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Upfront cash recovery

>=35% of the Resolution Debt Amount

Measured as a percentage of the total financial creditor claims admitted by RP

Upfront cash recovery shall be defined as the payment proposed to be made to both financial creditors as well as operational creditors at the time of Closing of the Transaction or signing of the Definitive Agreements.
Performance Bank Guarantee (PBG) / Unconditional letter of commitment from Bank / cheque will need to be submitted by the RA, which shall be for the higher of the amount prescribed as Performance Bank Guarantee in the Process Document or the proposed Upfront Cash amount.

"Net Present Value" of
continuing debt
(inclusive of upfront
cash payment)

>=70% of the Resolution Debt Amount

Measured as a percentage of the total financial creditor claims admitted by RP

This shall be computed by discounting the future cash flows to be paid to financial creditors by following a tiered discounting rate. Upfront cash payment, if any, shall be considered as part of NPV without applying any discount.
The discounting rate shall vary depending on the age bucket in which the cash flow falls.
The age buckets that shall be considered are as
follows:
· 0-5 years: 8%
· >5 years up to 10 years: 10%
· >10 years up to 15 years: 15%
· > 15 years: 30%
Note: - Intermediate values scored by linear interpolation

Discounted Value of Cash Flows from lender's equity and equity-like instruments

100% (maximum amongst all resolution)

Measured as a % of maximum value amongst all resolution plans. Cash flow from equity is assumed to be all in FY 21 (which is ten discounted).
Cash Flow from equity is calculated as per following formula:
% equity stake proposed for lenders * [(Projected FY 21 EBITDA as per resolution plan*Multiple) - outstanding debt in FY 21 - Minority interest (if any) + cash & cash equivalents]

Equity upside for the financial creditors

>=10% of the Resolution Debt Amount

This shall be computed based upon the amount of equity infused and factoring the extent of shareholding proposed to be offered to
financial creditors.

Equity infusion for
improvement of
business operations

>=15% of the Resolution Debt Amount

This shall be computed as the actual cash proposed to be infused by the RA in the Corporate Debtor for improvement of business perations in the form of Equity or Quasi-Equity within first 6 months from the date of signing of the Definitive Agreements plus discounted cash flows for infusion beyond 6 months, but up to 3 years, at a discount rate of 8% p.a. If the infusion is beyond 3 years, it will not be considered for scoring purposes.
Equity shall be defined as investment by way of Common Shares. Quasi equity shall mean fund infusion by RA in the form of instruments, other than common shares, which meet the following criteria:
· Sub-ordinate to the secured loans
· Non-interest bearing
· No redemption without the consent of secured financial creditors
For the parameter to be considered in scoring, the RA (as defined below) has to clearly provide all the details relating to the sources of
available funds being used for the proposed equity infusion.

Financial strength of resolution applicant/group (group net worth, revenue, EBIDTA)

Debt to EDITDA Ratio - Ratio of net debt to EBITDA, as per audited financial statements for FY 17 - Total Sales Turover, as per audited financial statements for FY 17
- Total investment proposed (including upfront cash and capital infusion) / Fund size (from which investment is proposed, as per the last audited financial statements)
Asset under Management - As per the last audited financial statement. Measured as a % of maximum value amongst resolution applicants

The financial strength of applicant would be important as the corporate debtor would need financial support for working capital and better utilisation of existing assets. The score will be awarded by COC based on presentation by resolution applicant along with documentary evidences.
For Strategic Investor - Debt to EBITDA ratio & Sales Turnover
For Financial Investor - Fund Size (from which investment is proposes) & Asset under management'

Reasonableness
of Financial
Projections and
feasibility of
honoring proposed
commitments

Confidence level on plan & projections, based on, but not limited to:
1. Asset Operations
2. Expension
3. Market Share
4. Synergies
5. Financing Plan

This shall be assessed based on various parameters including, inter alia, Sales, EBITDA, EBIT etc., and its Certainty / Likelihood / Feasibility / Eventuality of honouring proposed commitments.
This shall also refer to the reasonableness of the assumptions in the
business plan submitted by the RA and the assessment of risks and mitigations related to the implementation of the resolution plan including the plan for other stakeholders, viz. statutory authorities, employees and operational creditors.
An additional weightage of 10% on the amount arrived at after applying
quantitative parameters shall be assigned to this parameter.

Standing of Bidder / External Rating

Range: 0-10
(Based on the track record of the Applicant)

If multiple submitted, then highest rating considered.
If international rating submitted, then credit rating adjusted higher or lower as per difference in sovereign credit rating of country and India

This shall be assessed based on various parameters including, inter alia, external credit rating, turnover & asset under management (as applicable), collateral and adherence to financial Discipline / record of regulatory compliance.
The credit rating report should have been issued within the last 15 months from the date of submission of the resolution plan for the external credit rating to be valid for evaluation purposes.
India : CARE, ICRA CRISIL, Fithch / India Ratings
International: S&P, Moody's Fitch

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Upfront cash recovery >=35% of the Resolution Debt Amount Measured as a percentage of the total financial creditor claims admitted by RP Upfront cash recovery shall be defined as the payment proposed to be made to both financial creditors as well as operational creditors at the time of Closing of the Transaction or signing of the Definitive Agreements.

