IBC, Corporate laws

1. Financial Institutions and IBC
Ms. Hiral Mehta Kumar
Assistant Professor
National University of Study and
Research in Law, Ranchi

2. Introduction
• It is a fresh breeze of value – added economic
reforms
• Freedom from the sluggish legal regime of BIFR
and SICA
• Awarded Global Restructuring Review Award
for the Most Improved Jurisdiction in
restructuring and insolvency regime.
• Has already witnessed plethora of amendments
and judgments in a short span of time.

3. IBC and FIs
• Provision for Financial Institution: S. 3(14)
• Financial Service Providers and Financial
Services: S. 3(7) and S.3(8)
• Proceedings cannot be initiated against NBFCs.
• Reason: to prevent triggering of systematic risks
in the financial markets

4. NCLT
• DLF Phase – IV Commercial Developers
Limited and others
• Ambiguity has been removed by NCLAT by
dispensing with the requirement of CoC

5. Pre – Insolvency Process allowed
• Insertion of Section 12 A by Second Amendment
in 2018: allows withdrawal of proceedings,
provides a possibility for one – time settlement
helping recover more dues.

6. Disparity Done Away With
• Standard Chartered Bank v. Satish Kumar
Gupta, Resolution Professional of Essar Steel &
Ors., the NCLT has held that the financial and
operational creditors must be treated similarly,
i.e., be given the same percentage of haircut; and
discrimination amongst financial creditors on
the basis of existing priorities or security interest
is not permitted in the resolution plan.

7. Reorganisation
• The 2019 amendment to the code provides a new
Explanation to the definition of resolution plan to
clarify that a resolution plan seeking the insolvency
resolution of corporate debtor as a going concern
may include the provisions for corporate
restructuring, including by way of merger,
amalgamation and demerger.
• These reorganisation structures will now not fall
foul of the ‘going concern’ requirement of the IBC
and also enables reorganisation of businesses
through schemes for better value maximisation.

8. • Arcelor Mittal Case: 14 days directory which
further tightens the noose.
• Another interesting feature of the 2019
amendment is that the insolvency resolution
process of a corporate debtor shall not extend
beyond 330 days from the insolvency
commencement date - such timeline will include
the time taken in legal proceedings, in order to
prevent undue delays in the completion of the
CIRP.

9. • If the CIRP is not completed within the
timelines, then the corporate debtor will have to
be mandatorily liquidated. Another change
sought to be introduced is where pending CIRP
proceedings have extended beyond 330 days, the
same will have to be completed within 90 days.
This is, however, in contrast to the 730 days that
Essar Steel case has recently completed.
• It also seeks to protect financial creditors who
dissent to the resolution plan, and shall be
eligible to be paid at liquidation value of their
debt.

10. 2017 amendment
• The Code allows the insolvency professionals, vide
the 2017 amendment, to sell the movable or
immovable property of the debtor in case of
liquidation.
• It prohibits the insolvency professional to sell this
property to any person who is ineligible to be a
resolution applicant.
• The 2017 amendment inserted a provision to specify
that a person contravening any provisions of the
Code, for which no penalty has been specified, will
be punishable with a fine ranging between one lakh
rupees to two crore rupees.

11. • Almost two – thirds of the financial creditors
find IBC to be a convenient mechanism for
dispute resolution in a survey conducted by
PWC. The RBI, on 12 February 2018, ordered
lenders to initiate bankruptcy proceedings
within 180 days of default on a single payment.
• ARCs on the all – time highs as defaulting
promoters need to fix defaults
• Personal Guarantors of Corporate Debtors
within range w.e.f December 1, 2019

12. The Deterrence Effect
• Fear of losing companies has pushed promoters into one time
settlement under section 12A of the Code.
• Data from IBBI shows that financial creditors have been able
to realize 25% of their claims which has increased to 90% in
quarter ending December 2018.
• The data further shows that 142 cases have been closed and 63
withdrawn for a settlement under Section 12A of the code.
• Till September 2019, the number has risen to 119 withdrawals.
As per the IBBI report, almost 2.02 lakh crores of debt
pertaining to 4,452 cases was realized at pre-insolvency
proceedings, due to the mere fear of the code.
• Given this, CRISIL estimates the banking sector’s gross NPA
dropped to ~10% by March 2019, as compared to a previous
11.5% at the end of fiscal 2018.

13. • The Supreme Court in Dharani Sugar and
Chemicals Ltd. vs. Union of India has quashed the
RBI circular dated 12 February, 2018, which was
meant to speed up the resolution process.
• This now shifts the onus upon the banks for timely
revival of stressed assets, although mechanisms
under IBC continue to come to their rescue.
• This is the process of elimination and requires the
financial institutions to beware. Stringent norms,
elimination processes and deterrence have led to the
success of IBC.
• The financial institutions must now bring the
defaulters to book within timelines, creating a more
responsible environment and beneficial for
corporate debtors too.

14. Conclusion
• The legislature has been quick to amend the loopholes
and lacunae in the newly founded legislation.
• The judiciary has also played a key role in rapidly
developing the jurisprudence surrounding the code. The
code has proven to be true to its spirit of ‘creditor in
control’ rather than ‘debtor in possession’.
• The IBC has been a revelation, both in its original and
(current) revised form; it is important to note that the
IBC has seen multiple changes since its inception, most
of which have been well directed.
• The fear of IBC has been generating a lot of investor
interest. The bankers have not been far behind and many
of them have considered portfolio trades or pre-
insolvency single asset resolutions (pursuant to the
circular dated 12 February 2018) in recent times.

15. • In an effort to hasten the resolution of bad loans, the
RBI tightened its rules to make banks identify and
tackle any nonpayment of loans rapidly.
• Lenders will identify incipient stress in loan
accounts immediately on default, by classifying
stressed assets as special mention accounts (SMA).
• If the principal or interest payment or any other
amount is wholly or partly overdue, the account will
be categorised as SMA-0 for one to 30 days, SMA-1
for 31-60 days, and SMA-2 for 61-90 days.
• Lenders will be required to report defaults on a
weekly basis. The regulation provides for a strict
180-day timeline for banks to agree on a resolution
plan in case of a default or else refer the account for
bankruptcy.

16. • The NCLAT has been criticized over allowing the
promoters of Sterling Biotech to regain its
control upon full payment of dues, which may
dilute the importance of the code and suppress
the deterrent theory.
• Financial institutions have gained a greater
control over their stressed assets and non –
performing assets after the advent of IBC.
• Sluggish corporate debtors have now been
transformed into responsible debtors suddenly.
• The legislature has for once displayed dynamism
with a great support from the Judiciary,
although there is a long way to go.

17. THANK YOU