CORPORATE DEBT RESTRUCTURING – “A MECHANISM FOR THE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016”

 

By Nirmal Behera

Madhusudan Law College, Cuttack, India

Email- nirmalbhr6@gmail.com

 

ABSTRACT- The objective of this article is to relate the concept of Corporate Debt Restructuring, to the resolution mechanism for insolvency envisaged by the Insolvency and Bankruptcy Code, 2016 (IBC) and to the arrangement and compromise the mechanism under the Companies Act, 2013. To explore the methods and ways of corporate debt restructuring and application of those methods to the IBC’s debt resolution process is the main intention of this article. To distinguish between the corporate debt restructuring process and the corporate debt resolution process under the IBC is the effort. A new proposal trending after the pandemic of Covid-19 to address the issue of delays of insolvency resolution and the decreasing matters of insolvency resolution applications in the NCLTs, due to suspension of sections 7, 9, and 10 under IBC, 2016, namely Pre-packed schemes have also been discussed.

 

INTRODUCTION- After the enactment of The Insolvency and Bankruptcy Code, 2016(IBC), on 28^th May 2016, the laws relating to reorganization and insolvency resolution of corporate persons in India are consolidated and codified. Prior to the existence of IBC, there were multiple laws relating to insolvency and bankruptcy for companies, partnership firms, and individuals. The relevant laws were Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to the Banks and Financial Institutions Act, 1993, the SARFAESI Act 2002, and the Companies Act, 2013. These laws had several fora such as Debt Recovery Tribunal, Board of Industrial and Financial Reconstruction (BIFR), National Company Law Tribunal(NCLT) and their respective Appellate Tribunals. After the enactment of IBC, 2016 the forums are limited to NCLT and DRT as adjudicating bodies.

 

Chapter II and Chapter IV of the IBC Code provides for resolution process for the insolvency of the corporate debtors and fast track corporate insolvency the resolution process for the corporate debtors respectively. The code mandates to be time-bound, that is 180 days maximum from the date of the admission of  the corporate insolvency resolution application and may be extendable by 90 days on filing an application by the resolution professional  to the Adjudicating Authority(NCLT in this case) of the concerned jurisdiction (PROFESSIONAL'S, 2020). However, the resolution professional have to submit proper reasons to the Adjudicating Authority, that such extension was necessary.

 

CORPORATE DEBT RESTRUCTURING- This term consists of three words, a) Corporate, b) Debt, c) Restructuring. Per se from the term, it is supposed to mean an adjustment in the outstanding debt structure of a company with respect to its creditors. Such a process can be achieved through deliberate negotiations of the company with its creditors. The most obvious purpose for such debt restructuring is often to avoid bankruptcy. The evident effect of such debt restructuring is reductions in the debt as well as in interest rates of debt and an increase in the time limit to pay off the debt of the creditors. Generally, the companies facing financial hardships and having distressed assets opt for such debt restructuring schemes with the consent of their creditors and shareholders. The objective outlined by the Reserve Bank of India (RBI) in the Annexure of Revised Guidelines on CDR mechanism is to ensure timely and transparent mechanism for restructuring the corporate debts and minimizing the losses to the creditors and stakeholders (India). Such schemes of debt restructuring can also be termed as arrangement or compromise. S.230 of the Companies Act, 2013 confers the power on the National Company Law Tribunal to allow or sanction a compromise or arrangement, among the creditors and members or among the members of a company, as the case may be.

 

Corporate Restructuring can proceed on mainly two bases -

1-      Asset, 2- financial.

Asset based debt restructuring can be elaborate as Mergers & Acquisition, Demerger, Divesture. Financial based debt restructuring includes Internal Reconstruction, External Reconstruction, Buy- Back, and Conversion of Debt into Equity.

 

MERGERS & ACQUISITION- Mergers are also known as Amalgamation of companies. When two or more companies are joined to form a new company or one company is absorbed into another company, it is known as a merger. The resultant company comes into existence with all the property, rights and powers, and has all the duties and obligations of all the merged companies in it. Acquisition happens by the sale of shares, undertakings, and assets from the transferor company to the transferee company. It is also called a take-over. The transferee company acquires a portion of a business of the transferor company that is the portion of assets and liabilities of the transferor company.

DEMERGER- A scheme of division or splitting up of a company into two or more separate legal entities is called demerger. The shareholders of the demerged company are allocated the shares of the resultant company as well in a fair exchange ratio.

DIVESTURE- It is the process of selling a part of the company’s assets or subsidiary, investments to get money or cash.