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I &B Code 2016 allows a creditor (financial/operational) of a Company under Section 7 and 9 of IBC and the Company ("Corporate Debtor") itself under Section 10 of IBC to file an application before the National Company Law Tribunal ("NCLT") to initiate Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor in case of default, that is non-payment of debt, of INR 1 Lakh (Rupees One Lakh Only) or above. In case of failure of submission of a viable Resolution Plan as approved by 66% majority of the Committee of Creditors ("COC") to revive or restructure the Corporate Debtor, an order of Liquidation of the Corporate Debtor, as a last resort may be passed by the Ld' Adjudicating Authority i.e. Ld' NCLT.

Since the enactment of IBC, a numerous application has been filed under I & B Code 2016 to initiate CIRP against the Corporate Debtors. IBC has been amended time and again in order to simplify the process, remove any fallacies and promote ease of doing business.

However, I&B Code 2016 for the longest time did not contain any provisions that allowed withdrawal of the application from the NCLT for initiation of CIRP. The only provision that was available was under Rule 8 of The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016, wherein the NCLT could allow withdrawal of application on a request made by the applicant before its admission. Since the scope of these provisions is limited till the stage of acceptance of the application, hence it did not prove to be beneficial in this aspect.

Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP (Civil Appeal No. 9279 of 2017) was first of its kind matter, in which the Hon'ble Supreme Court allowed a settlement between the corporate debtor and the creditors using its inherent powers under Article 142 of the Constitution of India, which states that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it. The Apex court set aside the order of the Ld' NCLAT, whereby the Appellate Authority refused to exercise its inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 that provides 'inherent powers' to the Tribunals to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of process of the Tribunal. The same stand was subsequently taken by the Hon'ble Supreme Court in the matters ofMothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited (Civil Appeal No. 9286/2017) and thereafter in Uttara Foods and Feeds Private Limited v. Mona Pharmachem (Civil Appeal No. 18520/2017), wherein the Apex Court held,

" We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilize its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached."
The Court also ordered a copy of the order to be sent to the Ministry of Law & Justice.
Needless to say, the Promoters of a Corporate Debtor would not want to lose control over the affairs of the company, as it would have an immensely adversarial effect on their interests. In addition to this, keeping in mind that if a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted and not just the applicant creditor and the debtor, the Insolvency Law Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission if the CoC approves of such action by a voting share of ninety percent.

In view of the above, Section 12A was inserted w.e.f 06.06.2018.

The Report of the Insolvency Law Committee, published in March 2018, dealing with the issue of ' Withdrawal of CIRP Proceedings Pursuant to Settlement.' The ILC Report observed as follows:

"Under rule 8 of the CIRP Rules, the NCLT may permit withdrawal of the application on a request by the applicant before its admission. However, there is no provision in the Code or the CIRP Rules in relation to the permissibility of withdrawal post admission of a CIRP application. It was observed by the Committee that there have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP was granted. This practice was deliberated in light of the objective of the Code as encapsulated in the BLRC Report, that the design of the Code is based on ensuring that "all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution."

Thus, it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.

On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post-admission if the CoC approves of such action by a voting share of ninety percent..."
Section 12A reads as follows:
"The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety percent. voting share of the committee of creditors, in such manner, as may be specified."

Section 12A was to be read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which provided that an application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional before issue of invitation for expression of interest under regulation 36A.

Hence, on a plain reading of the above provisions, it was evident that an application filed under Section 7,9, and 10 of IBC could only be withdrawn before the issue of invitation for expression of interest.

Can withdrawal application be made after expression of interest or receipt of Resolution Plan

In the matter of Navaneetha Krishnan v Central Bank of India, Coimbatore & Another [Company Appeal (AT) (Insolvency) Nos. 288 & 289 of 2018], the Hon'ble National Company Law Appellate Tribunal vide its order dated 09.08.2018, held:

Taking into consideration the fact that the 'resolution plan' was submitted on 178th day and on the next day i.e. 179th day the 'Committee of Creditors' decided to go for liquidation as 180th day was to be completed and order under Section 31 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'I&B Code') was required to be passed and in absence of any good reason for extension of time, we are not inclined to grant any relief.
However, in view of Section 12A even during the liquidation period if any person, not barred under Section 29A, satisfy the demand of 'Committee of Creditors' then such person may move before the Adjudicating Authority by giving offer which may be considered by the 'Committee of Creditors', and if by 90% voting share of the 'committee of creditors', accept the offer and decide for withdrawal of the application under Section 7 of the I&B Code, the observation as made above or the order of liquidation passed by the Adjudicating Authority will not come in the way of Adjudicating Authority to pass appropriate order.
Similarly, in Satyanarayan Malu v. SBM Paper Mills Ltd. [M.A. 1396/2018, 827/2018, 1142/2018, & 828/2018 in C.P. (IB)-1362(MB)/2017], NCLT Mumbai allowed withdrawal of CIRP application, when resolution plan was pending approval of the Ld' NCLT, after acceptance by CoC. Ld' NCLT allowed the one-time settlement made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.

