In 2016 India overhauled its existing legal framework on bankruptcy and insolvency processes and the new Insolvency and Bankruptcy Code 2016 – aimed at streamlining the bankruptcy resolution process – was enacted.
Simultaneously, an increasing level of non-performing assets in the Indian banking sector triggered the promulgation of the Banking Regulation (Amendment) Ordinance 2017 on May 4 2017. This amendment, via the insertion of Section 35AA into the Banking Regulation Act 1949, gave the government the power to ask the Reserve Bank of India (RBI) to issue directions to any banking company requiring such bank to initiate insolvency proceedings with respect to any 'default'.(1)
The RBI subsequently directed several banks to start insolvency resolution proceedings against a list of identified companies which included, among others, Jaypee Infratech Limited (JIL), a leading real estate development company in India. By an August 9 2017 order, the National Company Law Tribunal admitted the insolvency petition filed by IDBI Bank Limited against JIL and initiated a corporate insolvency resolution process.
A significant number of JIL creditors were retail individuals who made advance payments for homes but had not yet been allotted possession of such homes (even though the time within which such allotment should have been made was long past).
The Insolvency and Bankruptcy Code identifies a 'creditor' as any person to which a debt is owed; however, only two classes of creditor (ie, financial creditors and operational creditors) can institute an insolvency resolution process with respect to a company. A 'financial creditor'(2) is a creditor to which a 'financial debt'(3) is owed (ie, any person that is owed a debt which is disbursed against the consideration for time value of money). An 'operational creditor'(4) is defined as a creditor to which an 'operational debt'(5) is owed (ie, a creditor which is owed a debt on account of provision of goods, services or employment to the company).
Permitting only an operational creditor or a financial creditor to initiate the insolvency resolution process has led to the exclusion of certain classes of creditor from initiating an insolvency resolution process – for instance, persons which have extended advances to the company for provision of goods and services by the company (eg, flat owners in case of JIL), decree holders, persons extending any security deposits pursuant to any contract, directors of a company extending interest-free loans to a company and persons that have paid any subscription amounts for any securities.
The Insolvency and Bankruptcy Code sets out in detail the rights of operational and financial creditors in an insolvency resolution process. However, a non-operational, non-financial creditor has no direct rights other than to identify its claim as a part of the claim collation process.(6) Further, such creditors (unlike financial creditors, which form the committee of creditors)(7) do not participate in the insolvency resolution process.
The case of JIL has highlighted the need for the Insolvency and Bankruptcy Code to recognise a wider class of creditors (other than financial and operational) that can initiate an insolvency proceeding and participate meaningfully in such process. The JIL case has also emphasised the important role that financial creditors play – as sole members of the committee of creditors that drive the insolvency proceedings – in order to address the interests of retail creditors (flat owners in this case) and other such creditors that are not adequately represented.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information please contact Shilpa Mankar Ahluwalia or Suswagata Roy at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700) or email (email@example.com or firstname.lastname@example.org).
(1) Under the Insolvency and Bankruptcy Code, 'default' is defined as the non-payment in whole, in part or any installment of a debt when such amount of debt has become due and payable and is not repaid by the debtor.
(2) Under the Insolvency and Bankruptcy Code, a 'financial creditor' is "any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to".
"a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes – (a) money borrowed against the payment of interest, (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent, (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument."
(4) The Insolvency and Bankruptcy Code defines 'operational creditor' as "any person to whom an operational debt is owed and includes a person to whom such debt has been legally assigned or transferred to".
"a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority."
(6) On the admission of an insolvency proceeding against a corporate entity, the adjudicating authority (the National Company Law Tribunal in the case of companies) will appoint an interim insolvency resolution professional who must, among other things, collate information on the creditors of the company.