Investing through insolvency code

By Sanjay Asher and Nikhil Kaul, Crawford Bayley & Co.
1
1921

IBC has created opportunities for equity and debt investors alike, write Sanjay Asher and Nikhil Kaul

The Insolvency and Bankruptcy Code, 2016 (code), notified by the government of India in May 2016, was in response to piling bad debt and the increasing quantum of non-performing assets plaguing the credit exposure of banks and financial institutions. The preamble of the code states that its fundamental objective is to consolidate and amend the “laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons”.

insolvency
Sanjay Asher

The code is a significant departure from the earlier regimes governing insolvency and liquidation in India. The insolvency resolution process under the code (resolution process) introduces 1) a creditor-in-control model – providing significant control to financial creditors over critical decisions in the resolution process; 2) appointment of a resolution professional to conduct the resolution process; 3) a time-bound systematic approach.

The resolution process sets out the implementation of a resolution plan for corporate and debt restructuring, in a way that ensures the corporate debtor continues to function as a going concern, which is in the interest of all stakeholders (including the creditors). The code provides the committee of creditors (CoC) with powers to take decisions on the manner in which the resolution process has to be conducted, including the right to approve or reject a resolution plan. A failure to implement a resolution plan within the timelines provided under the code would render a corporate debtor fit for liquidation, which is a process also governed under the provisions of the code.

Investment in equity

Insolvency
Nikhil Kaul

The code has attracted the attention of investors (resolution applicants), resident and non-resident, eager to participate in the race to pick up stressed assets at reasonable prices. The enthusiasm of resolution applicants is often fueled by the notion that the resolution process will wipe the slate clean with respect to past transgressions, non-compliances and defaults of corporate debtors with the blessings of the adjudicating authority, the National Company Law Tribunal (NCLT). The approval of a resolution plan by the NCLT makes it binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

The enactment of the code has, in a short span of time, led to the evolution of India’s investment landscape. As far as prospective equity investors are concerned, distressed Indian assets seem to be the flavour of the season. Corporate debtors with assets and businesses considered attractive are receiving expressions of interest and resolution plans from numerous prospective resolution applicants. The competitive bidding process may require prospective Resolution Applicants to offer competitive prices (and at times, revise it upwards).

In cases where there is a dearth of interest from prospective resolution applicants, due to lack of competition, they may be able to command a better price through the restructuring of corporate debtors, provided they can obtain approval from the CoC.

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insolvencySanjay Asher is a senior partner and Nikhil Kaul is a senior associate at Crawford Bayley & Co.