Insolvency Law

[By Akash Mukherjee] The author is a third-year undergraduate student at National Law University, Jodhpur Introduction The Insolvency and Bankruptcy Code, 2016 (hereinafter “the Code”) was enacted on 28th May, 2016. It has been in force for over three years, successfully operationalizing a mechanism for corporate insolvency resolution. The objective of the enactment was to provide an effective legal framework for the development of the credit market and entrepreneurship. The Code has been able to fulfill these objectives, so far, with respect to the corporate sector. However, corporate insolvency resolution is not the only means to attain the aforementioned objectives. Individual Insolvency, enshrined in Part III of the Code, aims to reach the same destination. Although, it has not been notified yet and is still in its nascent stages, the regime for individual insolvency portends major impact on the Indian credit market. This article would focus upon the need for the introduction of individual insolvency in the Code, the inadequacy of the current laws for recovery of individual debts, the mechanisms put in place for facilitating individual insolvency resolution and the issues with the proposed mechanisms. The need for Individual Insolvency Resolution Proprietorship and Partnership firms account for a substantial share in the income and employment sector in India. The Government initiatives like Start-Up India, under the aegis of Make in India programme, have identified their significance in the Indian economy and are aimed at providing a much-needed boost to them. Individual Insolvency Resolution framework, enshrined in the Code, must be pursuant to this goal. It should protect the interests of the debtor by preventing the creditors from causing detriment to him by putting in place a resolution process and isolating minimum assets for his subsistence. It must shield the individual against honest business failure and, thereby, promote entrepreneurship.[i] Meanwhile, it should also ensure increased returns to the creditors which would promote credit availability. Furthermore, the proposed framework would provide a resolution process for personal guarantors which is not in place currently. This would bridge the gap between corporate guarantors, for whom the resolution process is already in place, and personal guarantors. The Current Legal Framework is fragile The laws with respect to personal insolvency, currently in force, were enacted during the British Raj. The Presidency Towns Insolvency Act, 1909 for Madras, Bombay and Calcutta and the Provincial Insolvency Act, 1920 for the rest of India provide for the existing legal framework in India for individual insolvency. However, these laws have been a rare recourse for resolution of individual insolvency. Instead the Negotiable Instruments Act, 1881 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (hereinafter “SARFAESI Act”) have been used to initiate the process of formal recovery. Section 138 of the Negotiable Instruments Act has been a vital device for credit recovery since its introduction in 1988. It criminalized dishonor of a cheque which served as a deterrent for the borrower against default. This provision was used increasingly by the lenders in the home mortgage market since its introduction due to lack of any other viable alternative.[ii] Non-Banking Financial Corporations giving loans to individuals still actively resort to this section for recovery. The SARFAESI Act, 2002 provided the banks and financial institutions with the power to take possession of collateral security without any intervention from the Court. It was a tool of recovery against non-performing loans. The increased use of Section 138 has over-burdened the Courts which has led to inefficient and delayed disposal of matters regarding property and mortgages.[iii] Also, SARFAESI Act is available only to banks and financial institutions. Its effectiveness has diminished since its inception. The recovery rate under SARFAESI Act was 61% in 2008 which fell to 22% in 2013.[iv] Thus, both these alternatives have become obsolete in the present scenario. The resolution process under Part III of the Code Part III of the Code stipulates three procedures for resolution of personal insolvency on default of a threshold amount: Fresh Start Process[v]: The Code provides for a complete waiver of debt for a debtor with the annual income of less than Rs.60,000, assets less than Rs.20,000, debts not amounting to Rs.35,000 and no dwelling unit.[vi] The process can be initiated only by the debtor. The debtor must not be an undischarged bankrupt and must not own a dwelling unit.[vii] There should not be a fresh start process subsisting against the debtor or a fresh start order issued in relation to him twelve months prior to the date of application.[viii] The application is examined by a Resolution Professional (hereinafter “RP”). The RP submits a report to the Adjudicating Authority (hereinafter “AA”) recommending acceptance or rejection of the application by the debtor.[ix] The AA, after due consideration, either admits or rejects the application.