INTERNAL RECONSTRUCTION- It includes alteration of share capital, variation in share holder’s rights, reduction of share capital, the surrender of shares, etc. It relieves the company from its debts by means of negotiations with the creditors.

EXTERNAL RECONSTRUCTION- It occurs when a company liquidates itself for the purpose of selling its assets and liabilities to a newly formed company.

BUY-BACK OF SHARES- When a company repurchases its shares from its shareholders, it is called a buy-back of shares. It helps the company to reduce the outstanding number of shares in the market and maintain its earnings per share even during a recession.

CONVERSION OF DEBT INTO EQUITY- When the Companies default their loans with respect to their creditors and they seek to reduce their debts or interest rate, both creditors and the corporate debtor may negotiate and settle for a restructuring of debt through the conversion of some amount of outstanding debt into the equity shares that the creditors acquire in the corporate debtor’s share capital.

 

 

CORPORATE INSOLVENCY RESOLUTION PROCESS- As the term suggests, it is a resolution process for insolvency after the declaration of a corporate body as insolvent. Unlike corporate debt restructuring, which can be initiated even the company has not defaulted but running through some financial hardships, insolvency resolution for a corporate body, as provided in Chapter II under the Insolvency and Bankruptcy code, 2016 can only be initiated through filing an application in the Adjudicating Authority in the case of default of a company to pay its outstanding debt, which may be an operational debt or a loan default. Such an application can be filed by either the creditor or a corporate person. Thus, the corporate Insolvency Resolution Process may be said, to be a smaller aspect of Corporate Debt Restructuring.

 

The insolvency resolution plan under the IBC, 2016 may also include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger. The defaulter aspect of a corporate body for restructuring of its debts is separated into the IBC from the previously existing laws relating to Corporate Insolvency having one Adjudicating Authority which is National Company Law Tribunal in case of corporate insolvency.

 

ADVANTAGE OF INSOLVENCY RESOLUTION PROCESS UNDER IBC, 2016 -

 

The resolution process for insolvency is time-bound and thus no corporate debtor can delay to pay back the creditors their due, and prevent them to cause more losses in the name of corporate restructuring. Any delay of more than one hundred and eighty days shall result in mandatory winding up and liquidation of the corporate debtor according to IBC. Where under section 230 in Chapter XV of the Companies Act, 2013 provides for the “Power to compromise or make arrangements with creditors and members” and section 231 provides for “Power of Tribunal to enforce compromise or arrangement” and section 232 to 234 provides for the process of Mergers and Amalgamation of different kind of companies, but in section 12 in Chapter II of the Insolvency and Bankruptcy Code, 2016 provides for “Time-limit for completion of insolvency resolution process”. The time limit provided in section 12 of IBC is one hundred and eighty days from the date of admission of the application to initiate the resolution process for insolvency. The Court may extend the time period for not more than 90 days after getting an application from the insolvency resolution professional if it is satisfied that the subject matter of the case is such that the resolution process for insolvency cannot be completed within one hundred and eighty days. The IBC, 2016 mandates that the resolution process for insolvency of the corporate entity shall be completed within three hundred and thirty days from the insolvency commencement date including any extension of the period granted under section 12 (amendment of 2019, w.e.f. 16-08-2019).

 

The IBC also provides for Fast Track Corporate Insolvency Process in section 55 of Chapter IV for some specific corporate debtors whose assets and income are below a certain level, which is notified by the Central Government from time to time. Further, section 56 provides for the time limit for the completion of the fast track corporate insolvency process as ninety days. Such time limit can be extended beyond ninety days if the resolution professional files an application to the Adjudicating Authority if instructed to do, by a resolution passed by the committee of creditors by not less than 75 percent of voting share. Such extension permitted beyond ninety days shall not exceed forty-five days.

 

An explanation under Section 26, inserted by Act 26 of 2019, S.2 (w.e.f. 16-08-2019) of the IBC, 2016 clarifies that the resolution plan under the scope of IBC may include the way of merger, amalgamation, and demerger as well. Thus, the IBC also encompasses the very important domain of Corporate Restructuring for the proper application in the resolution process for insolvency.

 

Thus, the IBC, 2016 compliments the Companies Act, 2013 in the aspect of speedy resolution of corporate debts including corporate restructures in the pursuance of any arrangement or compromise scheme.

 

RECENT REPORT STUDIES-

 

In the year 2020, nearly 398 Corporate Insolvency Resolution Processes (CIRPs) of real estate cases, which is about 50% of total real estate CIRPs have been closed successfully under IBC. Home Buyers can file cases in both Consumer Court and NCLT, invoking RERA and IBC respectively (moneycontrol, 2021).

