Editor’s Note: Mr. Anoop Rawat is an Equity Partner in the Insolvency and Bankruptcy practice at Shardul Amarchand Mangaldas & Company. He has over 15 years of practice experience and during this short yet successful implementation phase of IBC in India, he has been instrumental in several high-profile cases, including some on the dirty dozen list, recommended for resolution by the RBI.  Acting for various stakeholders in the resolution process, he has been involved in some complex cases like Bhushan Steel, Reliance Communications and Aircel among many other notable names.

You can listen to the talk here:

 
Ahkam: In the background of the enactment of the IBC, which has seen a massive structural and behavioural change across the entire ecosystem surrounding the insolvency regime in India, it has created an environment that advocates for transparency among stakeholders. However, there is a complaint that there is an insufficient infrastructure with reference to effective implementation of the resolution plan, specifically in reference to the role of the committee of creditors and the resolution professional, in the period post-approval of the resolution plan by the adjudicating authority, but before the control has been transferred to the resolution applicants. Even section 30(2) of the IBC requires for post-approval management of affairs as well as implementation and supervision of the plan. Are there any specific duties for the committee of creditors or the resolution professional, during this stage that you think should be identified for better transfer of control to the resolution applicant?

Anoop: I think you have touched upon a very important aspect of the Insolvency Law, which is the governance for the implementation of the plan, post-approval of the plan by the National Company Law Tribunal. Now, the ‘committee of creditors’ concept as we understand under the Code, it basically deals with the duties or the functions of the resolution professional and the committee of creditors during the process period, which ends the moment NCLT approves the plan. Therefore, as far as the Code is concerned, there is no specific guidance as to what would be the role of the committee of creditors for this period. We do have references in the Code, which indicates that the plan should have the governance mechanism, but it does not have any specific role for the committee of creditors. Therefore, this role can come only by way of the provisions of the plan. What it means is that, because after the NCLT approval, there is a timeline for implementation and the committee of creditors or the lenders, who are the beneficiary of the plan, they are still not paid, or their debt is still not resolved. There is a requirement that the lenders, the erstwhile committee of creditors, should continue to have a say in the governance mechanism, through the provisions of the plan. Now, there is no standard or the model governance process that is followed, and every case is different. The way the plans are negotiated is different, the governance mechanisms post-NCLT [approval] are different. We have seen in several cases that there is a formation of a Monitoring Committee, sometimes it’s also called the Steering Committee, where we have representation from the lenders, from the erstwhile committee of creditors, and also representation from the erstwhile resolution professional, and also, in some cases, representation from the resolution applicant. The representation from the resolution applicant sometimes becomes tricky, in cases where the resolution applicant also needs the CCI approval, before it can implement the plan, and that CCI approval is not in place before the NCLT has approved. This problem has become acute now, because of the recent NCLAT judgment where they have held that the CCI approval can also come subsequently. And they have also indicated that it must come before the NCLT approval, but once the plan is approved by COC and it goes to the NCLT, then it’s difficult to align the CCI approval with the NCLT approval, so we will always have this issue. However, in cases where either the CCI approval is in place or the CCI approval is not required, there the resolution applicant can also have representation in the Monitoring Committee. Now, this Monitoring Committee, in a way, as far as the representation from the committee of creditors is concerned, takes care of the interests of the committee of creditors. However, it is not as effective as the statutory committee of creditors. So, to that extent, there is a great degree of variance in the governance mechanism throughout. It would be appropriate that if there is some legislative intervention here, where the governance structure is continued, the same governance structure with the same rights of the committee of creditors as it existed, prior to the NCLT approval is continued, till the time that the plan is implemented. Otherwise, there are so many complications, during the implementation phase, that the lenders, who are the representatives of the committee of creditors cannot effectively handle. One example would be where the resolution plan faces difficulty in implementation. A typical example would be the COVID period plan implementation, where the resolution applicants have been experiencing difficulties in arranging the finances, and therefore, they need the lenders to cooperate and give them more time or give some relaxation in the way the plan is to be implemented. Now, in those situations, in the absence of a committee of creditors, it is very difficult for any representative to take any effective call. And therefore, it necessarily has to go to the NCLT and the NCLT would have to give some directions. But it becomes chaotic. Similarly, in cases where the resolution applicant defaults in implementation, now there, in the absence of a committee of creditors, again, it becomes very complex as to who would take action, because the committee of creditors is not in the picture anymore. So, this remains a vacuum and a very critical aspect which needs to be provided for, either by way of an amendment to the Code or by way of an amendment to the regulations.