However, it has been seen that the Adjudicating and the Appellate Authorities allowed the withdrawal of such applications even after issuing of invitation for expression of interest in various instances.

In the matter of Mr. Vimal Chandrunwal v. Brilliant Alloys Private Limited [MA/536/2018 in CP/582/IB/ CB/2017], NCLT, Chennai vide its order dated 01.11.2018, refused to admit the application filed by the RP for withdrawal of the application filed after the issue of invitation for EOI, stating that Regulation 30A envisages that an application for withdrawal under Section 12A shall be submitted to the RP before the issue of invitation for EOI under Regulation 36A. In view of the aforesaid, Ld' NCLT dismissed the application.

However, in this regard, the Hon'ble Supreme Court vide its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors., SLP [Civil No. 31557/2018] allowed a settlement and set aside the order of NCLT, Chennai stating that,
"...Regulation 30A must be read along with the main provision of Section 12A which contains no such stipulation. Accordingly, this stipulation can only be construed as directory depending on the facts of each case."
In addition, the celebrated judgment of Swiss Ribbons & Anr. v Union of India v Ors, given by the Hon'ble Supreme Court, the Apex Court while dealing with the question, "Whether Section 12A is violative of Article 14", referred the above order in Brilliant Alloys and reiterated the above position, stating that the Regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36A.

In view of the above rulings, Regulation 30A was substituted vide Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2019 ("Regulation 30A") w.e.f 25.07.2019, which inter alia provided:

"An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before the issue of invitation for expression of interest under regulation 36A."

The amendments made to Regulation 30A specified the process for withdrawal of applications before the constitution of CoC, after the constitution of CoC but before the issue of invitation for expression of interest, and after the issue of invitation for expression of interest, stating the reasons justifying withdrawal after the issue of such invitation.
Section 29A of the Code is not applicable while deciding on the withdrawal of application under Section 12A of the I&B Code 2016.
In Andhra Bank v. Sterling Biotech & Ors (08.05.2019 - NCLT - Mumbai), the Promoters approached the members of COC with an OTS. On discussion, it was decided that the COC shall put to vote the OTS and if it did not receive enough votes (90%), then a resolution plan submitted by ACG Associated Capsules Pvt. Ltd. would be put to vote and if it also did not receive enough votes, then a resolution for liquidation will be put forth. However, neither plan received requisite votes. Thereafter, a fresh OTS proposal was put to vote which received 90% votes, pursuant to which an application under Section 12A was filed. The application under Section 12A was rejected by Ld' NCLT on the grounds that, (i) the Promoter was ineligible under Section 29A to present a resolution plan and (ii) the OTS is also a type of resolution plan, which implied that the promoters were ineligible to present an OTS and file application under 12A. Hence, the NCLT ordered liquidation.

In an appeal filed before Hon'ble NCLAT against the aforesaid Ld' NCLT order in Shweta Vishwanath Shirke & Ors V The Committee of Creditors & Anr. [Company Appeal (AT) (Insolvency) No. 601 of 2019], passed on 28.08.2019, it was observed that Section 29A of the Code is not applicable for entertaining/ considering an application under Section 12A of the Code as the Applicants are not entitled to file application under Section 29A as 'resolution applicant'. Hon'ble NCLAT set aside the order of 'Liquidation' passed by the Adjudicating Authority and allowed the Appellant (who filed the application of Section 7 - 'Andhra Bank') to withdraw the application. As a result, the 'Corporate Insolvency Resolution Process' initiated against the 'Corporate Debtor' namely- 'M/s. Sterling Biotech Ltd.' was set aside subject to the payment of the amount as payable by the Promoters/Shareholders to all the stakeholders/financial creditors' operational creditors in terms of Section 12A of the Code as approved with 90% voting share of the 'Committee of Creditors'. Similarly, recently in the matter ofCafé D Lake Private Limited [IA No. 1113 of 2019 in CP (IB) No. 202/07/HDB/2018] passed on 10.01.2020 by NCLT Hyderabad, the resolution plans were received and rejected by the COC (consisting of the sole financial creditor), which then passed a resolution for withdrawal of CIRP and accept the OTS offered by the Corporate Debtor, and the application of withdrawal was allowed by the Adjudicating Authority.

What is pertinent to note here is that even though Section 29A of the Code restricts certain persons from submitting a resolution plan for the Corporate Debtor, however, in case of withdrawal of application under Section 12A, the applicability of Section 29A is nullified. Meaning thereby, when the COC approves the withdrawal of the application and accepts the settlement offered by the corporate debtor by 90% votes, in such a case the provision of section 29A restricting the old management to regain the control of the corporate debtor does not apply and the control and approval of COC trump the provisions of section 29A.