[x] On admission, a moratorium period becomes applicable for six months on all creditors.[xi] The creditors can object to the process only on limited grounds.[xii] By the end of the moratorium period the AA shall pass a discharge order writing off all debts of the applicant subject to an entry in the credit history. Insolvency Resolution Process[xiii]: This provides for a mechanism for negotiation of a repayment plan between the debtor and the creditors under the guidance of the RP. This process can be initiated by either the debtor or the creditor.[xiv] On admission of the application by the AA, a public notice is issued inviting all the claims.[xv] Then, a repayment plan is formulated by the debtor under the supervision of the RP. If the plan is approved by 75% of the creditors,[xvi] and thereafter by the AA, it is implemented by the RP. On the successful execution of the plan, the AA passes an order discharging the debtor from his liability under the plan. The debtor, therefore, gets an ‘earned start’.[xvii] Bankruptcy Process[xviii]: On failure of the resolution process or non-implementation of the repayment plan, the debtor or creditor could initiate bankruptcy proceedings.[xix] If the application is approved the AA issues a bankruptcy order and appoints a

[ Rahul Kanoujia ]   The author is a 2nd year student of GNLU, Gandhinagar. Introduction: The most important feature of Insolvency and Bankruptcy Code, 2016[i] (hereinafter referred to as “IBC”) is the time bound resolution process, which tries to make sure that the process of resolution and liquidation does not suffer the trauma of never ending litigation. Such time bound resolution has been made possible through the introduction of limitations under various provisions of the Code, such as those given under Section 61and Section 62. These limitations are going to be the primary focus of this article. Section 61 of IBC,provides that the Appellate authority for filing an appeal from final order of the National Company Law Tribunal shall be National Company Law Appellate Tribunal. Similarly, Section 62 of IBC provides that an appeal from the order of National Company Law Appellate Tribunal on a question of law shall lie before the Supreme Court. Such appeal shall be filed within a period of 90 days. [ii] The year 2018 saw a multitude of case laws directly addressing appeals, significantly developing the law. The following section deals with some of those cases and the issues that they address. Issues before the National Company Law Appellate Tribunals: Whether an appeal filed beyond the maximum prescribed period of 45 days under Section 61 of the Code is maintainable? In the matter of State Bank of India v. MBL Infrastructure Ltd.[iii]the NCLAT Delhi held that Section 61 clearly stipulates that an appeal has to be preferred within 30 days from the order of the adjudicating authority. A delay not exceeding 15 days can be condoned in filing the appeal if the appellant is able to satisfy the appellate authority that there was sufficient cause for not filing the appeal within the prescribed period of 30 days. Thus, the maximum time frame for preferring an appeal is 45 days, which cannot be extended further on any ground whatsoever. Whether Appellate Tribunal has jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under section 61(2) of the I&B Code? In the matter of Sunil Sharma v. Hex Technologiesand Industrial Services v. Electrosteel Steels,[iv]the NCLAT held that Appellate Tribunal has no jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under Section 61 (2) of the Insolvency and Bankruptcy Code. Whether the Insolvency and Bankruptcy Board of India (IBBI)has the standing to challenge the findings of the adjudicating authority? In Insolvency and Bankruptcy Board of India v. Wig Associates,[v] the Insolvency and Bankruptcy Board of India (“IBBI”) challenged an interpretation accorded to Section 29(A) which allegedly resulted in approval of an ineligible resolution plan. The NCLAT Delhi held that under section 30(2), the resolution professional is duty bound to ensure that resolution plans are in conformity with the provisions prescribed thereunder. If the resolution plan submitted by an applicant is contrary to Section 29A, in view of Section 30 (2) (e) read with Section 30(3), the resolution professional should not have placed such resolution plan before the committee of creditors. In any case, if the legal interpretation accorded by the adjudicating authority contravenes the provisions of the Code, it is duty of the resolution professional to bring the same to the notice of the appellate authority by preferring an appeal. Further, it was also held that the IBBI does not have the locus standi to challenge a finding of an adjudicating authority under Section 61 of the Code. However, it is empowered under Section 196(g) to monitor the performance of the insolvency professionals and in appropriate cases, pass any direction as may be required for compliance of the provisions of the Code. Therefore, the appeal filed at the instance of the IBBI was dismissed. The tribunal however also clarified that the IBBI was at the liberty to inform the resolution professional