Ahkam: I think you have made a very valid point in how a flexible governance mechanism is required in this period, that is specifically tailored to the requirement of the entity that is undergoing insolvency resolution process. And directly referring to your example brings me to my next question, which would be in the context of COVID-19. I would like to ask how there has been another implication of the novel coronavirus, in terms of the national lockdown and disruption of the country’s economy, the government and IBBI have though taken the efficient implementation of insolvency framework as a key priority and taken some steps, however, there are certain concerns with reference to the resolution applicant, for example, if they are successful in getting an approval from the committee of creditors, as well from the National Company Law Tribunal now, and they want to go ahead and implement the plan, but now COVID poses an immediate threat to this implementation. Now, you know they have relaxed the timeline, but there could be material changes in the circumstances, due to which the successful resolution applicant may want to make a post-approval modification in the resolution plan. However, in our circumstances, there have been cases where the Adjudicating Authority has systematically held that there could be no changes in the substantive aspect of the plan after it has been approved by the Adjudicating Authority. What is your opinion on this subject as to what could be done to reduce the hardship that is faced by the successful resolution applicant in these tough times?

Anoop: Yeah, so the COVID situation has definitely posed a problem for the resolution applicants. However, to gauge its impact is very difficult.

COVID is not a long-term impact. It could right now, at best, be seen as a short-term liquidity issue or short-term business operation issues. But from a long-term perspective, the business may still be as viable as it was shown in the resolution plan. So, I think, when we talk about any relief or any changes in the plan, I would assume that the request of the resolution applicant would be to address the immediate liquidity issues, and not as an overall plan viability. Because if the overall plan viability is in question, then, of course, the fundamental basis of approving the plan also goes away.

Because, as you know, the fundamental assumptions for any approved plan is that it is feasible and viable. So, if it ceases to be feasible and viable because of a long-term impact, then, of course, it has to be validated again. How will it be validated? That is not something there in the Code today. But this is something which needs to be addressed, and I would assume that this will come out by way of judicial precedent. But, you know, for the time being, let us just assume that this COVID only creates a limited liquidity issue and a limited business hurdle. Now, in those situations, of course, you know, the one way in which you can take care of that is that you take some more time, maybe do some cost optimisations and request the custodians of the affair, which is the monitoring committee or the steering committee or the resolution professional who is continuing, to optimise the effect, and ensure that, you know, there is a minimal impact on the numbers. Thirdly, I think, the lenders, the resolution professional and the resolution applicant need to keep talking to each other, keep sharing the information with each other, in these kinds of situations. Also, it is very natural for the lenders to ask for a confirmation from the resolution applicant that they will not deviate from the resolution plan because that is something which is very sensitive to the lenders. The moment any lender talks about the discussion on any situation, which is attributable to COVID, that could mean, in a way, they are acknowledging that, yes, there would be a deviation. So, I think, the trust factor comes into play there, and the resolution applicant needs to give adequate comfort to the committee of creditors and the resolution professional that, yes, we’re still very much committed to the plan, and then, work out a solution which does not deteriorate or dilute the value for the committee of creditors, as compared to what was given in the plan. In some cases, it would also require the concurrence of the National Company Law Tribunal, because once the plan is approved under section 31, it becomes binding on all the stakeholders, and there cannot be any unilateral or bilateral changes to the plan. It has to go through the approval mechanism of the National Company Law Tribunal under section 60(5). Perhaps, that could be one section, which can be cited to get those changes agreed. But, unlike in other jurisdictions, where they do have some provisions for the amendment to the resolution plan, in India, the Code is completely silent on this aspect. So, it remains to be seen how the NCLT would come up with the jurisprudence on this aspect. And more importantly, how commercially lenders behave in these situations. There has to be a sense of responsibility, both amongst the lenders, and also, the resolution applicant. This situation should not be seen as either profiteering from the situation or being too much of a bully, where the lenders are threatening the resolution applicant with dire consequences of section 74. I think it has to be a balanced approach, and in a fair situation, where both parties are fair and reasonable, I think, National Company Law Tribunal should be in a position to give some guidance on this.

Ahkam: It is only reasonable to believe that the resolution applicant needs to be responsible in taking all the measures that are required to take up the enterprise, as well as the committee of creditors not being a bully, and allowing them a certain relaxation, considering the situation that we have, at our hand. So, that moves me to my next question with respect to the problems that are in the face of resolution professional, during this COVID period. This COVID period not only threatens the continuance of the distressed entity as a going concern but also impacts value maximisation of stressed assets. Now, a problem could be, for example, that in the entity undergoing insolvency, the resolution professional is not able to take physical custody of the asset or keep the unit undergoing as going concern. So, how should the resolution professional, in your opinion, tackle the challenge of maintaining the operations as a going concern with frugal workforce and funding?

