India has recently extended the suspension of insolvency proceedings by another three months until March 25, as corporates are struggling to cope with the pandemic. While the measure is bound to lighten their burden, policymakers will need to plan to prevent the resolution process's snarl-up.
On March 24, 2020, the minimum threshold for default under Section 4 of the Insolvency and Bankruptcy Code was increased to Rs 1 crore to deter the triggering of insolvency proceedings against Indian companies. Moreover, the government introduced an ordinance to impose a blanket ban on initiating Corporate Insolvency Resolution Proceedings (CIRP).
The ordinance inserted Section 10A into the IBC, which prohibits debtors, financial creditors, and operational creditors for six months (extending up to one year) from initiating the CIRP under Sections 7, 9 and 10 for a default arising on or after March 25, 2020. Further, a proviso to Section 10A dictates that no application shall ever be filed to initiate the CIRP for a default occurring during the period. The entire essence of ensuring that the corporate debtor remains a going concern may get sabotaged.
The ordinance uses the term 'any default’, since its introduction, as arising due to the COVID-19 and the subsequent lockdown. Further, the proviso to Section 10A provides a perpetual prohibition against initiating the CIRP. This safe harbour allows corporate debtors to take advantage of and evade their liabilities and obligations. Besides, it is silent on the question of continuing debts and their treatment. A debt which arises in the lockdown period continues until after the suspension period. The question remains whether it comes under the purview of this protection or not.
Often hailed as one of the most significant reforms ever, the IBC process has undoubtedly cut down the legal process time. Significantly, in over 80 percent of the cases, a resolution has been achieved before the completion of the process.
With the IBC suspension in place, creditors and debtors are looking for alternate channels for restructuring debts and dealing with stressed assets. Section 230 of the Companies Act 2013 provides a scheme of arrangement between the members and the creditors, but it reverses the trend of ‘creditor-in-control’ under the IBC.
Further, the section requires the approval of three-quarters in value of creditors before the NCLT approves it; and this process usually takes a minimum of six-eight months. Therefore, certain modifications are needed to Section 230 to match the resolution mechanism's efficacy under the code.
It would be timely to consider the pre-pack insolvency resolution: the process is a hybrid of in-court and out-of-court insolvency. An arrangement for restructuring between the company, creditors, and the potential buyer is arrived at before an insolvency professional's appointment.
The concept of pre-packs is yet to percolate into the Indian market formally. However, with the IBC moratorium, they could assume a central role in the resolution process. The key advantages of pre-pack insolvency are that it is less time consuming, cheaper, and eases the burden on the NCLT and the NCLAT.
However, the biggest challenge posed by pre-packs revolves around transparency and accountability. The negotiations between the creditors and investors take place in private as opposed to the open-bidding regime under the CIRP.
Though the Companies Act provisions apply to companies in India with foreign investment, there is no particular recourse for foreign creditors. In such a scenario, foreign investors might rely on the Bilateral Investment Treaty (BIT) claims. Most the BITs have a sunset clause that makes it possible for investors to bring claims under the BITs for a period of 15-20 years.
In particular, a clause on the Fair and Equitable Treatment (FET) provided under such investment treaties can offer international investors a mechanism to bring claims against Indian companies. As such, the clause is one of the most invoked in investment treatment arbitrations.
Since the IBC was a legal framework based on which foreign creditors entered the Indian market, a tribunal may find India to have breached the FET protection. However, India can cite economic necessity as an argument, as was held in the LG&E Energy Corporation v Argentine Republic case.
Since the government's effort has been towards increasing the ease of business, it would be prudent to establish mechanisms that enable interested parties to conclude proceedings speedily. India's Competition Act has already introduced a green channel mechanism, whereby approvals can be obtained swiftly for mergers and acquisitions, even for IBC cases.
India now has to broaden the framework for a speedy resolution of stressed assets by creating a dedicated adjudication process and providing a blend of consultation and a negotiated settlement towards this end.