The Insolvency and Bankruptcy Code, 2016 (Code) has just been passed by both Houses of the Indian Parliament. The key objectives of the Indian government in driving this legislation forward were to improve India‘s poor ranking on the ease of doing business index created by the World Bank Group and to stimulate the growth of the Indian capital markets, and the stated intention of the Code is to replace the relevant insolvency, restructuring and winding up provisions which are spread over a number of Indian statutes.
Herbert Smith Freehills has been engaging with the Bankruptcy Law Reform Committee (BLRC) since the release of the BLRC‘s Interim Report in February 2015 and we were invited to assist the BLRC and contribute our thoughts on the draft Code from the foreign perspective. We provided our inputs (both directly and through our participation in the UK-India Financial Partnership) to the BLRC on their various papers and thought processes by sharing our experience in the UK on the development of a new English bankruptcy code in the 1980s and its evolution since then and its practical application through case law studies. We are grateful to the BLRC for their acknowledgment of our contribution in their final report published in November 2015.
A number of matters need to be finalised before the Code can be implemented in its current form, including:
- the drafting of repealing legislation and transitional provisions;
- the resourcing the National Company Law Tribunal and National Company Law Appellate Tribunal (responsible for corporate insolvency cases) and the Debt Recovery Tribunal (responsible for individual bankruptcy cases) and the training of its members to perform their new role;
- the establishment and training of Resolution Professionals;
- the drafting of the Rules and Regulations under the Code;
- the setting up of the Information Utilities; and
- the setting up of the new regulator, the Insolvency and Bankruptcy Board of India.
Areas of concern for contracting parties
While the full implementation of the Code is therefore some way off, foreign creditors and foreign counterparties are likely to anticipate the implementation of the Code in their approach to Indian transactions, and our expectation is that there are two key areas which are likely to be of concern:
- the classification of the foreign creditor or counterparty as an operational creditor or a financial creditor. The Code envisages a distinction between these two classes of creditors and categorisation as one or the other has implications for the rights and powers of such creditor under the Code, including with regard to the trigger of an insolvency process and the ability to participate and vote on creditors‘ committees. There are reasons why a foreign creditor or counterparty may choose to go one way or the other or they may wish to preserve optionality depending on the circumstances.
- any creditor of a company can trigger an insolvency process under the Code, regardless of whether the relevant payment default by the Indian company relates to debt owed to such creditor. This could result in a potential hair trigger in relation to an insolvency process and the compulsory moratorium period that follows. Accordingly if you are a foreign party considering the entry into a medium or long term contract with an Indian counterparty (or vice versa), you need to be considering how best to optimise your position.
If you would like to have a discussion about the Code and its implications for your business or potential investments from the foreign legal perspective we would be very pleased to assist you.
Description of the Code
The Code is a unified and comprehensive piece of legislation for the resolution of insolvency in respect of companies, limited liability partnerships, partnership firms and individuals. The Indian government is in the process of proposing a separate framework for insolvency processes in relation to banks and other financial sector participants. The Code creates a new institutional framework which consists of adjudicatory bodies, a regulator, insolvency professionals and information utilities that seek to facilitate a time bound insolvency resolution and winding up process.
After careful deliberation, the BLRC elected to follow a system similar to the UK‘s practitioner led insolvency procedures as opposed to the US Chapter 11 debtor-in-possession system. As a result, architecturally the Code has many similarities to the UK‘s Insolvency Act but it is not a wholesale adoption of that statute and does differ in a number of important respects.
The resolution process is limited to 180 days (with the exceptional possibility of extension in defined circumstances) and is triggered by a payment default; there is no balance sheet insolvency test in the Code. There are provisions for a resolution proposal to be prepared by an insolvency professional, who is responsible for maintaining the business as a going concern during the resolution period, and for that proposal to be voted on by the financial creditors. If no resolution is achieved, liquidation follows. During the resolution period there would be a moratorium, intended to enable the resolution process to occur.
Challenging antecedent transactions is an important feature of the Code and is a step in the right direction to achieve an effective regime that ensures that promoters and others do not strip value from a company in distress, and protects the general body of creditors against fraudulent preferences and transactions at an undervalue; personal liability in relation to such matters has proved to be an effective discipline in other jurisdictions.