Tag: #Insolvency

-Report by Anurag Sinha

Regarding Reliance Home Finance Ltd.’s (RHFL) insolvency, the Supreme Court has approved a resolution plan filed by Authum Investments and Infrastructure Ltd (All), a non-banking financing business, to cover RHFL debenture holders. Nevertheless, the scheme excludes holders of dissenting debentures.

A bench comprised of Justices BR Gavai and Aravind Kumar further ruled that the dissenting debenture holders be given the option of accepting the conditions of the Resolution Plan (RP) who advocated such a purchase.

Following the approach followed in the case SEBI vs Rajkumar Nagpal 2022 involving a sister firm of RHFL, Reliance Commercial Finance Ltd, the Court utilised the authorities under Article 142 of the Constitution to give the decision (RCFL).

“We conclude that the facts in the current instance are identical to the facts in the case of SEBI vs Rajkumar Nagpal. In this scenario, we believe that a new voting procedure proposed in the SEBI Circular will further prolong the resolution process and may disrupt the efforts of stakeholders, especially retail debenture holders… We are inclined to grant such instructions to shape the relief in light of the specific facts and circumstances in this instance, which are similar to those in Rajkumar Nagpal (supra), the bench stated.

The panel went on to say that dissenting debenture holders should be given the option of accepting the resolution plan’s conditions or pursuing other legal actions to recover their responsibilities.

FACTS:

In 2018, RHFL issued debentures via private placement, for which it executed several Debenture Trust Deeds. Nine of them were executed with IDBI Trusteeship Services Ltd. It has taken on a sizable loan in the past. the pooling of resources via loans from several financial entities Also, RHFL’s failure affected the issued Debenture Trust Deeds. In accordance with the authorized RHFL RP, all 19,353 holders of minor debentures would get full payment of their principal.Debenture holders’ approval was required per a SEBI circular titled Standardisation of procedure to be followed by Debenture Trustee(s) in event of Default by issuers of listed debt instruments because the RBI Circular only applied to debts owing to Banks/Financial Institutions.

In order to comply with the requirements of the SEBI Circular, debenture holders must cast their votes before. To engage in an ICA, 75% of investors must provide their blessing, on a numerical basis, and 60% must give their blessing, on an ISIN basis. An International Securities Identification Number (ISIN) is a 12-character alphanumeric identifier that may be used to identify a single security. In 2021, a business lawsuit was filed at the Bombay High Court,

Debenture holders’ vote on the RP. The Supreme Court ordered a gathering of the holders of debentures to a meeting and further ordered that the results of the vote be kept secret. The vote tally disclosure was the subject of a separate appeal. According to the results, 94.55% of the debenture holders present (869 out of 919) voted in favour of the RP Le.

The consortium of lenders also accepted a resolution plan for the RCFL that was provided throughout the proceedings. Both RPs share many similarities. Separate actions before the High Court had also required RCFL to call a meeting of debenture holders. The Securities and Exchange Board of India (SEBI) appealed the meeting’s convening before the High Court’s Division Bench on the grounds that the voting mechanism did not comply with the SEBI Circular but instead followed the procedure stipulated in the Debenture Trust Deeds. The Division Bench ruled against the appeal, explaining that the SEBI Circular could not be retroactively implemented. The SEBI was so displeased that it filed a petition with the Supreme Court.

In the case of Rajkumar Nagpal, a three-judge panel of the Supreme Court ruled in favour of the appeal, concluding that the SEBI Circular will be applied retroactively.

Yet, the Court pointed out that debenture holders would greatly benefit from the RCFL’s resolution plan. It then moved to adopt the plan, giving holders of dissenting debentures the choice of accepting the plan or standing outside it and seeking alternative legal measures to collect their dues.

After receiving this ruling, RHFL submitted an Interim Application requesting the resolution plan be approved under the following conditions:

When the High Court heard the interim plea, it rejected it, reasoning that it lacks the authority under Section 151 of the CPC to provide relief and adopt the settlement plan, as it did in the instance of Rajkummar Nagpal. The Supreme Court was primarily concerned with this issue.

