In July 2022, the Supreme Court deviated from the hitherto well-established legal position that a creditor had to only demonstrate the “existence of debt” and “default” for admission of any insolvency petition.
From noteworthy judgements to sweeping macroeconomic policy decisions for India’s IBC regime, here is a look at 2022’s top developments in the insolvency and bankruptcy domain.
The Supreme Court held that the NCLT had discretionary powers to admit/reject an insolvency application
In July 2022, the Supreme Court deviated from the hitherto well-established legal position that a creditor had to only demonstrate the “existence of debt” and “default” for admission of any insolvency petition. In the Vidharbha Industries case, in a judgement that is per incuriam the judgment in Innoventive Industries, the Supreme Court held that NCLT has discretionary powers to admit/reject a financial creditor’s application. If the facts and circumstances so warrant, the NCLT can keep the admission in abeyance or even reject the application. This departure from the existing position has introduced an element of uncertainty and has the potential of delaying the admission of applications to commence corporate insolvency resolution processes.
Treatment of Government dues under a resolution plan
The Supreme Court in Rainbow Papers judgment (September 6, 2022) held that the dues of the tax authorities under the Gujarat Value Added Tax Act, are to be considered as secured debt and are to rank equally with secured financial debt under the distribution waterfall. As a result, the minimum amount of dues payable to Government and statutory authorities (as an ‘operational creditor’) during the resolution process of a corporate debtor will have to be re-considered and there cannot be a uniform approach to all Government and statutory dues. The classification of such dues will now have to be undertaken in two-pronged manner, firstly, examination of the provisions of the governing legislations to ascertain whether or not a charge is created in favour of the relevant Government and statutory authority in respect of their claim; and secondly, whether or not the provisions of such governing legislation are expressly made subject to the IBC. The interpretation of the provisions of the IBC laid down by the Supreme Court diverges from one of the stated objectives of the IBC, which is to alter the priority of payments of Government dues.
Measures to encourage new investor classes
In January 2022, SEBI amended the SEBI (Alternative Investment Funds) Regulations, 2012 and introduced a sub-category of special situation funds (SSFs) under category I of alternative investment funds. The SSFs will only be investing in ‘special situation assets’ which includes stressed loans available for acquisition or as part of a resolution plan approved under the IBC. The amendment has opened up more opportunities for investors to tailor their investments and bring more domestic investors into play.
In October 2022, RBI specifically allowed asset reconstruction companies (ARCs) to act as resolution applicants under the IBC, subject to compliance with certain conditions. Earlier the participation of ARCs was questioned by the regulator as participation as resolution applicant was not specifically permitted under the SARFAESI Act. The new policy change is a welcome move and is provides impetus to stressed asset market with wider participation and opens doors for competitive challenge process resulting in maximisation of value of stakeholders.
Insolvency Professional Entities as insolvency professional
IBBI recently allowed an Insolvency Professional Entity (IPE) to be registered as an insolvency professional. This amendment will facilitate IPEs to take up the role of interim resolution professionals/resolution professionals in corporate insolvencies. This may also prove to be significantly beneficial for the resolution of large stressed accounts by providing requisite infrastructural support and avoid value erosion.
The ‘bad bank’ enters the fray
As a significant macro-economic development to revamp the stressed asset resolution, the Government of India established the National Asset Reconstruction Company Ltd. (NARCL) to aggregate and manage non-performing loans. It is expected that the establishment of NARCL help the consolidation of distressed debt and have a better ability to steer resolutions. This has also opened up new opportunities for investors to invest in security receipts issued by NARCL, which are to some extent also backed by government guarantees.