to move an appeal under S.61. Scope of appellate jurisdiction of NCLAT vis-à-vis the power conferred on the central government under section 242 of the Code. In the matter of Principal Director General of Income Tax v. M/s. Spartek Ceramics Indiaand National Engineering Industries Ltd. v. Cimmco Birla,[vi]The NCLAT held that the NCLAT is empowered to hear the appeal under the Companies Act, 2013, the Code and the Competition Act, 2003only. The central government by exercising the power under section 242 cannot empower the NCLAT to hear an appeal pursuant to a Notification which granted ninety days’ period to prefer an appeal under section 61(1). Grant of ninety days’ period was in clear violation of section 61(2) of the Code, which clearly prescribed a time limit of 45 days only. Thus, while the central government is empowered under section 242 to make any provision to remove the difficulty in giving effect to the provisions of the Code, the provision cannot be in violation of any of the substantive provisions of the Code. Distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In the matter of Prowess International Private Limited v. Action Ispat & Power Private Limited, the NCLAT drew a distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In an appeal preferred under Section 421 of the Companies Act, 2013, the period of limitation is counted from the date on which a copy of the order is made available by the tribunal pursuant to sub-section (3) of Section 421 of the Companies Act, 2013. [vii] Under Section 61 of the Code, the appeal is required to be filed within thirty-days, means within thirty-days from the date of knowledge of the order against which appeal is preferred. Conclusion The above judgements provide much needed clarity with regard to the Appeal Mechanism under Section 61, that appeal is to be filed within thirty days. However, as per proviso

[Medhashree Verma and Kavya Lalchandani] The authors are 3rd year students of National Law University Odisha, Cuttack.  Introduction  The long-standing dilemma regarding the constitutionality of the Insolvency and Bankruptcy Code, 2016 (IBC) has been finally settled by the Hon’ble Supreme Court of India. In Swiss Ribbons Pvt. Ltd. & Anr v. Union of India,[i]the court answered all the issues regarding the constitutionality of the IBC and stands as a perfect example of Judicial Deference to enter into the sphere of legislaturefor matters relating to the economy of the country which the legislature has the liberty to experiment with. Keeping in mind the background and the pre-existing state of laws regarding insolvency, the court observed that unification of law governing insolvency was necessary and a system of speedy disposal of insolvency matters and a fast resolution process was necessary to save the economy from rising Non-Performing Assets. The Court also referred to the BLRC report which stated that “In such an environment of legislative and judicial uncertainty, the outcomes on insolvency and bankruptcy are poor”. Thus, in order to expedite the process of insolvency resolution and to save the financially unstable companies as a going concern, the IBC was enacted. The court stated that “The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being mere recovery legislation for creditors”. It dealt with the following pressing issues related to the IBC: Classification of creditors: Article 14 IBC happens to be the first insolvency legislation to have created a distinction between the creditors as operational creditors and financial creditors. The preferential treatment given to the financial creditors under the scheme of the Act to the extent of ignoring the interest of the operational creditors has been a topic of moot since the inception of the IBC. It was also contended that the classification between the two kinds of creditors is discriminatory as the debtors to the operational creditors are given a notice of demand under the provisions of the Act and are even entitled to raise a genuine dispute regarding the same while the debtors to the financial creditors are not entitled to the same. Moreover, vires of section 21 and 24 of IBC were also assailed on the ground that the operational creditors do not get a right to vote in the meetings of the committee of creditors. It was contended that there is no intelligible differentia in the classification of creditors and hence the same violates Article 14 of the Constitution. However, the Court rejected the arguments and held that the class of financial creditors is mostly limited to the banks and financial institutions who lend huge amounts to the corporate debtors. Their credit is usually secured, unlike the operational creditors who are unsecured and grant loans in small amounts. Also, the nature of lending is different between the financial and operational creditors. The financial creditors lend money to the enterprises for working capital or on term loan which helps the corporate debtor in initiating and running the business. On the other hand, operational creditors are related to lending and supply of goods and services. The court noted that the amount that is owed to the