JUDGEMENT BY THE COURT:

In the current instance, the Court remarked that small investors with up to Rs 5 lakhs in exposure gain to the tune of 100% of their principal investment. Even debenture holders with more than Rs. 5 lakhs in exposure receive 23.24% of their principal amount, as in Rajkumar Nagpal’s instance.

“In the current instance, such unscrambling of the resolution process will not only be time-consuming, but it may also have a negative impact on the agreed realized benefits to retail debenture holders who have already approved the negotiated settlement before the High Court. We believe that in this situation, too, we should extend the advantage under Article 142 of the Indian Constitution to retail debenture holders. We are inclined to provide such directions to shape the relief in light of the specific facts and circumstances in this instance, which are comparable to those in Rajkumar Nagpal (supra). In any instance, we intend to defend the interests of dissenting debenture holders who are not covered by the proposed RP outlined in the lender’s ICA and to pursue further legal remedies “When accepting the appeals, the Court made the following observation:

Senior Counsel KK Venugopal and Dhruv Mehta intervened on the appellants’ behalf. Senior Counsel KV Viswanathan represented Bank of Baroda and Canara Bank, and Assistant Solicitor General Venkataraman represented SEBI.

READ FULL JUDGMENT: https://bit.ly/3mM6WEQ

INTRODUCTION

One of the main changes in India’s overall set of laws is the Insolvency and Bankruptcy Code. This is on the grounds that the IBC does not just make India more grounded as far as the lawful structure, yet it additionally gives it another financial character and acknowledgment on an overall scale. If a disagreement emerges concerning bankruptcy, the debtor and the creditor have the authority to commence insolvency procedures against each other under the IBC, which is a combined study of numerous legal committees. With the President of India’s consent, the Insolvency, and bankruptcy Code 2016 became effective on May 28, 2016. Before that, there were long cycles that didn’t impressively offer a financially functional arrangement anyway as of now, this code is a one-stop reply for settling liquidations. To give a single guideline to Insolvency and Bankruptcy related issues, the Indian Insolvency framework went through a complete upgrade blending a couple of past guidelines (merging of 13 existing laws).

INSOLVENCY & BANKRUPTCY CODE, 2013

Meaning – Insolvency generally occurs when a person is unable to pay their debts to the creditor at the expected time frame. Bankruptcy, on the other hand, occurs when a court of competent jurisdiction declares a person or a business insolvent and issues necessary instructions to rectify the situation and safeguard creditors’ interests. Bankruptcy is a legal process by which an insolvent borrower seeks relief from his or her creditors.

Evolution – A statute was passed in 1828 that marked the commencement of insolvency-related law in India. In 1848, the Indian Insolvency Act established a division between traders and non-traders. There was no legislation dealing with insolvencies in non-presidency districts until 1907. The new Companies Act was approved in 2013, making several modifications to the corporate insolvency procedure.¹ Chapter XIX of the Firms Act of 2013 dealt with the resurrection and rehabilitation of ill companies. This chapter has been removed since the IB Code now covers the full revival/rehabilitation method or mechanism. The Insolvency and Bankruptcy Code, 2016 consists of 255 sections (divided into 5 parts) and 11 schedules. At this point, the IBC is the main regulation that oversees indebtedness, insolvency, and the recreation of failed organizations, reducing the job of earlier regulations.

FUNCTIONS & PROVISIONS OF IBC, 2016

The 2016 Code lays out a period-restricted strategy for settling indebtedness. At the point when a debt holder defaults on an installment, loan bosses hold onto responsibility for the debt holder’s resources and have 180 days to settle the indebtedness. To guarantee that the goal cycle chugs along as expected, the Code awards debt holders’ resistance from banks’ goal claims during this time. The Code likewise unites components from existing regulation to give a solitary scene to borrowers and lenders, all things considered, to address bankruptcy.

The IBC, 2016, specifies a Rs 1 crore least boundary for starting the pre-packaged bankruptcy goal strategy. It considers the excusal of simultaneous bankruptcy goal process and pre-packaged indebtedness goal process petitions documented against a similar corporate borrower. Punishment for starting a pre-packaged liquidation goal strategy deceitfully or malignantly to misdirect others, as well concerning the fake organization of the corporate indebted person during the cycle. Offenses including the pre-staging insolvency goal strategy are culpable.