In the matter of Shaji Purushottaman V. Union Bank of India [Company Appeal (AT) (Insolvency)No. 921 of 2019] passed on 06.09.2019, the Corporate Debtor was willing to settle its claims with the Union Bank of India (Financial Creditor under Section 7 of IBC). Hon'ble NCLAT stated that the order of admission cannot be set aside, except where an application u/s 12A is filed, by settling the matter with all the Creditors with approval of 90% of the voting share of the 'Committee of Creditors' subject to filing of an application by 'Union Bank of India' for withdrawal of application u/s 7 of IBC. The Counsel appearing on behalf of the Union Bank of India submitted that the 'Resolution Plan' had already been approved by the 'Committee of Creditors' after taking into consideration the claim of the 'M/s. Edelweiss Asset Reconstruction Company Ltd(in whose favor guarantee was given by the 'Corporate Debtor').'

However, Hon'ble NCLAT allowed the Appellant to move an application u/s 12A for settling the claims of all the Creditors including the guarantors. In this regard, the Appellate Authority held,
"If an application u/s 12A is filed by the Appellant, the 'Committee of Creditors' may decide as to whether the proposal given by the Appellant for settlement in terms of Section 12A is better than the 'Resolution Plan' as approved by it, and may pass appropriate order. However, as such a decision is required to be taken by the 'Committee of Creditors', we are not expressing any opinion on the same."
Further, in Jai Kishan Gupta v. Green Edge Buildtech LLP and Ors. [Company Appeal (AT) (Ins) Nos. 969-970 of 2019], decided on 06.12.2019, the Hon'ble NCLAT referred to the judgment of Swiss Ribbons to hold that,
"...the Hon'ble Supreme Court has in the above para - 82 left discretion with the Adjudicating Authority to allow or disallow an Application for withdrawal or settlement. The last sentence of the paragraph states that "this will be decided after hearing of the parties concerned and considering all relevant factors on the facts of each case." Thus, the Adjudicating Authority has to consider all relevant factors on the facts of each case and to make a decision. Para - 83 of the Judgement in the matter of "Swiss Ribbons" has dealt with a decision being taken by COC under Section 12A and left the door open that if COC arbitrarily rejects a just settlement and/or withdrawal claim the NCLT, and thereafter NCLAT can set aside such decisions under Section 60 of the Code."
In view of the above, what can be seen and concluded is that the Adjudicating Authorities are allowing withdrawal of applications filed under IBC, not only after issuing an invitation of EOI but in some cases, even after receiving resolution plans. It is without a doubt, evident that such a withdrawal is being allowed for the maximization of assets of the corporate debtor. The Courts of law have, over time, distinctly upheld the importance of protecting the interests, not only of the creditors but also of the corporate debtor, wherever possible. It has been one of the most prominent opinions of the Courts that ordering Liquidation of a corporate debtor is to be treated as a last resort and should be avoided to the maximum extent possible.

A few persons possessing knowledge in this arena have raised questions in this regard, stating that such actions of allowing withdrawal results in waste of time and effort that has been invested during the whole CIRP period. However, it is pertinent to note here, that such flexibility may go a long way in protecting the value of the assets of the corporates and various stakeholders. The original promoters with vested interests in the companies are better aware of the nitty-gritty involved in managing their company and these provisions further uphold the notion with which IBC was enacted, that is, protection of interests of the stakeholders and maximization of the value of the assets of the corporate debtor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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nclt and nclat allow withdrawal of applications under section 12a of ibc deviating from regulation 30a

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a better chance at a settlement between parties given more importance

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NCLT And NCLAT Allow Withdrawal Of Applications Under Section 12A Of IBC Deviating From Regulation 30A, A Better Chance At A Settlement Between Parties Given More Importance - Insolvency/Bankruptcy/Re-structuring - India

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I &B Code 2016 allows a creditor of a Company under Section 7 and 9 of IBC and the Company itself under Section 10 of IBC to file an application before the NCLT to initiate CIRP against the Corporate Debtor in case of default, ...

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Featured assets on Myresolutionplan.com 

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Featured assets on Myresolutionplan.com 

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Google Data Studio turns your data into informative dashboards and reports that are easy to read, easy to share, and fully customizable.

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The so-called pre-packaged insolvency procedure, or pre-pack, will also help ease the burden on bankruptcy courts, once the changes to the Insolvency and Bankruptcy Code are approved by Parliament.

"Pre-packs are probably intended to lower the burden of courts and effectively come out with an alternative solution," said Shardul Shroff, executive chairman at law firm Shardul Amarchand Mangaldas and Co.

A huge backlog of cases at National Company Law Tribunal (NCLT) benches have stretched resources and led to delays in resolution of cases. The current covid-19 crisis has only added to the delays. A pre-pack resolution, experts say, will help shorten the long-winded court process.

It will also help reduce uncertainty on whether the stressed assets will draw interest from bidders and even if they do so, whether lenders will accept their bids.

Till December, bankruptcy courts in India admitted 3,254 companies for resolution. Of this, resolution plans have been approved for 190 cases; 246 cases have been closed on appeal or review and liquidation proceedings have begun in 780 cases. "Pre-packs appear to be an attempt to see whether these cases can be settled and subjected to an order of NCLT as binding on parties," said Shroff.