operational creditors is generally less and contracts entered into with the operational creditors do not have clauses relating to a specific repayment schedule. The court further observed that in the case of an operational creditor there is a larger possibility of existence of a genuine dispute and can use arbitration as a means of settling their dispute. In contrast, the financial debts lent by the financial creditors have authentic documentation maintained by the banks and the financial institutions and the defaults made can be easily verified. Furthermore, financial creditors are concerned with the financial health of the corporate debtor and are in a better position to restructure the loans and help the corporate debtor recuperate from the financial stress which the operational creditors do not and cannot do because of the nature of contract that they enter into with the corporate debtor. Thus, there exists an intelligible differentia in the classifications of the creditors which is directly related with the object of the act which is to preserve stressed entities as a going concern and implements fast resolution mechanisms for the corporate debtor. The court observed that vires of Section 21 and 24 of IBC cannot be assailed on the ground that the operational creditors do not get a right to vote in the meetings of the committee of creditors as no resolution plan is passed by the adjudicating authority without ensuring that roughly equal treatment is given to the operational creditors as well. It is to be ensured that the minimum payment is made to the operational creditors which should not be less than the liquidation value. Analysis: The reasoning that the court used to justify the preferential treatment given to the financial creditors over operational creditors fails to address the fact that in some legislations may incidentally affect the rights and welfare of a party which may not have been its may concern. In the present case, this anomalous situation circles the operational creditors as the primary focus of the legislation is to give control of the stressed company to the financial creditors. This can be explained throughthe matter of Bhushan Steel ltd[ii].,in which Larsen and Toubrochallenged the claims it was supposed to receive as the operational creditor to the Bhushan Steel. Bhushan Steel owed about nine hundred crores to Larsen and Toubro. Larsen and Toubro made a move to the NCLAT and pleaded that the committee of creditors (which consists only of the financial creditors) had satisfied most of its claims. But, on the other hand the dues of the operational creditors were not settled.  It further contended out of the total amount of the total amount of 12 billion that has been earmarked for the settlement of dues of the operational creditors, 10 billion must be given to Larsen and Toubro. The Tata

[Anmol Jain and Srishti Rai Chhabra] The authors are 3rd year students of NLU, Jodhpur. Introduction “The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.” The Insolvency and Bankruptcy Cody, 2016 [“the Code”] received the official sanction[i]recognizing its constitutional tryst in entirety in quite a significant verdict. We still remember the packed courtroom to hear the amusing and intelligent arguments of the virtuoso lawyers. IBC, a landmark aspired by high-ranked officials for improving the financial structure of the country (seeI do as I doby Raghuram G. Rajan and Of Counselby Arvind Subramanian) has sustained the constitutional scrutiny. It is worth mentioning that the judgment is beautifully written and structured. Though at certain places one might feel less satisfied with the restricted reasoning of the Court, however, such concession can be granted for the Court’s recognition of limited judicial review in economic matters at the outset of the judgment. Here, we endeavour to present a brief overview of the judgment spiced with our critique. The Case The Court has tried to establish the premise behind its reasoning and exercising judicial restraint by considering the fall of Lochnerdoctrine (practice of the US Supreme Court to declare the socio-economic legislations as unconstitutional using the ‘due process’ clause) in the US, which initiated with the dissents of Justice Holmes and Justice Brandeis of the U.S. Supreme Court. As per Justice Holmes’ dissenting opinion in Lochner v. New York[198 U.S. 45 (1905)]: “The courts do not need to substitute their social and economic beliefs for the judgment of legislative bodies, who are elected to pass laws.” Further, the Court relied on its own judgment in R.K. Garg v. Union of India[ii]to hold that the laws relating to economic activities should be viewed with greater latitude as compared to laws relating to civil rights. As there is no straitjacket formula to solve an economic problem, the legislature will employ trial and error method to find solution of such problems. The Court, therefore, should exercise judicial restraint in interfering with legislations like the Code, and question the constitutionality only when such legislations are ‘palpably arbitrary, manifestly unjust and glaringly unconstitutional’. The Court, after