RELATION OF NCLT WITH IBC

In contrast to concerns expressed during the IBC’s creation and later talks regarding the difficulty of quickly installing adjudicating capability, the NCLT is capable of fulfilling the job of adjudication under the IBC. While the NCLT’s present operation has defied expectations from previous insolvency cases, there are clear gaps between how the NCLT operates under the IBC and what is intended by the statute.² The empirical investigation on whether the NCLT is able to provide judgments within the timeframes required by law, as well as if the judgments are consistent with the function envisioned by the legislation, reveals that there exist gaps. From an adjudicating authority for the Insolvency redressal process of companies and individuals to the power prescribed to NCLT, it can be said that NCLT plays the most important role under IBC. It provides simplicity for financial creditors, operational creditors, and corporations to collect money from debtors.

PROCESS OF INSOLVENCY RESOLUTION

Corporate Insolvency Resolution: During the resolution of Corporate Insolvency, the creditor should record an application with the NCLT for starting bankruptcy redressal procedures. The NCLT will be expected to either acknowledge or dismiss the application within 14 days of documenting the application. When the application has been acknowledged by the NCLT, the administration of the indebted person is suspended and the transitional power, selected by the NCLT and alluded to as the ‘break indebtedness goal proficient’ assumes control over the administration of the corporate debt holder. Further, as soon the application for CIRP is conceded by the NCLT, a ban produces results on the corporate indebted person, which forbids the continuation or commencement of any legal actions against the debt holder, the exchange of its resources, or the requirement of any security interest. Within 30 days of the NCLT admitting the application for CIRP, the interim resolution expert reviews the creditors’ claims and forms the creditors’ committee. The panel of loan bosses then, at that point, names a free individual as the goal proficient, alluded to as the Insolvency Resolution Professional (‘IRP’) to assume control over the administration of the corporate borrower for the rest of the CIRP. Within 180 days of the commencement of the CIRP, the IRP is expected to draw up a goal plan for the restoration of the corporate borrower. Such an arrangement should be supported by lenders holding no less than 75% of the obligation of the corporate account holder.³

CASE LAWS – IBC

In Aditya Enterprises vs Rajratan Exim Pvt. Ltd.⁴, due to the non-payment of a debt owed to them by a corporate debtor, Aditya Enterprises applied. The adjudicating body stated that just receiving a loan cannot be considered an operational/financial obligation; nevertheless, the purpose of the loan is equally significant. Because the receipt makes no indication of the corporate debtor taking the loan for commercial purposes. The presence of a disagreement does not preclude the occurrence of a default; there is no indication that a due date exists.

In Sree Metaliks Limited and another V. UOI and Anr.⁵, The petitioner had challenged Section 7 of the 2016 Insolvency and Bankruptcy Code, as well as the provisions governing it, in the 2016 Law of Insolvency and Bankruptcy (Application to the Adjudicating Authority). In a petition lodged under section 7 of the IBC, the petitioner contended that IBC 2016 did not provide any chances to hear from a corporate debtor. The Calcutta High Court stated that the necessity for NCLT and NCLAT to follow natural justice principles may be found in Section 7(4) of the Code and Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. It was decided that the NCLT must provide the financial debtor a reasonable chance to present his or her case before admitting the petition filed under Section 7 of the Code.

In Bank of Baroda V.Rotomac Global Pvt. Ltd and Rotomac Exports Pvt Ltd⁶ The COC was suggested by the resolution professional for a 90-day extension of the CIRP. The COC, on the other hand, voted against it. As a result, the RP filed for the corporate debtor’s liquidation. The Competent authority held that the resolution to extend CIRP failed because no resolution plan was submitted within 180 days of the program’s start. As a result, the liquidation of a corporate debtor was acknowledged.

CONCLUDING OBSERVATIONS

Since the inception of the Insolvency and Bankruptcy Code in 2016, the issues relating to creditors and debtors have vastly improved. It has recognized the competent authority for the implementation of more efficient laws since the existing insolvency legislation does not demonstrate reliability due to issues such as delays in appointment and permissions, stock of non-performing assets, and so on. It needs to strengthen the process by attracting a broader variety of strategic purchasers who are prepared to bid on assets and present resolution plans following the code. It can also improve by putting in place more and more effective Asset Reconstruction Companies to help with dispute settlement.

