INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
7.8 Out-of-Court v In-Court Enforcement A typical private credit out-of-court restructuring would require the co-operation of the borrower and the equity holders of such borrower and other security providers. The out-of-court restructuring may involve the conversion of debt into equity, the refinancing of debt with haircuts or the sale of the company to a new investor to resolve the debt. An in-court restructuring is a creditor-driven, court- supervised process and does not warrant co-oper - ation from the borrower or the equity holders. This gives the lenders greater control over the restructuring process. The IBC recognises the clean slate principle. The courts in India have clearly recognised a whitewash of past liabilities (including statutory liabilities) upon the completion of a CIRP. This is not available during out-of-court restructurings. 7.9 Dissenting Lenders and Non-Consensual Restructurings In order to protect the rights of dissenting financial creditors, the IBC provides that financial creditors who do not vote in favour of the resolution plan must be paid an amount that is not less than the amount they would have received pursuant to the liquidation water - fall set out in the IBC in the liquidation of the corporate debtor. This amount has to be paid in priority to the amounts payable to assenting financial creditors. However, a proposed amendment to the IBC sub - mits that the dissenting financial creditors will receive the lower of the liquidation value or the amount pay - able under the resolution plan, if such amounts were distributed in accordance with the statutory priority waterfall. 7.10 Expedited Restructurings Under the IBC, a pre-packaged insolvency resolution process is currently only available for micro, small and medium enterprises (MSMEs). Insolvency pro - ceedings can be initiated against MSMEs with a pre- agreed resolution plan. This accelerates the resolution by enabling negotiations with creditors before filing with the NCLT.
Key decisions in a CIRP, including the approval of a resolution plan, require the consent of at least 66.6% of financial creditors by value, and such decisions are binding on all stakeholders. Consequently, lenders with minimal voting shares may still be bound by the decisions made by the specified majority. Due to a moratorium being imposed, the lenders are not able to enforce their security interest. The guaran - tors are not covered by the moratorium, and lenders can enforce their remedies against them, including initiating a CIRP. 7.6 Transactions Voidable Upon Insolvency Under the IBC, if the liquidator or the IRP is of the view that the corporate debtor has given a preference to any person, then such liquidator or IRP may apply to the NCLT to seek a declaration that such transactions are void and that their effect is to be reversed. The types of transactions subject to scrutiny are: • preferential transactions that favour specific credi - tors, sureties or guarantors over others; • undervalued transactions, where a corporate debtor transfers assets for a value that is signifi - cantly less than their actual worth; and • extortionate credit transactions, where the terms require the corporate debtor to make exorbitant payments in respect of the credit provided, or where the terms are unconscionable under the principles of law relating to contracts. The look-back period for preferential transactions and undervalued transactions is two years preceding the insolvency commencement date (ie, the date on which an application for initiating the CIRP is admitted by the NCLT) for a related party and one year in the case of any other person. However, the look-back period for extortionate transactions is two years prior to the insolvency commencement date in all cases. 7.7 Set-Off Rights The Insolvency and Bankruptcy Board of India (Liqui - dation Process) Regulations, 2016 provide the right of set-off during the liquidation process. The IBC does not recognise the principle of set-off during a CIRP. This has also been clarified by the Supreme Court of India.
116 CHAMBERS.COM
Powered by FlippingBook