The interests of banks, financial institutions and other lenders and recovery of loans advanced by them is at the heart of the insolvency framework introduced by the Insolvency and Bankruptcy Code, 2016 (code). Although the code has been brought into being to protect the interests of the lenders, no lender wants a transaction to enter insolvency proceedings.
There are many provisions in loan agreements that may not protect the lenders’ interest before the insolvency proceedings are initiated. The provisions under existing loan documentation need to be revisited.
Definition of financial indebtedness: The lenders prefer to keep restrictive covenants with respect to the financial indebtedness of the borrowers. However, now lenders must ensure that the definition of financial indebtedness is wide enough to cover all that is covered under the definition of financial debt in section 5(8) of the code, which includes various aspects like borrowings in general parlance, bonds, debentures, hire purchase, derivatives transactions, receivables sold on recourse basis, guarantee, indemnity obligations.
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SNG & Partners has offices in New Delhi, Mumbai and Singapore. Aditya Vikram Dua is a senior associate and Aniket Sawant is an associate.
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