References:

1. https://housing.com/news/ibc-insolvency-and-bankruptcy-code/
2. https://journalsofindia.com/nclat-ibc-and-companies-act/#:~:text=Its%20role%20under%20IBC%3A%20NCLT%20is%20the%20adjudicating,or%20operation%20creditors%20or%20the%20corporate%20debtor%20itself.
3. https://gamechangerlaw.com/ibc-2016-overview-of-the-insolvency-and-bankruptcy-code-2016/
4. https://indiankanoon.org/doc/33528420/
5. https://indiankanoon.org/doc/164560992/
6. https://www.soolegal.com/rc/bank-of-baroda-vs-rotomac-global-pvt-ltd-and-roromac-exports-pvt-ltd-cp-no-ib-70-ald-2017-with-ca-no-74-2018-

Written by Hemant Bohra student at School of Law, Lovely Professional University, Punjab.

The Supreme Court had recently delivered its judgment in the case of Phoenix Arc Private Limited v Spade Financial Services & Ors. This judgment was headed by Justice DY Chandrachud. Further, the judgment was also divided into sections in order to facilitate better analysis.

A. The Appeals

There were 2 sets of appeals that were made in this case. Initially, the NCLT had held that AAA Landmark Pvt. Ltd. and Spade have to be excluded from the CoC which was formed in relation to the CIRP initiated against AKME Projects Limited. It was primarily done because of the fact that NCLT had held that the following entities cannot be held as financial creditors as they were related parties of the Corporate debtor and hence must be excluded from the CoC. NCLAT had reversed the decision that they were not the related parties to the Corporate Debtor but held that they can be considered as financial creditors.

B. CIRP for the Corporate Debtor

On April 2018 a CIRP was initiated against the Corporate Debtor. In which Spade, along with its subsidiary AAA had filed their claims against the Corporate Debtor. In the CoC, the IRP rejected the claim of Spade stating that its claim cannot be considered within the scope of financial debt under section 5(8) of the IBC as there was an absence of consideration for the time value of money. Further, the claim of AAA was also rejected on the ground that its claim of being considered as the financial creditor was filed after the expiry of the period stipulated for the filing of such claim.

C. Whether Spade and AAA are Financial Creditors of the Corporate Debtor

Under section 5(7) of the IBC, a person can be held as a financial creditor if a financial debt is owed to it. Further, under section 5(8), a financial debt will be disbursed against consideration for the time value of money. The court in Swiss Ribbons Pvt. Ltd. v UoI has defined these terms in its judgment. Further, reliance was also made on the case Pioneer Urban Lands and Infrastructure Ltd. vs UoI which defined the terms “disbursed” and “time value for money”. The court also considered the Insolvency Law Committee’s interpretation of “time value” to mean as compensation or the price paid for the length of time for which the money has been disbursed.

D. Whether Spade and AAA are related parties

In order to understand the relation of Spade and AAA with the Corporate Debtor, it was crucial for the court to understand the relation between Anil Nanda and Arun Anand. After submissions by the counsels of both the parties and the evidences submitted before the tribunals as well, the court came to the conclusion that the transactions between AAA and the Corporate Debtor were collusive in nature and AAA along with Spade were related parties to the Corporate Debtor.

E. Whether Spade and AAA can be excluded from the CoC

The court held in the present case that AAA and Spade were related parties within the meaning of section 5(24) of the IBC. Further, there also existed a long-standing relationship between Mr. Arun Anand and Mr. Anil Nanda. Hence, the transactions between AAA and Spade with the Corporate Debtor could be considered to be collusive in nature. Which further means that allowing the entities in the CoC would definitely have an effect over the other financial creditors.

The court held in its decision that:

1. The decision of the NCLAT, in as much as it referred to Spade and AAA as financial creditors, is set aside.
2. The decision of the NCLAT, in as much as it referred to Spade and AAA as related parties of the Corporate Debtor under Section 5(24), is affirmed.
3. The decision of the NCLAT, in as much as it excluded Spade and AAA from the CoC in accordance with the first proviso of Section 21(2), is affirmed

Reported By – Tanuj Sharma