Anoop: Yeah, I think that’s a very pertinent question, and this is what the real problem is today, for resolution professionals, because many businesses, which are in the insolvency resolution, they have lost tremendous business. And then, their revenue levels have gone down substantially. I think in these situations, it is the duty of committee of creditors also to come out and provide interim funding for maintaining the ‘going concern’ status of the corporate debtor. This, basically, also helps in preservation as well as maintaining the going concern of the company, and at the end, the beneficiaries are the lenders only. So, I think, in these situations the resolution professionals should be preparing the detailed data of where all the shortfalls exist, making a case for interim funding by the committee of creditors, and convincing the committee of creditors in giving the interim funding. Resolution professionals are expected to have a mind of a businessman and have the ability to present the case in a better way. Also, I think, it is very important, that during this period, not too much of a cash burn happens. If there are certain activities which are not likely to yield any profit in the shorter run, there, you know, I think the capacity levels need to be moderated to align with the existing subdued demand situations. And also, at the same time, optimise the cost in whichever best way possible, and keep the committee of creditors informed. I think these are some of the things that the resolution professional needs to undertake in order to ensure that the assets are preserved and the going concern status is maintained as well as that he is not blamed tomorrow, for not taking adequate action for preservation and protection of the assets.

Ahkam: So, from the specific problems that have hurdled the response of the resolution professional and resolution applicant, respectively, now, I want to make a general question relating to the structural framework of debt resolution during this COVID period. The government has suspended the IBC for a six-month period, which could be extended to a year-long period, as reported by the sources. The only restructuring mechanisms that are available are the out-of-court restructuring mechanism through the June 7 RBI Circular, or the scheme of arrangements under the Companies Act, which remain the two most available routes right now. So, do you think this infrastructure can handle the demand efficiently or there could have been a better handling of the situation? For example, under the IBC, the government also suspended the initiation of voluntary insolvency, which could, for example, have been left out of the suspension. What are your views on this?

Anoop: I think, first coming to that, [section] 230 is also a court-imposed restructuring. Of course, you know, it happens on the basis of the shareholder’s resolution but that is something for which you need to go to the NCLT. So, I think, what you mean is the resolution outside IBC and outside the courts established under the IBC. Now, as you rightly said, there are two mechanisms, prevalent mechanisms, one is the resolution under ‘June 7’, and other is the scheme of arrangements under section 230. Now, definitely, the banks overall do not have, I would say because of my experience, that the banks would not have that kind of bandwidth to deal with the massive defaults of the stressed assets that come to their table because of the COVID situation.

One good part is that while the IBC has been suspended for six months, at the same time, there is a relief that is given, for principle and interest for the overall of the six-month period. So, you will not have defaults. And even if there are defaults, the defaults after the cut-off date mentioned in the ordinance, which is in March, the defaults cannot be used to initiate the insolvency resolution processes. I would assume that during this period, the banks would try and give some liquidity to the system and the companies, so that they do not go into the default stages. But there could definitely be other cases which cannot now be made profitable unless a deep restructuring happens. So, I think the banks would have to then, therefore you know, create different buckets. One bucket would be where the immediate liquidity can be provided. The second bucket would be where deep restructuring is there, and third bucket where, you know, you just need to preserve the asset and there is no hope for revival and then you finally want to send it to either insolvency or liquidation, as and when it restarts.

