The Ministry of Corporate Affairs (“MCA”) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (hereinafter referred to as the “Rules”) on 15 November 2019. The objective of notifying the Rules was to provide a framework for insolvency and liquidation proceedings of Financial Service Providers (hereinafter referred to as “FSPs”) other than banks.

The Government of India introduced the Insolvency and Bankruptcy Code, 2016 (IBC) to simplify and consolidate various existing laws relating to insolvency and bankruptcy and to provide for a single legal framework to deal with all instances of insolvency and bankruptcy in India.

The Indian Insolvency & Bankruptcy Code, 2016 (IBC) has seen several challenges in recent times. The Indian Government has been proactive in responding to these. In response to the recent set of challenges, the Government intends to implement another round of amendments to the IBC. The key takeaways from this proposed amendment are discussed below.

In a big move to strengthen norms for the Insolvency Resolution Professionals (IRP‘s), the governing body for the Insolvency Professionals, the ‘Insolvency and Bankruptcy Board of India (herein referred to as ‘the Board’) has notified amendments to the (i) the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 and (ii) the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016.

The terms of the transaction documents for mergers and acquisitions are often dictated by the economics of investment and the bargaining position of the parties. The terms so contractually agreed upon must, however, always be within the operative legal framework. Liquidation Preference (“LP”) is a tool often used to embolden investors seeking security of their investment. LP is crucial, especially where the investors anticipate exit at a value lower than their initial investment.

The National Company Law Appellate Tribunal (“NCLAT”) vide its order dated 23.09.2019 passed in the matter ofVinayaka Exports and another Vs. M/s. Colorhome Developers Pvt. Ltd., overturned the decision of the National Company Law Tribunal, Chennai Bench (“NCLT”) dismissing an application filed by two financial creditors under Insolvency and Bankruptcy Code (“Code”) owing to the pendency of a civil suit and pre-existing dispute between the parties.

FACTS:

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) has been often cited as one of the key economic reform of the present government . Undoubtedly the new enactment resulted in large corporate entities queuing up to acquire distressed companies and their assets, put on block following initiation of IBC proceedings, thereby infusing efficiencies in the economy due to likely revivals of such companies .

The Reserve Bank of India (RBI) issued a revised prudential framework for resolution of stressed assets on 7 June 2019 (Revised Circular) in supersession of the erstwhile circular on Resolution of Stressed Assets dated 12 February 2018 (Feb 12 Circular) which was struck down by the Hon’ble Supreme Court on 2 April 2019.

The 2005 Report of the Expert Committee on Company Law (JJ Irani Committee Report) had noted that an effective insolvency law:

“should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stakeholders reasonably arrived at. Where revival / rehabilitation is demonstrated as not being feasible, winding up should be resorted to.

Commercial decisions are largely driven by incentive structures. Therefore, if legal policy favours a particular commercial outcome, the decision-making in that regard must be placed in the hands of entities most likely to be affected by such outcomes. This logic can also be applied to insolvency proceedings. The favoured policy outcome of the Indian insolvency law framework is the maximization of value of a corporate debtor. In the context of an insolvent company, the persons most likely to gain from such maximization of value are its creditors.