 

Nowadays due to the impact of Covid-19, sections 7, 9, and 10 are been suspended, that is the initiation of the resolution process for insolvency of the corporate person for financial creditors, operational creditors, and corporate applicants are been suspended. Hence, there is a significant decrease in the numbers of CIRP matters admitted and resolved (Rajesh Kumar Gupta, 2021). To address this issue, there is an ongoing concept of Pre-Packed Schemes under IBC. The pre-packed schemes are basically pre-determined schemes of corporate debt restructuring. It is an arrangement under which the corporate debtor and the creditor negotiate the sale of the whole or any part of the company’s assets or business prior to the appointment of an insolvency professional as administrator. Such a plan would have already accepted by the creditors and hence there will be no difficulties to get approval from NCLT as it will bypass various requirements and legal interventions by NCLT. The benefits of such pre-packed schemes would be-

a) Better returns to creditors, b) saving time money, and resources, c) surety of the outcome; d) it would reduce the burden on NCLTs (2020). The Ministry of Corporate Affairs has invited comments on the pre-packed schemes proposal and if the proposal is accepted, the pre-packed schemes shall become part of the IBC. Though there are no statutory references for the term pre-packed schemes, the proposal aims to enhance the efficiency of the existing framework of IBC and cut the cost and time for insolvency resolution (Chaturvedi, 2021).

 

CONCLUSION- Corporate Debt Restructuring is a broader term and encompasses all kinds of structural changes to a corporate body, to the extent of its dissolution and reconstruction into a new company. But corporate insolvency resolution under the Insolvency and Bankruptcy Code, 2016 is limited to the portion of the debt restructuring in order to prevent a company to reach the threshold of  bankruptcy. To initiate a resolution process for insolvency it is mandatory for a corporate person to either become the default of its dues to a creditor. A failure to reach a deal among the creditors and corporate debtor within the prescribed time period in the IBC shall mandatorily result in the winding up and liquidation of the corporate debtor, which is not the case in the general corporate debt restructuring. In Corporate Debt Restructuring, corporate the default of debt to any creditor is not necessary to initiate a scheme of arrangement or compromise. Although, both the company and the creditors or class of creditors, members or class of members can make an agreement as to the time limit for the end of the restructuring process within the scheme of arrangement supervised by the National Company Law Tribunal, expiration of such time limit would not render the company a bankrupt title or lead to its liquidation. It will be right to say that the insolvency resolution process of the corporate person under IBC, uses Corporate debt restructuring as a mechanism of arrangement or compromise to resolve the issue of insolvency of the corporate bodies.

 

 

 

Works Cited

Chaturvedi, Arpan. 2021. India Proposes Pre-Packaged Insolvency Resolution Option. Bloomberg. [Online] January 8, 2021. [Cited: 01 16, 2021.] https://www.bloombergquint.com/law-and-policy/india-proposes-pre-packaged-insolvency-resolution-process.

India, Reserve Bank of. Notifications/pdfs/67158.pdf. CDR - Reserve Bank of India. [Online] [Cited: 01 16, 2021.] https://m.rbi.org.in/upload/notification/pdfs/67158.pdf.

2020. India: Pre-Packaged Deals In IBC. mondaq. [Online] May 14, 2020. [Cited: 01 2021, 16.] https://www.mondaq.com/india/insolvencybankruptcy/933504/pre-packaged-deals-in-ibc.

moneycontrol. 2021. Over 50% of real estate cases under insolvency and bankruptcy code closed in 2020. moneycontrol. [Online] January 8, 2021. [Cited: 01 16, 2021.] https://www.moneycontrol.com/news/business/real-estate/over-50-of-real-estate-cases-under-insolvency-and-bankruptcy-code-closed-in-2020-6320321.html.

PROFESSIONAL'S. 2020. Time Limit for completion of insolvency resolution process(Section 12). The Insolvency and Bankruptcy Code, 2016 (31 of 2016) BARE ACT. Delhi : PROFESSIONAL BOOK PUBLISHERS, 2020.

Rajesh Kumar Gupta, Chief General Manager, IBBI. 2021. Revoke IBC suspension to resolve stressed assets. THE NEW INDIAN EXPRESS. [Online] January 15, 2021. [Cited: 01 16, 2021.] https://www.newindianexpress.com/opinions/2021/jan/15/revoke-ibcsuspension-to-resolve-stressed-assets-2250366.html.