The plan to bring pre-packaged IBC has been in the works for some time and experts said the current crisis may be a good time to implement it. The ministry of corporate affairs had in April last year sought comments on pre-packaged resolutions from interested parties.

An 11-member panel, headed by former Securities and Exchange Board of India (Sebi) chairman U.K. Sinha, is examining the issue to suggest a suitable framework. It is examining three modes-pre-packaged insolvency resolution, pre-arranged insolvency resolution and pre-arranged sale.

To be sure, not everyone is convinced pre-packaged resolutions are the way to ease the burden on bankruptcy tribunals. "What would really help is if the government increases the strength of NCLT benches to tackle the growing number of cases, and that would be more effective than bringing new legislation," said Karan Kalra, founder of Bombay Law Chambers.

Kalra said there are provisions in the IBC that allow for quicker resolution of cases.

"Take Section 12A for instance, which allows the case to be withdrawn by consent of lenders. One can use this if there are quicker solutions or deals available outside the IBC process after it has been admitted," he said, adding that while a pre-packaged deal increases certainty, it does not necessarily lead to value maximization, the core principle of the bankruptcy code.

The practice of pre-packs was first developed in the US, following the enactment of the Bankruptcy Reform Act of 1978. Soon after its introduction, it became so popular that in 1993, nearly one-fifth of all public bankruptcies were pre-packaged. Much like in the US, the practice of pre-packs is widespread in the UK, Netherlands, France and Germany.

Sitesh Mukherjee, partner at law firm Trilegal, believes a pre-pack may not work in the Indian context as firms are largely promoter-driven. "Only those bidders who are able to view the company from the promoters' eyes will have an advantage. There is a huge amount of asymmetry in terms of transparency and disclosures," said Mukherjee.

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Govt plans pre-packaged IBC deals to ease caseload

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The so-called pre-packaged insolvency procedure, or pre-pack, will also help ease the burden on bankruptcy courts, once the changes to the Insolvency and Bankruptcy Code are approved by Parliament. "Pre-packs are probably intended to lower the burden of courts and effectively come out with an alternative solution," said Shardul Shroff, executive chairman at law firm Shardul Amarchand Mangaldas and Co.

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By Ashish Rathi

The Union Cabinet has decided to put the Insolvency and Bankruptcy Code, 2016 (IBC) in abeyance by suspending the admission of new cases into insolvency for the next six months to address the hardship of businesses which risk being dragged into bankruptcy due to pandemic-fuelled distress. This move has resonated well with the banks, who are, in fact, suggesting a two-year suspension in light of what they estimate is going to be the time it would take for the markets to normalise and provide reasonable recovery.

While IBC in its current avatar would remain suspended for fresh cases, it becomes pertinent that alternative solutions to address the stress in the system be explored. Pre-packaged insolvency or more colloquially, "Pre-Pack" is one such promising solution.

Essentially, a pre-pack is a mix of an out-of-court restructuring scheme and formal insolvency process where the terms of sale are pre-negotiated and finalised with approvals of creditors prior to filing for insolvency with the court. After obtaining the approval of the court, the plan gets implemented through the mechanism of the IBC and is binding on all the stakeholders. Pre-Pack has been in existence in developed countries like the US and the UK for many years and has enjoyed a fair bit of success.
Why India needs Pre-Pack
Pre-Pack is strongly built around the tenets of value preservation and timely resolution, which form the lifeblood of any insolvency law.

The current insolvency regime, although a great improvement over its predecessors, leaves a lot to be desired with respect to recovery rate, swiftness, and ease of resolution. Asset stripping and value deterioration are few of the major concerns, as the current Section 29A bar, which disallows an exhaustive list of people from acquiring companies under insolvency, also bars erstwhile promoters. This leaves little incentive to the promoter to contribute positively towards the process, risking asset stripping while business-as-usual comes to a standstill. A pre-pack, on the other hand, would check perverse behaviour and give incentive to the existing management to revive the company while ensuring business continuity, which would help preserve value and maximise recovery for the lenders. This is all the more relevant in certain industries, such as trading and services, which are traditionally asset-light.

Undue delays and litigation also remain a persistent issue in the current scenario. As per the latest statistics, it takes approximately 394 days for resolution, which far surpasses the stipulated timelines. Pre-pack will cut these timelines significantly, while also cutting down costs of litigation and administration, and will decongest the overburdened NCLTs. It is noteworthy that in May 2019, a company in the US, called Sungard Availability Services, had its pre-pack confirmed within 19 hours, setting a record as the fastest ever bankruptcy case in the US.

Introduction of pre-pack would, however, be a fundamental shift from the current "creditor in control" model, and brings with it its own set of challenges, which would necessitate significant changes to the framework. Legislation would have to be brought in to address the risk of lack of transparency and cramdown on the unsecured creditors or operational creditors as they would not be parties to the dialogue preluding the submission of plan. Principles of equity and transparency would also have to be built into the Code, taking care not to shackle it to the point of inefficiency. Regulatory framework around the insolvency professionals would also need to be strengthened further to check the exercise of what could be significantly more power in the hands of insolvency professionals in a pre-pack.

