The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Ordinance”), effective June 05, 2020 suspends IBC filings primarily for Covid related defaults between March 25, 2020 and November 25, 2020 (extendable till March 25, 2021). The rationale for such suspension stems from the fact that the Government would rather facilitate revival as against pushing entities into insolvency. For the financial creditors, the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been an important tool for resolution of distressed debt. The moratorium in the IBC process shields defaulting companies from a flurry of recovery litigation, thereby providing them a meaningful chance of resolving defaults. In the absence of such moratorium, the creditors and the RBI as the regulator of Indian banks will have to pave the way to facilitate restructuring outside IBC. The way forward includes resolution by way of debtor in possession as opposed to creditor in possession, consensual restructuring including through a Scheme under the Companies Act, 2013 and other ways of restructuring including under the framework of RBI’s stressed assets circular dated June 7, 2020 (“Resolution Framework”) or such other measures that RBI may need to announce in due course.
To stabilise the Covid affected entities, the measures announced by RBI through March and April (“RBI Covid Regulatory Package”) in granting moratorium on payments to banks and NBFCs is a welcome step. Term loans and working capital loans enjoy the benefit of the moratorium under RBI Covid Regulatory Package. Consequent measures on asset classification has also provided some relief. Consequently, during the moratorium period, creditors should actively pursue an action plan with the company and its promoters, as any revival plan without the promoters and board support will be difficult to implement. As on date, the Resolution Framework mandates a compulsory resolution only for assets over INR 1500 crores, but even for defaults below this amount, a clarification on how a binding resolution could be structured may be required.
Extension of repayment schedules and sanctioning of new loans including by way of a one-time measure without treatment as “restructured account” could be an immediate measure which RBI may need to implement. RBI may also consider providing a time-bound window for implementing a promoter driven plan along with standstill on asset classification for banks.
While the RBI governed entities are bound by the Resolution Framework, there is a plethora of other lenders such as FPI entities, mutual funds, ECB lenders, ARCs (to an extent) and other distressed asset funds which play a crucial role in financing, but are not bound by the Resolution Framework to participate in a resolution which the RBI governed entities may arrive at. The present timing may therefore be a perfect opportunity for lenders to adopt an integrated approach. While RBI, SEBI and the Government may initiate financial regulatory co-ordination, it would also be necessary for the RBI to ensure that there is meaningful restructuring even within the Resolution Framework which incentivises the lenders, including those who are not bound by the Resolution Framework, to opt in.
Practices of cram down, unequal treatment for differently placed creditors and therefore respecting creditors with differential security interest, last mile funders, priority lenders and interim financiers, would need to significantly change from what is presently the practice.
In cases where a voluntary restructuring is not feasible, a clean option would be restructuring under Sections 230-232 of the Companies Act, 2013. This is a consensual scheme and is usually approved by the NCLT as long as it is fair and reasonable, made in good faith and is for the benefit of each class of creditors and members. Such a Scheme requires the consent of a majority of creditors and shareholders, and regulatory approvals. It is widely believed that the Scheme process usually takes longer. From a practical perspective, on account of the Ordinance, it is possible that the NCLT fast tracks approvals for Schemes. The RBI may need to make some amendments to accommodate such Schemes from a provisioning / asset classification perspective.
Easy fix to solve genuine cases facing liquidity constraints is to ensure access to fresh capital. As Indian banks and NBFCs continue to face stress, it is necessary to implement steps to strengthen the corporate bond market including by liberalising the VRR / 50:50 framework for FPI investment in NCDs. Allowing a wider set of lenders to participate in financing for repayment of maturing debt, enabling banks and NBFCs to provide additional capital without risk of a restructuring classification, providing access to foreign investors to participate in the Indian distressed debt market directly, could be some of the measures that RBI needs to consider on an immediate basis.
Contributed by: Veena Sivaramakrishnan, Partner; Soummo Biswas, Partner; Sagar Manju, Principal Associate.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
The Bar Council of India does not permit solicitation of work and advertising by legal practitioners and advocates. By accessing the Shardul Amarchand Mangaldas & Co. website (our website), the user acknowledges that: