ltd. V. Nisus Finance and Investment Managers LLP allowed a settlement between the parties after the application was admitted even though the NCLT rules expressly prohibit the same.[6] Recently, the NCLT-Kolkata Bench suggested an out of court settlement in the matter of Binani Cements insolvency.[7] This incident sparked a debate on whether insolvency can be resolved through methods other than the formal Court-driven CIRP. The Supreme Court has allowed the out of court settlement bid to be considered by the committee of creditors along with other bids Criticism Though allowing such settlements may be desirable in the interests of corporate rescue, doing so in the absence of legal provisions to satisfy the claims of other creditors is dangerous in as much as it reminiscent of the time before the Code when the debtor was able to get away from not paying all the creditors, especially the unsecured ones. Pre-packaged arrangements now in existence have received criticism on many grounds. One such ground is that there are increased chances of connected party sales to the existing management, their kin, promoters etc. with the sale grossly undervalued. Another drawback is that the market may not tested properly before the sale of assets leading them to be sold off at a lower value. Generally unsecured creditors who do not have access to information by way of contract are often left out of the negotiations nor are they given an opportunity to make representations. The business may be sold off without their claims being satisfactorily redressed. The efficacy of pre-packs as an alternative informal insolvency arrangement is also questionable. There is no convincing evidence that pre-packs will always lead to maximum realization of value of assets. In cases where there are a large number of creditors with different interests, it will be difficult to reach an agreement to sell off the business to one or a few of the creditors. In those cases, formal bankruptcy procedure must be resorted to. Conclusion Nevertheless, the judicial trend and rise in resort to arbitration in India indicates the preference towards out of court/quasi-judicial insolvency resolution.  Therefore, there is a need to amend the present insolvency regime so as to accommodate such pre-packs into the Indian insolvency regime. One existing method which could be utilized as a pre-pack is the scheme of arrangement under the Companies Act. A pre-pack pool, an independent body of professionals in existence in the

The Insolvency and Bankruptcy Code (Amendment) Bill, 2017: Key Highlights and Implications. [Mudit Nigam] The author is a third-year student of National Law Institute University, Bhopal. The President of India, in exercise his power under Article 123 of the Constitution of India, promulgated the ordinance titled the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”). The purpose of the Ordinance was to strengthen the insolvency resolution process by disqualifying certain persons from presenting a resolution plan under the Insolvency and Bankruptcy Code (“Code”). However, the same was widely debated as it imposed restrictions on presentation of resolution plan by connected persons thereby adversely affecting the initiation of corporate insolvency resolution process.  In order to fill the gaps and clarify the position, the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 (“Bill”) was passed by Parliament in January, 2018 and currently awaits the President’s assent. The Bill extends the application of the Code to the personal guarantors to the corporate debtor and the proprietorship firms who were earlier immune from any liability under the Code.[1] This has brought much needed clarity on initiation of insolvency process against the personal guarantors of the corporate debtor. Reference must be made to the judgment of the Allahabad High Court in case of Sanjeev Shriya v. State Bank of India, wherein the Court observed that moratorium issued under section 14 of the Code would be applicable to the proceedings initiated against the personal guarantors.[2] The applicability of the Code to proprietorship firms will ensure proper completion of insolvency resolution process against small and medium enterprises (SMEs), which often run on a proprietorship model. A “resolution applicant” under section 5(25) of the Code includes any person who presents a resolution plan to the insolvency professional. However, after the amendment takes effect, the scope of the term would be limited only to such persons who fulfill the eligibility criteria prescribed by way of the amendment and who present a resolution plan in pursuance of the invitation by the insolvency professional under the amended section 25 (2)(h). The imposition of the eligibility criteria is likely to prevent unscrupulous persons from presenting a resolution plan and prevent unnecessary proceedings against the corporate debtor. Further, this change will give importance to the interests of the creditors as they will also have a say in approving the eligibility criteria. Another implication of this change is that it allows persons to jointly submit a resolution plan, thereby facilitating acquisition of large stressed assets. The Bill further amends the duties of a resolution professional under section 25 of the Code. Prior to the amendment, the resolution professional had a duty to invite any prospective lender or investor, or any other person. However, after the amendment, a resolution professional would be under an obligation to impose certain eligibility criteria with the approval of the committee of creditors, which criteria would have to be fulfilled by a resolution applicant in order to qualify for an invitation to present a resolution plan. While deciding the eligibility criteria, regard shall be given to the complexity as well as the scale of operations of the corporate debtor’s business, in addition to other conditions as may be specified by the Insolvency and Bankruptcy Board of India. The Bill inserts a new section 29A in the Code which expressly bars certain persons from presenting a resolution plan. Unlike the Ordinance, the Bill uses the expression ‘persons acting jointly or in concert,’[3] which implies that apart from the ineligible person, any other person acting together with such person for a common objective is also ineligible to be a resolution applicant. The new section also bars undischarged insolvents, disqualified directors,[4] willful defaulters,[5] promoters, and persons whose account has been classified as a non-performing asset by the Reserve Bank of India and a period of a year or more has been passed after such classification. However, the Bill allows such ineligible account holders to become eligible to submit a resolution plan if they clear all the overdue amounts with interest and other charges relating to their NPA accounts.