So, given the existing bandwidth, this would be the best solution. Of course, they have to provide inbuilt checks and balances of which case falls in which bucket. But at the same time, for all the previous defaults, basically, the defaults pre-cutoff date in the ordinance; those defaults can still go under insolvency. So, therefore any financial debt default or operational debt default, which existed prior to this cut-off date, any of the financial creditor or an operational creditor, or for that matter, even the company, can take it to the insolvency resolution. And that is something which is sensible also, I think. There are other issues around the ordinance, but let’s just leave it to some other discussion. Now, coming back to the question on the capacity and the feasibility of resolution under the June circular. So, let us say there are cases where you need to do a proper restructuring or a resolution, and a short-term liquidity alone will not be sufficient. Now, in those cases, in addition to the capacity issue, there are other related issues that you have various varieties. You have a variety of creditors who have lent to the corporate debtor – there could be banks, there could be the NBFC’s taking deposits, there could be the NBFC’s not taking deposits, there could be the mutual funds, there could be foreign portfolio investors, but all of them are not covered under the same regulator. They are regulated through different regulators. So, one question that comes up is the efficacy of the system: Whether the existing regulation is adequate enough to ensure that there will be a quick resolution for the stressed companies. And you know, when I say quick, I mean, a very, very fast resolution, because the value is deteriorating very fast. So, any delay would work to be detrimental for all the stakeholders. So, today if you look at the June 7 circular, it lacks in its ability to bind all the creditors together; it is largely a voluntary mechanism, an inter-creditor based arrangement, where if the lenders are not signing the inter-creditor agreement, the resolution is not binding on them. Then, there are the issues of the lenders who come under the purview of other regulators, like SEBI, the PFRDA or IRDA. So, there’s a big coordination issue that exists today, when we talk about restructuring of an account under the June 7 circular. So, I think, there has to be some legislative intervention there as well. There has to be some legislation, which binds all the creditors who have majority decision, like the cramdown provisions we have in the insolvency code. So, similar provisions need to be provided for a resolution under the June 7 circular. Also, there needs to be a level playing field. What I mean by that is that under the June 7 circular, you have all the lender banks, who come together, form kind of a JLF that used to exist earlier and take a decision for their own benefit. Now, I think, that approach needs to change. There has to be a platform where an independent person can come in and can create a committee or a lender forum, where all lenders can come together, and they will have the same kind of voting rights, or a say, as is available to any other creditor, bank or any other NBFC. So, that is very, very important. Now till such time, some of these fundamental issues, and of course, there are many others as well, like operational issues, like credit rating, forensic and other things. But, I think, till such time that these issues are resolved, June 7 will still remain on paper, and it will not be able to serve the same purpose as is achieved under an insolvency code resolution.

Ahkam: I think you have made some remarkable observations on this question and to sum it up, I think, what you said was basically the coordination gap between all the creditors of the distressed entity as well as RBI June circular only providing cover over the lender banks and being inapplicable over other lenders, who there could be a variety of. So, that could be one problematic aspect of this infrastructure to handle the demand of distressed assets. Now, this brings me to my final question for the discussion, and in this respect, it is a very general principle-based question. Looking at the IBC, which was enacted with a view to lure foreign investors and increase foreign investment in the country, but despite the steps taken, the foreign investor confidence is still dwindling, which is reflected in the weak foreign investment. Do you believe that the Indian debt regulations need to be reconsidered and streamlined to include certain more investor-friendly steps? Like, for example, permitting investment in the domestic rupee debt by foreign investors. Because currently, the only solution they have is that they could invest through the depository receipts issued by asset reconstruction companies, or if they are FPIs, they could maybe invest through other routes, or they could go through the external commercial borrowing route. What do you think, given our approach to relax the foreign investment regulations, could be reconsidered and how we could attract more foreign investors towards the distressed asset market that is growing in India?

Anoop: No, I think, this is a very, very important observation that you made, and in fact, this is something that the government is already, I think, thinking about, as far as my understanding goes, because this particular issue had been highlighted in several (IBBI) roadshows that have occurred outside India to discuss the insolvency regime. And that is precisely the question that was asked, that right now, they have to rely on an ARC to invest and there should be avenues for direct investment. So, I am hopeful that some positive development should happen. Of course, you know, what policy drives a decision, we don’t know today. And there could be various reasons why the restrictions are continued or are lifted. But certainly, this is something that the investors have highlighted as the key concern. In addition to that, I think the marketability of the asset, that is another thing that we can definitely work on better. The way the assets are marketed and the quality that the information memorandum is in today does not inspire enough confidence. We also had some issues faced by the foreign investors in terms of the clarity on some of the legal principles, like what is the entitlement of a dissenting financial creditor and of operational creditors. Fortunately, now we have enough jurisprudence, and fortunately, the Supreme Court has upheld legal principles. So, we do have a clarity on that aspect. But I think some of these other aspects need more clarity and there needs to be strict and elaborate guidance on how the asset will be marketed to be able to attract good investment.

Ahkam: The marketability of the asset is a really important factor right now, and maybe, along with the issue of foreign investment, if we better the marketing of the asset and the information memorandum structure, then maybe we could attract more investors.

Anoop: Yeah, because, they can still come with a direct investment strategy. But most of these funds may not want to come in as a direct investment, because they may want to hold the debt for some time and then take an exit. So, while they continue to have an option available to come in as a direct resolution applicant or some of the other aspects, you know, the secondary market sales, secondary market purchases; now in those segments, some of the regulatory restrictions, if they are eased, then we’ll see more investors’ interest coming in.

We express our sincere gratitude to Mr. Anoop Rawat for taking out time from his busy schedule and providing insightful responses to the questions.