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UK’s insolvency reforms can show India the way

  • Introducing certain provisions that form part of the UK's new law on corporate insolvency can help save Indian companies that can still be rescued from going into the insolvency process.

The United Kingdom has recently enacted the Corporate Insolvency and Governance Act 2020 (CIGA). The CIGA has introduced important reforms to the UK insolvency law, including provisions such as a ‘free-standing’ moratorium and a new ‘restructuring plan’ regime, with ‘cross-class cram down’. These may serve to inform reforms to the provisions for schemes of ‘compromise or arrangement’ under the Companies Act, 2013.

Under the CIGA, companies can seek shelter under a ‘free-standing’ moratorium from creditor action. Insolvency laws generally provide for a moratorium after the company enters into the (often irreversible) resolution process. For instance, under the Insolvency and Bankruptcy Code, 2016 (IBC), a moratorium is ordered when the company is admitted into the corporate insolvency resolution process. Under a ‘free-standing’ moratorium, the outcome, or the process to be followed for such outcome, is not predetermined. The company may choose any viable option for its rescue or restructuring; in fact, it is not necessary to choose any formal process—it can even be rescued without a formal process.

The moratorium is overseen by an insolvency professional who acts as a ‘monitor’, but the directors remain in charge. It is initially granted for a period of 20 business days, which may be extended for a further period of 20 business days if the directors make the necessary filings, and if in the monitor’s view, the rescue of the company is likely. Any extension beyond a period of 40 business days may be granted in limited circumstances after considering the interests of the pre-moratorium creditors and the likelihood that the extension will result in the company continuing as a going concern.

In order to prevent a misuse of the moratorium, certain exclusions have been provided. For instance, if a company has been in moratorium in the preceding 12 months, a moratorium under the CIGA cannot ordinarily be granted. The moratorium must come to an end if it becomes apparent that the company cannot be rescued. Companies in the financial services sector are ineligible.

A similar free-standing moratorium under the Companies Act or the IBC will give Indian companies and their creditors the breathing space to work out a rescue plan as it will shield them from the threat of litigation. Attempts have been made in India to obtain a free-standing moratorium under the existing Companies Act; however, a clear legal provision will give the National Company Law Tribunal (NCLT) a firmer statutory backing for ordering such a moratorium.

Supervision by a ‘monitor’ who is accountable to the NCLT and the Insolvency and Bankruptcy Board of India will prevent misuse and provide objectivity to the resolution process. Further, the moratorium is for a limited period, which will compel companies and creditors to arrive at resolution plans quickly. In cases where a default has already occurred, the execution of an inter-creditor agreement within the Reserve Bank of India’s stressed asset guidelines may be made a pre-condition for grant of a moratorium, as such an agreement pre-supposes that the company has reasonable prospects of a rescue. Further, payments to related party creditors (financial and operational) should be suspended during the moratorium.

The second reform introduced by CIGA is the provisions for “Arrangements and Reconstructions for Companies in Financial Difficulty", or a ‘restructuring plan’. The provisions are modelled on the provisions for ‘schemes of arrangement’ under the UK Companies Act 2006, with a crucial difference. A scheme of arrangement in the UK, as in India, is effective only when approved by each class of creditors and members (shareholders). Under the CIGA, a restructuring plan can be approved by a court and be binding on the dissenting classes of creditors or members (“cross-class cram down") if such classes of creditors or members would be no worse-off under the proposed restructuring plan than in the most likely outcome if the restructuring plan were not to be approved.

Similar cross-class cram down provisions already exist in India in the IBC, where a resolution plan approved by a two-thirds majority of financial creditors binds operational creditors and members. The Supreme Court has also upheld such cross-class cram down provided that fair and equitable treatment is accorded to operational creditors. This principle is the foundation of modern insolvency law and may be made applicable to schemes of corporate debt restructuring under the Companies Act 2013 also. Operational creditors and shareholders may be bound by the proposed scheme even if they do not approve it, provided they are not worse-off under the proposed scheme than in liquidation and, in the view of the NCLT, the scheme is fair and equitable.

Reforms to the scheme provisions of the Companies Act will provide an enabling framework for Indian companies to resolve and restructure their debts and avoid the spate of insolvencies that may occur after the period for which the IBC is suspended comes to an end. A free-standing moratorium will allow companies a ‘calm period’ to work out a resolution. Further, having introduced a modern cross-class cram down provision as part of our insolvency law in the IBC, lawmakers should not hesitate to make similar provisions in the scheme process. Historically, schemes have been frustrated by persons who have no real economic value in the resolution. The success of the IBC is owed in no small measure to the decision-making being confined to the financial creditors as a single class. It is time to replicate the successful features of the IBC in the Companies Act to create an alternative resolution mechanism that is equally effective.

The authors are partners at law firm Cyril Amarchand Mangaldas

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