[6] The section also disqualifies a person upon conviction for an offence punishable with 2 years of imprisonment or more. It is still unclear whether the person must be convicted for an economic offence or for any other offence as well, although the use of the word ‘any’ suggests that the nature of the offence is immaterial. Unlike the Ordinance which disqualified a person who ‘has been’ prohibited by the Securities and Exchange Board of India (“SEBI”) from trading and accessing in securities market, section 29A as introduced by the Bill prohibits only a person who is currently barred by the SEBI. This brings more clarity as the Bill relaxes the earlier complete restriction imposed on persons who have been previously disqualified by the SEBI. The same section explicitly disqualifies a promoter or a person who in managerial or controlling capacity in the company/corporate debtor has indulged in unlawful transactions as decided by the National Company Law Tribunal (“NCLT”). Much confusion lies on the presentation of a plan by the guarantor of a corporate debtor. The Ordinance as well as the Bill, under the newly introduced section 29A, bars guarantors of the corporate debtor against whom insolvency proceeding has been initiated. On December 18, 2017, the NCLT in the matter of MBL Infrastructure Limited, observed that the words ‘enforceable guarantee’ used in the section mean and refer to such class of guarantors within the entire class of guarantors who, on account of their antecedent, may adversely impact the credibility of the process under the Code. Thus, a guarantor cannot be disqualified only on the ground of existence of a binding contract of guarantee.  However, an appeal has been preferred against this order and the matter is pending before the National Company Law Appellate Tribunal. Under clause (j) of section 29A, persons ‘connected’ with the debarred persons are also ineligible to present the plan. Unlike the Ordinance, the Bill clearly explains the words ‘connected person’ as including promoters, persons in managerial capacity and

Discordant Notes in IBC Jurisprudence: The Sanjeev Shriya Case. [Riddhi Joshi] The author is a second-year student at Symbiosis Law School, Pune. The author may be reached at riddhi.dhananjay@symlaw.ac.in. On 6th September, 2017, the Allahabad High Court passed a judgment in the case ofSanjeev Shriya v. SBI, extending the moratorium provided for under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to personal guarantors in respect of the debts alleged to have remained unpaid by a corporate debtor. Facts of the Case The factual matrix of the case is as follows. M/s. LML Ltd. (“LML”) was declared a ‘sick industrial company’ by the Board for Industrial Financial Reconstruction on May 8, 2007. Under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, State Bank of India filed an application before the Debt Recovery Tribunal (“DRT”) for recovery of the debt owed by LML. The Bank instituted the proceedings for recovery of the dues jointly and severally from LML as well as from the personal guarantors. LML filed an application to initiate the corporate insolvency process under Section 10 of the IBC. On May 30, 2017, the National Company Law Tribunal (“NCLT”), Allahabad Bench admitted the application and, as contemplated in section 14 of the IBC, imposed a moratorium on the institution of suits or continuation of pending proceedings against LML. LML and the personal guarantors then moved an application at the DRT seeking stay of proceedings filed by the Bank before the DRT. In view of the NCLT’s order, the DRT stayed the proceedings but only against LML and observed that there was no order to restrain the proceedings against the personal guarantors. The personal guarantors challenged this order of the DRT before the Allahabad High Court. Judgment While staying the proceedings at the DRT against even the personal guarantors, the Allahabad High Court relied on sections 60(1) and 60(2) of the IBC, which provide that the Adjudicating Authority in relation to personal guarantors shall be the NCLT. The High Court observed that in cases where the insolvency resolution process has already begun, the application relating to insolvency resolution of a personal guarantor would also lie before the same NCLT. The High Court also observed that when the primary debt is still in a fluid state, two parallel proceedings in different jurisdictions cannot be maintained. Based on this reasoning, the High Court stayed the proceedings at the DRT even against the personal guarantors. Analysis Unfortunately, the High Court appears to have erred. The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was the precursor to the current regime under the IBC. Section 22 of SICA contemplated a bar on proceedings against a ‘sick industrial company’ in pari materia to the moratarium under section 14 of the IBC. Section 22(1) of SICA provided- Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law…no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority. This provision came up for consideration before the Supreme Court in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. The Supreme Court first took