The insolvency law has undergone several amendments since its inception in 2016 to keep pace with the changing landscape and pre-pack will be a major step in the direction of continuous evolution. Recently, the insolvency law committee was reconstituted to deliberate on the functioning and implementation of the Code, and in this regard, in April 2019, the ministry of corporate affairs had invited comments on implementation of pre-pack in India. It was also recently reported that a panel headed by former SEBI chairman UK Sinha is deliberating on the framework and it is expected that legislation may soon follow. In unprecedented and distressed times like these, when insolvencies are bound to increase, the introduction of pre-pack becomes more necessary than ever.
Partner ( business restructuring services), Mazars. Views are personal
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With IBC suspended, now pave the way for pre-packaged insolvency

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By Ashish Rathi The Union Cabinet has decided to put the Insolvency and Bankruptcy Code, 2016 (IBC) in abeyance by suspending the admission of new cases into insolvency for the next six months to address the hardship of businesses which risk being dragged into bankruptcy due to pandemic-fuelled distress.

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The "evolving" insolvency law is a kind of "Swachhata drive" to clean up non-performing assets as well as put companies in the hands of capable and credible people, according to Insolvency and Bankruptcy Board of India chief MS Sahoo.

Around 3,600 companies have been admitted under the Insolvency and Bankruptcy Code so far. While acknowledging that the IBC is still evolving, Sahoo said authorities are conscious of the emerging needs.

"As and when they find a problem, they try to address it as expeditiously as possible. The insolvency professionals, creditors, National Company Law Tribunal, IBBI -- all are on a steep learning curve. The Supreme Court has been settling matters at a quick pace. I believe the road to success is always under construction," he told PTI in a recent interview.

Sahoo is the chairperson of the Insolvency and the Bankruptcy Board of India, a key authority in implementing the IBC. A case is taken up under the IBC only after approval from the NCLT.

When asked about the enduring benefits of the IBC, which came into force in 2016, the IBBI chairperson said, "This is another kind of Swachhata (cleanliness) drive to clean up non-performing assets and to put companies in the hands of capable and credible people".

This reinforces the rule of law by treating every company on the same level-playing field, irrespective of its size or the influence of the people behind them. Repayment of the loan is no more an option, but an obligation.

MS Sahoo, Chairperson, IBBI

With the IBC in place, as the Supreme Court puts it, the defaulter's paradise is lost, Sahoo emphasised. The IBC provides for a time-bound and market-linked resolution of stressed assets. If the resolution does not happen, the company concerned goes into liquidation.

"Failing is succeeding in Silicon Valley. An entrepreneur should not be stuck up in a business if he is failing to deliver," Sahoo said.

On whether the success of IBC is not just in numbers, the IBBI chief said that given the behavioural change, the performance should be seen in totality. It should be seen in terms of "what happens under the IBC, what happens on account of the IBC and what happens in the shadow of the IBC," he said.

190 companies were rescued, while 780 companies were referred for liquidation. Thus, the number of companies getting into liquidation is four times that of companies being rescued. These 190 companies, however, had assets, which is four times the assets of the 780 companies.

MS Sahoo, Chairperson, IBBI

"Thus, asset rescued is four times compared to those referred to liquidation. Importantly, of the companies rescued, one-third were under Board for Industrial and Financial Reconstruction or defunct. Of the companies that proceeded for liquidation, three-fourths were under BIFR or defunct," he said.

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Insolvency Law A 'Swachhata Drive' Against Non-Performing Assets: IBBI Chief MS Sahoo

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The "evolving" insolvency law is a kind of "Swachhata drive" to clean up non-performing assets as well as put companies in the hands of capable and credible people, according to Insolvency and Bankruptcy Board of India chief M S Sahoo.

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The scheme, which will have a pre-negotiated deal and the respective tribunal will just take it up for approval, is expected to ease the burden of the National Company Law Tribunal (NCLT).

Shardul Shroff, executive chairman at law firm Shardul Amarchand Mangaldas & Co told Mint in an interview that pre-pack is a solution, where parties come forth with an existing offer. "You offer a settlement and submit it to the creditors committee and then the CoC would negotiate it to an agreeable level," said Shroff.

With a huge backlog of cases, the NCLT benches are stretched and the current delay due to covid-19 will only add to it. A pre-pack provides certainty of resolution without going through the long-winded court process. Moreover, in a typical IBC case, there is always an uncertainty if people bid, and even if they do, whether lenders will accept it.

Till December 2019, the bankruptcy tribunal has admitted 3,254 companies for resolution under IBC. Of this, resolution plans have been approved for 190 cases, 246 cases have been closed on appeal or review and 780 cases are headed for liquidation.

"Pre-packs appear to be an attempt to see whether those cases can be settled and subjected to an order of the NCLT as binding on the parties. Pre-packs then are probably intended to lower the burden of the courts or the NCLT and effectively come out with an alternate solution which has the same effect of going through a CIRP," said Shroff.