establishing the premise behind presuming the constitutionality of the court, delved into the objects underlined the Code – to bring the insolvency law in India under a single unified umbrella, to speed up the insolvency process and to ensure revival and continuation of the corporate debtor. Prior to the Code, the insolvency matters were dealt by multiple fora under various laws such as Sick Industrial Companies (Special Provisions) Act, 1985; the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and the Companies Act, 2013. The petitioner had successfully argued that the constitution of the NCLAT, with its lone bench in Delhi, goes against the judgment of the Court in Madras Bar Association v. Union of India[iii](2014) where it was held that permanent benches of NCLAT have to be constituted wherever there is a seat of the High Court, or circuit benches be constituted. The Court has ordered the Union of establish circuit benches of NCLAT within 6 months. Next, the petitioner argued that in Madras Bar Association v Union of India[iv](2015), it was held that the administrative support to all the tribunals should be from the Ministry of Law and Justice; therefore, the NCLAT should not function under the Ministry of Corporate Affairs. Though the Government cited Article 77(3) of the Constitution and Delhi International Airport Limited v. International Lease Finance Corporation and Ors.[v]to argue that the allocation of rules of business among various Ministries is mandatory, the Court accepted petitioner’s claim. However, we see the existing regime, the Ministry of Corporate Affairs deals exclusively with all the matters pertaining to the administration of companies – the Code;[vi]the Insolvency and Bankruptcy Board of India; the Competition Commission of India; the Companies Act, et al. Therefore, we argue that for better corporate governance, NCLT and NCLAT should continue to function under the Ministry of Corporate Affairs only. This goes in line with the existing setup wherein Ministries provide administrative support to their corresponding tribunals. For instance, Department of Telecommunication administers Telecom Disputes Settlement and Appellate Tribunal; Ministry of Environment, Forest and Climate Change administers National Green Tribunal and Department of Revenue administers the GST Appellate Tribunal. Next, the Court was confronted with multiple challenges related to arbitrariness, the first being the issue of reasonable classification between financial creditors and operational creditor. At the outset, the Court laid down a common rule of Article 14 for all such challenges – A constitutional infirmity is found in Article 14 only when the legislation is manifestly arbitrary.The petitioners had challenged the requirement of a demand notice to the operational debtor by the operational creditor before initiating the process under the Code, which is absent in case of a financial debt. The Court did not uphold this argument and distinguished the two debts as follows: Financial Debt Operational Debt Financial debt is given for establishment of business and keeping the business as a  going concern in an efficient manner. Operational debt is generated as part of a business activity owing to exchange of goods and services, including employment. Evidence of debt is readily available with the financial creditor and in the records of information utilities. The information utilities are under the duty to send notice to the debtor before recording any debt for verification purposes. All operational creditors might not have accurate account of all liabilities in verifiable form due to its recurring nature. It increases the possibility of disputed debts. It is generally given in large sum and by a small number of persons. It is given in small sum by a large number of persons. It is a secured debt. Sometimes, it is not secured against collaterals. Here, the contracts provide a specified repayment schedule, wherein defaults entitle financial creditors to recall a

[Jayesh Karnawat & Kritika Parakh]   The authors are 3rd year students at NLU, Jodhpur. Abstract The globalization of business enterprises has evolved with time, leading to businesses having assets and liabilities which are spread over the globe. This, in turn, has raised complex issues and intricacies pertaining to cross-border insolvencies in different situations. For these situations, ascertainment of the law to be applied, the jurisdiction where the proceedings are to be conducted and enforcement of the orders regarding the assets are crucial for the settlement of the dispute. A uniform cross-border insolvency law in different countries would enable a smooth resolution of these complexities. Therefore, the United Nations Commission on International Trade Law adopted in 1997 a Model Law to assist states in framing their cross-border insolvency law. This article discusses the intended transformation of Indian Cross-Border in consonance with the Model Law.  Introduction To The Indian Cross-Border Insolvency Law The Indian cross-border insolvency matters, which are presently governed by Sections 234 & 235 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] does not provide sufficient and comprehensive legal framework to deal with different types of matters.