IBC an ideal tool for solving bad loan issue
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SANJAY DOSHI
While the government has been pursuing measures
to tackle rising levels of nonperforming debt in public sector banks,agrowing
pile of bad debt had also beenaconcern for the lender community.
With its clear and precise outlook towards
insolvency, the Insolvency and Bankruptcy Code (IBC) 2016 might not only
serve as an ideal tool to solve the badloans issue, but is also expected to
haveasignificant impact on the conduct of business in the country.
Under the Code, an insolvency proceeding can be
commenced by any creditor (financial or operational) or the corporate debtor
itself, by filing an application with the Adjudicating Authority (AA) at the
National Company Law Tribunal (NCLT). Insolvency proceedings can be initiated
on admission of the application by the NCLT, after which the lenders have to
formacommittee of creditors (CoC) and appoint an insolvency professional (IP)
to act asaresolution professional (RP) and run the borrower´s business in the
interim period.
To arrive ataresolution, the Code prescribes
preparation and submission ofa “resolution plan” withinarational timeline of
180/270 days from the commencement of insolvency proceedings.
Section 5(28) of the Code definesaresolution
plan as “aplan proposed by any person for continuation of the corporate
debtor asagoing concern in accordance with Part II”.
The objective ofaresolution plan is to maximise
eventual returns to the creditors.
Aresolution plan must be prepared in accordance
with Regulation 37 and 38 under the Code.
Regulation 38 stipulates mandatory contents
ofaresolution plan, which should include specific sources of funds to pay
insolvency resolution process costs, sources of funds to pay liquidation
value (operational creditors and dissention financial creditors), the term of
the plan, implementation schedule, the manner of management of the business
and adequate means for supervision.
The Code stipulates that it will be the RP´s
duty to invite prospective lenders, investors and any other persons to put
forward the resolution plan.
The corporate debtor may also filearesolution
plan for consideration.
According to Section 25(i) of the Code, it will
be the RP´s duty to present all resolution plans received at the CoC´s
meetings.
The responsibility of approvingaresolution plan
rests with the CoC, which will approve it with not less than 75 per cent
voting in favour of it. Whereaplan approved by the CoC is subsequently
approved by the AA, the final plan will be binding on the corporate debtors,
its employees, members, creditors, guarantors and other stakeholders involved
in the resolution plan.
If the CoC fails to approve and
submitaresolution plan within the prescribed time, the corporate debtor could
look at liquidation as an option, which will result in auctioning of the
company´s assets to recover dues.
The NCLT is not expected to rejectaplan on the
ground that it is not feasible, or possible to implement the plan
fromapractical or economic/commercial point of view.
The NCLT is not meant to delve into the
technical and economical complexity of the plan on what is
essentiallyacommercial decision of the creditor.
However, the resolution plan may be challenged
at the NCLT on technical grounds such as irregularities in conduct of
meetings or voting process, challenge in calculation and payment of
liquidation value, whether the plan is unfair, unjust and prejudicial to the
interest of petitioner, and whether approval was obtained by fraud or
misrepresentation.
However, there are certain areas around the
resolution plan which remain unaddressed by the Code.
There is lack of clarity on whether the CoC can
approve more than one plan byamajority, and whether the AA can request
modifications in plans approved by the CoC on technical grounds or mistakes apparent
from records.
The Code is also silent on changes that may be
required after approval ofafinal plan by the AA, due to circumstantial
variations such as change in regulation, loss of key customer or cancellation
of licence.
Clarity is also required on whether consent of
shareholders is required on the approved plan for sale of assets, mergers and
amalgamation, as per the provisions of the Companies Act, 2013.
In the past, the RBI has initiated various
restructuring schemes —such as Corporate Debt Restructuring, Strategic Debt
Restructuring, Joint Lenders Forum, Scheme for Sustainable Structuring of
Stressed Assets and the 5/25 scheme —to enable lenders to formulateaplan of
action and restructure debts of companies facing financial difficulties onatimely
basis.
While these schemes had the essence
ofaresolution plan, they were prescriptive and lacked flexibility.
The resolution plan under the IBC is expected
to be more objective, flexible and resolutionoriented.
Agood resolution plan should be based onarobust
business strategy, and list material assumptions underpinning the business
plan, including current laws.
It should also highlight key critical factors
and milestones, and clearly define the implementation and monitoring
mechanism.
An approved resolution plan under the IBC
should beamanifestation of the combined judgment of all stakeholders, having
the objective of maximising eventual returns to the creditors, thereby
preserving the value of the business.
Lastly, it is expected to provide better results
than prospective liquidation byacorporate debtor.
The writer is Partner, KPMG in India.
These views are personal
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Saturday, August 5, 2017
IBC an ideal tool for solving bad loan issue SOURCE BUSINESS STANDARD
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