IBC an ideal tool for solving bad-loan issue | Business Standard–06.08.2017

While the government has been pursuing measures to tackle rising levels of non-performing debt in public sector banks, a growing pile of bad debt had also been a concern for the lender community. With its clear and precise outlook towards insolvency, the Insolvency and Bankruptcy Code (IBC) 2016 might not only serve as an ideal tool to solve the bad-loans issue, but is also expected to have a significant impact on the conduct of business in the country.
Under the Code, an insolvency proceeding can be commenced by any creditor (financial or operational) or the corporate debtor itself, by filing an application with the Adjudicating Authority (AA) at the National Company Law Tribunal (NCLT). Insolvency proceedings can be initiated on admission of the application by the NCLT, after which the lenders have to form a committee of creditors (CoC) and appoint an insolvency professional (IP) to act as a resolution professional (RP) and run the borrower’s business in the interim period.
To arrive at a resolution, the Code prescribes preparation and submission of a “resolution plan” within a rational timeline of 180-270 days from the commencement of insolvency proceedings. Section 5(28) of the Code defines a resolution plan as “a plan proposed by any person for continuation of the corporate debtor as a going concern in accordance with Part II”.
The objective of a resolution plan is to maximise eventual returns to the creditors. A resolution plan must be prepared in accordance with Regulation 37 and 38 under the Code. Regulation 38 stipulates mandatory contents of a resolution plan, which should include specific sources of funds to pay insolvency resolution process costs, sources of funds to pay liquidation value (operational creditors and dissention financial creditors), the term of the plan, implementation schedule, the manner of management of the business and adequate means for supervision.
The Code stipulates that it will be the RP’s duty to invite prospective lenders, investors and any other persons to put forward the resolution plan. The corporate debtor may also file a resolution plan for consideration. According to Section 25(i) of the Code, it will be the RP’s duty to present all resolution plans received at the CoC’s meetings. The responsibility of approving a resolution plan rests with the CoC, which will approve it with not less than 75 per cent voting in favour of it. Where a plan approved by the CoC is subsequently approved by the AA, the final plan will be binding on the corporate debtors, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. If the CoC fails to approve and submit a resolution plan within the prescribed time, the corporate debtor could look at liquidation as an option, which will result in auctioning of the company’s assets to recover dues.
The NCLT is not expected to reject a plan on the ground that it is not feasible, or possible to implement the plan from a practical or economic/commercial point of view. The NCLT is not meant to delve into the technical and economical complexity of the plan on what is essentially a commercial decision of the creditor. However, the resolution plan may be challenged at the NCLT on technical grounds such as irregularities in conduct of meetings or voting process, challenge in calculation and payment of liquidation value, whether the plan is unfair, unjust and prejudicial to the interest of petitioner, and whether approval was obtained by fraud or misrepresentation.
However, there are certain areas around the resolution plan which remain unaddressed by the Code. There is lack of clarity on whether the CoC can approve more than one plan by a majority, and whether the AA can request modifications in plans approved by the CoC on technical grounds or mistakes apparent from records. The Code is also silent on changes that may be required after approval of a final plan by the AA, due to circumstantial variations such as change in regulation, loss of key customer or cancellation of licence. Clarity is also required on whether consent of shareholders is required on the approved plan for sale of assets, mergers and amalgamation, as per the provisions of the Companies Act, 2013.
In the past, the RBI has initiated various restructuring schemes — such as Corporate Debt Restructuring, Strategic Debt Restructuring, Joint Lenders Forum, Scheme for Sustainable Structuring of Stressed Assets and the 5/25 scheme — to enable lenders to formulate a plan of action and restructure debts of companies facing financial difficulties on a timely basis. While these schemes had the essence of a resolution plan, they were prescriptive and lacked flexibility.
The resolution plan under the IBC is expected to be more objective, flexible and resolution-oriented. A good resolution plan should be based on a robust business strategy, and list material assumptions underpinning the business plan, including current laws. It should also highlight key critical factors and milestones, and clearly define the implementation and monitoring mechanism.
An approved resolution plan under the IBC should be a manifestation of the combined judgment of all stakeholders, having the objective of maximising eventual returns to the creditors, thereby preserving the value of the business. Lastly, it is expected to provide better results than prospective liquidation by a corporate debtor.

The writer is Partner, KPMG in India. These views are personal

via IBC an ideal tool for solving bad-loan issue | Business Standard Column

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