[i] In order to smoothen the process of cross-border insolvency by increasing the cooperation between the domestic and the foreign courts, and domestic and foreign insolvency professionals, the Insolvency Law Committee[ii] has proposed a draft law which is in consonance with UNCITRAL Model Law of Cross-Border Insolvency, 1997 [“Model Law”]. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee[iii] and the N.L. Mitra[iv] Committee. However, the same has not yet taken the form of legislation. The authors seek to analyse the lacunae in the proposed draft with the hurdles faced by different countries in implementing the Model Law. Urge For A Comprehensive Framework The provisions of IBC regarding cross-border insolvency require bilateral agreements with other countries and issuance of request letters to foreign courts leading to delay and uncertainty. Uncertainty further lies with the implementation of bilateral treaties as well because of varying provisions with different nations, which escalates the burden of Judiciary. Till date neither India has any bilateral agreement with any country, nor there exists any specific provision under the Code of Civil Procedure, 1908 for enforcing foreign insolvency orders (the extant general provisions to recognize and implement foreign judgments and orders on a reciprocal basis given in the Code of Civil Procedure shall apply to insolvency proceedings as well in the interim). A robust framework to deal with cross-border insolvency will lead to ease in doing business resulting into increase in the entry of foreign companies and investment. Hurdles & Lacunae In The Proposed Draft The Model Law provides a framework only for individual companies and not for enterprise groups. With the increase in financial integration in the world and increasing multinational companies, the present model framework is expected to have limited applicability. It is pertinent to note that Part III of the IBC has not been yet notified. This restricts the application of Model Law to corporate debtors only and not to partnerships and individuals. Initially, Singapore had also followed a similar approach. However, in the UK and US, the application of the law is not restricted to corporate debtors. The proposed draft allows the authority to refuse to take action if it is of the opinion that it is manifestly contrary to public policy. A similar approach has been followed by all the other jurisdictions as well. The proposed draft uses the term ‘manifestly’ in order to narrow down the ambit of ‘public policy’. In the absence of any guidelines to exercise this discretion, the same becomes quite vague and gives a lot of discretion to the authority, which indicates a need to monitor its application by NCLT. Section 375(3) (b) of the Companies Act, 2012, deals with the insolvency of Unregistered Companies, which may include in its ambit foreign companies as well. According to this provision, an unregistered company may be wound up if it is unable to pay its debts. In the US, Section 220 of the Companies Act, 2006 (US), deals with the insolvency of all the types of enterprises. However, in the UK there is no such provision and insolvency of every type of enterprise is governed by the Insolvency Law only. This multiplicity of provisions leads to the duplicity of regimes and confusion reigns. There is a need to harmonize these sections by introducing necessary amendments to bring all the insolvency proceedings under a common Section 17 of the proposed draft allows the tribunal to declare moratorium (a legal authorization to debtors to postpone payment) in respect of foreign main proceedings. A foreign main proceeding means a foreign proceeding in the country where the debtor has the center of its main interests, such as its headquarters or its place of incorporation. A foreign proceeding is “non-main” proceeding if it is filed where the debtor has only an establishment or place of operation. The applicability of Section 17 of the proposed draft to foreign non-main proceedings is still a question. Moreover, if not, the committee has not given satisfactory reasoning for the same. The draft proposes to provide foreign representatives with direct access to domestic courts. Here one major issue is that India does not allow foreign lawyers and law firms to practice in India.[v] However, the Committee has proposed that foreign representatives similar in nature to insolvency professionals may form a separate class of professionals. The committee recommended the adoption of the Model Law on the principle of reciprocity. It means that Indian Courts will recognize and execute the foreign court’s judgment, only if that foreign country has adopted similar legislation or entered into a bilateral agreement. However, with subsequent economic development in future and the successful experience of the Model Law’s implementation, this requirement may be withdrawn. Furthermore, neither the US nor the UK has such a requirement of reciprocity. Such provision would limit the application of the Indian law on cross-border insolvency