The plan to bring pre-packaged IBC has been in the works for some time now and experts feel that the current covid-19 situation might be a good time to implement it. The Ministry of Corporate Affairs (MCA) had, in April 2019, sought comments on pre-packaged IBC from various stakeholders.

A panel of 11 members headed by UK Sinha, former chairman of Securities and Exchange Board of India (Sebi) is examining the issue to suggest a suitable framework. It is examining three modes --- pre-packaged insolvency resolution, pre-arranged insolvency resolution and pre-arranged sale.

However, not everyone is convinced that pre-packaged IBC is the way to ease the burden of the bankruptcy tribunal. "What would really help is if the government increases the strength of the NCLT benches to tackle the growing number of cases and that, I feel, would be more effective than bringing new legislation," said Karan Kalra, founder, Bombay Law Chambers.

Kalra said that there are already some provisions in the IBC that allows for quicker resolution of insolvency cases.

"Take the Section 12A for instance which allows the case to be withdrawn by consent of lenders. One can use this provision if there are quicker solutions or deals available outside the IBC process after it has been admitted by the tribunal," he said, adding that while a pre-packaged deal increases certainty, it does not necessarily lead to value maximisation, the core principle of IBC.

The practice of pre-packs was first developed in the USA, following the enactment of the Bankruptcy Reform Act of 1978. Soon after its introduction, it became so widely popular that in 1993, nearly one- fifth of all public bankruptcies were pre-packaged.

Much like in the USA, the practice of pre-packs is well established and widespread in the UK, Netherlands, France and Germany.

Sitesh Mukherjee, partner at law firm Trilegal, believes that a prepack may not work in Indian context as companies are largely promoter driven. "Only those bidders who are able to view the company from promoter's eyes will have an advantage here. There is a huge amount of asymmetry in terms of transparency and disclosures. This needs to be resolved before we think of having pre-packaged deals," said Mukherjee.

Till December, 2019, a total of 135 cases have been withdrawn under Section 12A of IBC. Of these, 37 cases were withdrawn owing to full settlements with creditors and another 44 cases for other settlements with creditors, showed data from the Insolvency and Bankruptcy Board of India (IBBI).

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Government may introduce pre-packaged deals in IBC to mitigate covid-19 delays

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The pre-packaged scheme will already have a deal and the respective tribunal will just take it up for approval.With a huge backlog of cases, the NCLT benches are stretched and the current delay due to covid-19 will only add to it

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Bankruptcy rule maker, the IBBI, on Friday notified separate amendments to regulations-- Insolvency Resolution Process for Corporate Persons Regulations, 2016 and Liquidation Process Regulations, 2016 to ensure the lock down period is not counted while calculating the timelines prescribed for specified tasks. The changes are effective from 29 March.

While the Bankruptcy Code prescribes a 330 day time frame for resolving a bankruptcy, regulations prescribe timelines for various steps involved in the process. The idea is to avoid hardships arising in meeting the timelines due to the national lockdown since 25 March aimed at containing the spread of Coronavirus.

IBBI regulations require that the corporate liquidation process should be completed in a period of one year unless extended by the National Company Law Tribunal. It also specifies a model timeline within which various tasks that are part of the liquidation process should be completed, explained Gaurav Gupte, partner at law firm Cyril Amarchand Mangaldas. The amendment to the liquidation regulations has the effect of excluding the period of the national lockdown from any computation of time under the liquidation regulations, said Gupte.

This was need of the hour as due to the lockdown, many procedures which are to be done as per the timelines could not be performed and the Adjudicating Authority would otherwise be flooded with applications for excluding such period or for extension of timelines, said Daizy Chawla, senior partner at law firm Singh & Associates.

The government recently brought out the Taxation and Other Laws (Relaxation of certain provisions) Ordinance, 2020 to ease various statutory compliance requirements in view of the lockdown. Tax payers have been given extra time to make investments to claim tax relief for FY20 income. Also, businesses have been given extra time for filing various statutory submissions.

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insolvency and bankruptcy board of india

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Lockdown period excluded from bankruptcy resolution, liquidation time frame

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Bankruptcy rule maker, the IBBI, on Friday notified separate amendments to regulations-- Insolvency Resolution Process for Corporate Persons Regulations, 2016 and Liquidation Process Regulations, 2016 to ensure the lock down period is not counted while calculating the timelines prescribed for specified tasks. The changes are effective from 29 March.

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NEW DELHI: Continuing efforts to ensure a more conducive regulatory framework for stakeholders, IBBI has sought comments from the public on existing regulations under the insolvency law. Insolvency and Bankruptcy Board of India (IBBI) is a key entity in implementing the Insolvency and Bankruptcy Code (IBC).

Noting that stakeholders could play a more active role in making regulations, IBBI said that they may contemplate, at leisure, the important issues in the extant regulatory framework that hinder transactions and offer alternate solutions to address them.

"This is akin to crowd sourcing of ideas. This would enable every idea to reach the regulator. Consequently, the universe of ideas available with the regulator would be much larger and the possibility of a more conducive regulatory framework much higher," IBBI said in a release.

