It has now been more than a year since the introduction of India’s new Insolvency and Bankruptcy Code (IBC). As the dust settles, it is clear that reforms by Narendra Modi’s government is redefining how business, as well as the resolution of bad debts, is conducted in India.
Prior to the introduction of the new IBC, ‘recovery’ and ‘bad loans’ were words rarely used together.
The options available to a foreign entity with assets in India looking for a commercial recovery - as part of an insolvency process - were mired in interminable legal proceedings.
However, the new process focuses on creditor-driven insolvency resolutions, as opposed to the company’s management. It now forces all parties to deal with the process in a timely manner.
For instance, the new IBC process for assessing whether a company’s business is viable to continue, and the options for its rescue, must be completed within a period of 180 days. However this can potentially be extended by a further 90 days.
Any rescue plan must be approved by a 75% majority vote among financial creditors within that period. If no resolution is agreed, the company immediately enters a liquidation process.
The legislation continues to develop and give the IBC additional bite to ensure that it is fit for purpose in India. A report commissioned by the government of India this April (2018) has proposed a number of progressive and positive amendments to the IBC. They give rise to a number of opportunities, some of which are highlighted below.
Private equity opportunities
The requirement that all decisions under the IBC must be approved by 75% of financial creditors represented a positive step towards creditor-driven resolutions. However, it also meant that a minority of creditors (25%) could stymie any resolution plans and effectively force the company into liquidation. This is especially difficult because, in our experience, approximately 10% of creditors do not usually engage with the IBC process and do not cast a vote.
To encourage a culture of recovery rather than liquidation, it is proposed that this voting limit should be reduced to 66%. This makes it easier to reach a resolution and creates opportunities for third parties, such as private equity outfits, to save a company’s business.
Bad debt and asset recovery opportunities
The IBC imposes a stay on any asset recovery actions, such as an enforcement of a legal judgment, against a company in an IBC process. This is similar to the position in the UK. However, recent court judgments have created uncertainty around whether this stay on asset recovery actions extends to all of the assets owned by the company’s promoters (owners) and group companies who are not in an IBC process. Even where those assets are not owned by the company in an IBC process. An example of this includes assets, unrelated to the company, that are subject to the stay preventing the enforcement of any legal or cost judgment. As a result of this, asset recovery actions have been hampered in many cases.
It is proposed that this issue should be addressed in the IBC to clearly define which assets are subject to an IBC stay. This would safeguard the asset recovery opportunities involving enforcement of judgments, recovery of bad debts and personal insolvencies in India.
Interim finance and interest is currently classified under the IBC as an insolvency cost and receives the highest priority under both the resolution plan and in a subsequent liquidation. However, interest is no longer accrued if the company enters a liquidation process, essentially turning the interim financer into a first priority unsecured creditor.
This has created challenges in relation to the availability and pricing of interim finance to assist with the IBC process. Under the new proposals, interest on interim finance would accrue for up to a year after the liquidation date, which should help to promote the interim finance market.