IBC Ordinance; Home Buyers to be Treated as Financial Creditors [Riya Goyal] The President has recently given his nod to promulgate an ordinance amending the insolvency law, recognising homebuyers as financial creditors to real estate developers. This settles a long drawn controversy created by various conflicting court decisions regarding the status of homebuyers as being financial or operational creditors, which was further deepened by the IBBI issuing a claim form for “creditors other than financial or operational creditors”[1] To understand the implications of this ordinance, it is pertinent to first understand the meaning of financial and operational creditors. Section 5(8) of the Code defines ‘financial debt’ to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and inter alia includes money borrowed against payment of interest, etc., As per earlier interpretations of the definition, the contract between the real estate developer and the homebuyer were seen as simple sale and purchase agreements  and not as a ‘financial debt’. The only exception to this view was the  assured return scheme contract, in which there was an arrangement wherein it was agreed that the seller of the apartments would pay ‘assured returns’ to the home buyers till possession of property was given.[2] However such judgments were given considering the terms of the contracts between the home buyers and the seller and were fact specific, thus no consistency existed. Further Section 5(20) of the Code defines operational debt as “debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority”. In relation to this the NCLT in Col. Vinod Awasthy v. AMR Infrastructure Ltd. (Principal Bench-Delhi)[3] had ruled that, notwithstanding the presence of an assured return clause, a purchaser of a flat cannot be treated as a provider of ‘goods’ or ‘services’ to the builder and therefore, does not qualify as an ‘Operational Creditor’ and cannot initiate Insolvency Process in that capacity. This Non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors may be a cause for worry since it deprives them of, first, the right to initiate the corporate insolvency resolution process (“CIRP”), second, the right to be on the committee of creditors (“CoC”) and third, the guarantee of receiving at least the liquidation value under the resolution plan.This puts into jeopardy the future of millions of homebuyers in a situation where Delay in completion of underconstruction apartments has become a common phenomenon. the records indicate that out of 782 construction projects in India monitored by the Ministry of Statistics and Programme Implementation, Government of India, a total of 215 projects are delayed with the time over-run ranging from 1 to 261 months.[4] To resolve this issue a committee was constituted under the Corporate Affairs Ministry to  review the various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders,it was evident  that the amounts so raised are used as a means of financing the real and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. This could be covered under Section 5(8)(f)of the Code, which is in the nature of residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing.” An example has been mentioned in the entry itself i.e. forward sale or purchase agreement. Though a forward contract to sell product at the end of a specified period is not a financial contract. It is essentially a contract for sale of specified goods, however if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f)[5]. Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8). This demonstrates eminent common sense and appears to be a correct application of the concept of ‘time value of money’. It recognizes that a purchaser of a real estate unit is under no obligation to pay a substantial amount of money as down-payment if the possession of the unit is not likely to be handed over to him in the near future. In that scenario, the builder would have to arrange finance from independent sources for the development of the project. This would not only require collateral/security but involve imposition of extremely onerous conditions, including but not limited to a relatively exorbitant rate of ‘interest’. Simply put, a bank lending money to the builder, needless to state, would qualify as a ‘Financial Creditor’ and entitled to all the rights emanating from such an arrangement under IBC, including the right to initiate insolvency process under IBC, in case of a default in repayment of debt. From that viewpoint, if the builder succeeds in inviting funds from an individual purchaser, as opposed to a Bank, on much more favorable terms, in that case – it does not stand to reason as to why that individual purchaser should not be entitled to similar protection as a Bank, when it is essentially serving the same purpose. Any other view discriminates between an individual purchaser of a real estate unit and the Bank, and to the former’s detriment. It also needs to remembered that the purchaser of a real estate unit under such an arrangement is parting with a huge amount

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