According to the regulator, despite the best of efforts and intentions, a regulator may not always have the understanding of the ground realities, as much and as early as the stakeholders and the regulated may have, particularly in a dynamic environment.

Further, it noted that comments received between April 13 and December 31, 2020 would be processed together and following the due process, regulations would be modified to the extent considered necessary.

"It will be the endeavour of the IBBI to notify modified regulations by March 31, 2021 and bring them into force on April 1, 2021," the release issued on Monday said.

Public consultation enables collective choice and hence plays an important role in the evolution of the regulatory framework, it added.

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insolvency and bankruptcy board of india

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IBBI seeks public comments on existing regulations

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NEW DELHI: Continuing efforts to ensure a more conducive regulatory framework for stakeholders, IBBI has sought comments from the public on existing regulations under the insolvency law. Insolvency and Bankruptcy Board of India (IBBI) is a key entity in implementing the Insolvency and Bankruptcy Code (IBC).

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The vast repository of corporate data contained within the corporate affairs ministry's MCA-21 registry will be available for research and studies into corporate governance and other related topics.

The ministry has invited proposals for funding up to Rs 50 lakh for research in various topics from integration of the MCA-21 database with other databases to a corporate governance index (CGI) and more, in a notification on Wednesday.

Corporate affairs secretary Injeti Srinivas, constituted an expert committee under the chairmanship of chief economic advisor KV Subramanian to identify areas of research where the MCA-21 registry could be used to further corporate growth from a macroeconomic perspective, as per the notification.

The MCA-21 was implemented by the ministry in 2006 whereby its services were made available online and companies could submit regulatory filings in digital format. The registry has thus become one of the most comprehensive sources of Indian corporate sector data.

"In this process, it has emerged as a repository of corporate sector data in India, which when used for research purposes, shall promote evidence-based policy making...The outcome of this research is to provide actionable policy inputs for the Ministry by utilization of the wealth of data available in the MCA-21 database," it said.

The indicative list of topics provided by the ministry included a bankruptcy prediction model based on the financial statements of companies and a study of related party transactions to identify money laundering.

It also suggested the use of artificial intelligence and machine learning for insolvency forecasts and the study of accounting standards with respect to compliance and congruence with global standards.

As per the funding guidelines, institutions, organisations, agencies and individuals of academic repute or engaged in research in related domains may apply. The timeline for the proposed projects should be within 6 month but can be extended by the expert committee.

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Ministry of Corporate Affairs invites proposals for research into corporate governance using MCA-21 repository

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The vast repository of corporate data contained within the corporate affairs ministry's MCA-21 registry will be available for research and studies into corporate governance and other related topics. The ministry has invited proposals for funding up to Rs 50 lakh for research in various topics from integration of the MCA-21 database with other databases to a corporate governance index (CGI) and more, in a notification on Wednesday.

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New Delhi: In a major relief for corporate borrowers hit hard by the coronavirus pandemic, the government has decided to amend the insolvency law to suspend up to one year provisions that trigger insolvency proceedings against defaulters, according to PTI sources.

Further, the sources said amendments to the IBC (Insolvency and Bankruptcy Code) would pave the way for banks to restructure loans.

The sources said an ordinance would be promulgated to suspend three sections of IBC for up to one year and a decision in this regard was taken by the Union Cabinet on Wednesday.

Section 7, 9 and 10 of the IBC would be suspended for six months and the suspension time can be extended up to one year. An enabling provision with respect to extending the time would be part of the ordinance, they added.

Suspension of these provisions could be extended up to one year based on the economic situation going forward.

The effective date of the amendments coming into force would be the date of promulgation of the ordinance, the sources said.

Section 7 and 9 pertain to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively. Section 10 relates to filing an application for insolvency resolution by a corporate.

The coronavirus outbreak and the nationwide lockdown to curb spreading of infections have significantly impacted economic activities and the latest decision in a way provides more leeway for corporate borrowers in repaying their loans.

As per existing norms, if a payment default exceeds 90 days then the lender concerned has to refer the account for resolution under IBC or any other mechanism permitted by the Reserve Bank of India (RBI). The lender does not have the option to restructure the loan.

Currently, RBI norms prohibit restructuring of loans and resolution has to be done under IBC.

Last month, Finance Minister Nirmala Sitharaman indicated that the government may consider suspending some key provisions of IBC in case the current situation following the outbreak of COVID-19 pandemic continued beyond April 30.

Sitharaman is also in charge of the corporate affairs ministry, which is implementing IBC.

"If the current situation continues beyond April 30, 2020, we may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of six months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default," she had said.

In March, the government raised the threshold default amount for invoking insolvency proceedings under IBC to Rs 1 crore from Rs 1 lakh in order to prevent triggering of such proceedings against small and medium enterprises. Many such enterprises are under financial stress due to the lockdown.

The move was part of relief measures that were announced in view of the coronavirus pandemic.

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Govt decides to suspend up to 1 year IBC provisions that trigger fresh insolvency proceedings: Report

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Section 7, 9 and 10 of the IBC would be suspended for six months and the suspension time can be extended up to one year. An enabling provision with respect to extending the time would be part of the ordinance, they added.