note of section 128 of the Indian Contract Act, 1872, which provides that the liability of a surety is co-extensive with that of the principal debtor, unless it is otherwise provided by contract. While reviewing the section, the Supreme Court also relied on the well established principle of statutory interpretation that where the language of the provision is explicit, the language of the statute must prevail. The Court held that, in section 22, the terms ‘proceedings’ and ‘suit’ have not been used interchangeably. ‘Proceedings’ being a wider term than ‘suit’, the bar on ‘proceedings’ applies only with respect to the industrial company. The Court, therefore, held that proceedings other than a suit for recovery can be proceeded with against the personal guarantors. Now, section 14(1) of the IBC lays down as follows- (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. Clearly, there is no language in this section barring proceedings against personal guarantors. In fact, in Schweitzer Systemek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd., the NCLT, Mumbai Bench clearly interpreted the benefit of the moratorium to be limited only to corporate debtors. It is unfortunate that Schewitzer Systemek India was not brought to the attention of the Allahabad High Court. It is more unfortunate that, even though

[Vishakha Srivastava and Ashutosh Kashyap] The authors are fourth-year students at Chanakya National Law University, Patna. In the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the Supreme Court was confronted with two pertinent questions in relation to the Insolvency and Bankruptcy Code, 2016 (“Code“): firstly, whether, in relation to an operational debt, the provision contained in Section 9(3)(c)[1] of the Code is mandatory; secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor. Facts of the Case Hamera International Private Limited executed an agreement with the Appellant, Macquarie Bank Limited, Singapore, by which the Appellant purchased the original supplier’s right, title and interest in a supply agreement in favour of the Respondent. The Respondent entered into an agreement for supply of goods in accordance with the terms and conditions contained in the said sales contract. Since amounts under the bills of lading were due for payment, the Appellant issued a statutory notice under sections 433[2] and 434[3] of the Companies Act, 1956. After the enactment of the Code, the Appellant issued a demand notice under section 8 of the Code[4] to the contesting Respondent, calling upon it to pay the outstanding amount. The contesting Respondent stated that nothing was owed by them to the Appellant. They further went on to question the validity of the purchase agreement dated in favour of the Appellant. The Appellant initiated the insolvency proceedings by filing a petition under section 9 of the Code.[5] The National Company Law Tribunal (“NCLT”) rejected the petition holding that section 9(3)(c) of the Code was not complied with, inasmuch as no certificate, as required by the said provision, accompanied the application filed under Section 9. Decisions of the Adjudicating Authorities The NCLT held that section 9(3)(c) of the Code is a mandatory provision, and therefore, non-compliance of the provision would lead to rejection of the application seeking to initiate insolvency proceedings. Thus, it was held that the application would have to be dismissed at the threshold. On appeal, the National Company Law Appellate Tribunal (“NCLAT”) agreed with the NCLT holding that the application would have to be dismissed for non-compliance of the mandatory provision contained in section 9(3)(c) of the Code. It further held that an advocate/lawyer cannot issue a notice under section 8 on behalf of the operational creditor. The NCLAT observed that as there was nothing on the record to suggest that the lawyer/ advocate held any position with or in relation to the Appellant, the notice issued by the advocate/ lawyer on behalf of the Appellant could not be treated as notice under section 8 of the Code. Appeal to the Supreme Court The Court observed that the first thing to be noticed on a conjoint reading of sections 8 and 9 of the Code, as explained in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, is that Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are: occurrence of a default; delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt. It is only when these conditions are met that an application may then be filed under section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed. Under section 9(3), what is clear is that, along with the application, certain other information is also to be furnished. Under section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. Under rules 5 and 6 of the Adjudicating Authority Rules 2016, read with Forms 3 and 5, it is clear that, as Annexure I thereto, the application in any case must have a copy of the invoice/demand notice attached to the application. That this is a mandatory condition precedent to the filing of an application is clear from a conjoint reading of sections 8 and 9(1) of the Code. On a reading of sub-clause (c) of section 9(3), it is equally clear that a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. The true construction of section 9(3)(c) is that it is a procedural provision, which is directory in nature, as the Adjudicatory Authority Rules read with the Code clearly demonstrate. The Court further observed that section 8 of the Code speaks of an operational creditor “delivering” a demand notice. It is clear that had the legislature wished to restrict such demand notice being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Delivery, therefore, would postulate that such notice could be made by an authorized agent. In fact, in Forms 3 and 5, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under section 9 of the Code. The position further becomes clear that both forms require such authorized agent to state his position with or in relation to the operational