Rs 60,000 Crores Have Been Realized Through Successful Resolution Plans Under IBC : Justice S K Kaul

The central promise of the IBC has been to guarantee a time bound resolution of bad debt, said Justice Sanjay Kishan Kaul, judge of the Supreme Court of India, while giving a talk at the Symposium on 'Recovery and Resolution- Emerging Challenges before Recovery Tribunals & NCLTs' on  Saturday at Chennai.

"The central promise of the IBC has been to guarantee a time bound resolution of bad debt, which, if left unresolved for extensive periods of time, can have a degrading effect on lenders, investors, liquidity and market sentiment. The Code attempts to strike a balance between creditors' interests and the debt ridden company, by not only providing for a partial recovery of dues, but also recovering the maximum assets of a failing company, after meeting debt obligations, thereby allowing the company to start afresh.", he said.

His lecture was on the topic "Jurisprudence-Emerging Perspectives on Recovery v. Resolution and Bracing up to the new Insolvency Regime".

The move to Insolvency and Bankruptcy code was made to cement the concept of 'creditor in control' as opposed to the 'debtor in possession', in order to ensure higher chances of resolution of the insolvency of a firm, said Justice Kaul, who was formerly the Chief Justice of Madras High Court.

"The soul of the code was stated to be in ensuring the resolution of the insolvency of a firm, wherein a collective attempt was to be made to keep an insolvent firm as a going concern and to maximize the value of its assets. The effort was to embellish a system where the focus was to ensure a partnership of creditors, who would work together to not only recover their dues, but also fortify the life and health of the insolvent company. This was as opposed to a system where recovery was the preferred course of action by the economic and legal set up."

Reviewing the journey of IBC over past three years, the judge said :

With the IBC providing a robust framework for market driven and time bound resolution processes, since its inception, 80 cases have been resolved by accepted resolution plans and an amount of Rs. 60,000 crores has been realised through these resolution plans. The change is behavioural too. Having created an apprehension in the minds of the management of companies of losing control over their companies, various promoters have been prompted to settle or resolve their dues before a formal process is started. Further, promoters are eager to re-negotiate/ restructure debt at the earliest sign of distress, which helps in the value preservation of the corporate entity. This has also provided an impetus to corporate entities partnering with new investors to resolve earlier signs of distress, before approaching the NCLT. This is witnessed in the 3300 cases that have been disposed of by the Adjudicating Authority, based on out-of-court settlements between corporate debtors and creditors, which led to recovery of amounts over INR 1,20,390 crores.

In 2016, while the IBC was still in the process of kicking in, the World Bank released data which revealed that in India, insolvency resolution took 4.3 years on an average, as opposed to the United Kingdom and the United States, which took 1 year and 1.5 years respectively. Additionally, the World Bank, in its Ease of Doing Business Index, 2015 ranked India 137 out of 189 countries on the 'ease of resolving insolvency' based on varying elements. In 2019, this ranking improved considerably as India was ranked 108 out of 190 countries.

He added that a  key element of a modern corporate insolvency resolution processes is the provision of 'breathing space' to a debtor to enable assessment of its viability and sale of its assets or restructuring of its debts. In this period, therefore, the aim is to help businesses continue trading, while a resolution that maximizes value for all creditors, is reached.

To enable this, it is key that 'critical suppliers', without the supply of whose goods and services the debtor cannot function, continue their supplies without interruption.

The judge also elaborated on the 'success' stories under IBC, such as that Bhushan power resolution. A comparison between insolvency law regimes in other jurisdictions with Indian practices was also undertaken.

Justice Mr. Senthil Kumar Ramamoorthy (Judge, Madras High Court),  Justice Mr. Tarun Kumar Kaushal (Retd.) (Chairperson DRAT, Chennai), Mr. T. Manoharan (Padma Shree Awardee, Non Executive Chairman, Canara Bank, Mr. S. Ramann (MD & CEO, NeSL) were also present at the Symposium.

Read the full text of speech of Justice Kaul :

Respected Judges of the Madras High Court,

Chairperson, DRAT,

Presiding Officer and Members of the DRT,

And other panelists, special invitees, and organisers, and my dear friends, welcome!

It gives me pleasure to be part of this discussion today, which brings together some of the leading minds dealing with the ever evolving landscape of bankruptcy and insolvency laws. This symposium comes at an opportune moment, with the recent introduction of amendments to the Insolvency and Bankruptcy Code, in August 2019.

Jurisprudence of Insolvency Laws

Businesses need efficient and speedy procedures for exit as much as for start-up. World over, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones. This ensures that the human and economic resources of a country are continuously re-channelised for efficient use, thereby, also increasing the overall productivity of its economy.

However, along with growth of each business, comes the danger that poor management, bad business judgement or fraud may result in it becoming unviable. In such cases, it is possible for the productivity of the enterprise to be restored at a low cost, and without attendant distress to the stakeholders. This may be done so by providing more capable managerial talent an opportunity to run the concern.

The role of all insolvency laws, to start off, was considered to facilitate a reduction in the incentive for individual enforcement against the assets of a distressed company. Thus, sufficient incentive was sought to be provided for creditors to favour collective insolvency proceedings over individualized debt enforcement mechanisms.

Insolvency laws have been famously considered to be examined through the prism of creditors negotiating from behind a Rawlsian 'veil of ignorance'. In this situation, creditors face a classic case of Prisoner's Dilemma. While each creditor has the incentive to race towards individual enforcement of its debt, the same may result in a chaotic run on the assets of the business of the corporate debtor and produce a worse outcome for creditors as a whole, particularly for those who are at the losing end of the race for recovery. Thus, as creditors may not know whether they will win this race, they usually prefer collective insolvency proceedings that, at least in theory, are meant to maximize aggregate recovery for creditors.

With time, to bring about a more inclusive vision of insolvency laws, a broader set of concerns vis-à-vis a wider array of stakeholders was sought to be catered to. Thus, asset preservation as an end, to revive a debtor's business, whenever viable was recognised as a legitimate concern of insolvency laws. Further, the interests of all those stakeholders who were affected by the failure of a company, including financial creditors, trade creditors and employees were sought to be accommodated by this evolving field of law.

Scholars tend to accord bankruptcy laws a central role in promoting the survival of a company as an independent objective in order to save jobs and, arguably, to maximise social welfare. The UNCITRAL Legislative Guide on Insolvency, states nine broad objectives of an insolvency law regime:

(1) Provision of certainty in the market to promote efficiency and growth;
(2) Maximization of value of assets;
(3) Striking a balance between liquidation and reorganization;
(4) Ensuring equitable treatment of similarly situated creditors;
(5) Provision of timely, efficient and impartial resolution of insolvency;
(6) Preservation of the insolvency estate to allow equitable distribution to creditors;
(7) Ensuring a transparent and predictable insolvency law that contains incentives for gathering and dispensing information;
(8) Recognition of existing creditor rights and establishment of clear rules for ranking priority of claims; and
(9) Establishment of a framework for cross-border insolvency.

The Indian Scenario

In 2016, while the IBC was still in the process of kicking in, the World Bank released data which revealed that in India, insolvency resolution took 4.3 years on an average, as opposed to the United Kingdom and the United States, which took 1 year and 1.5 years respectively. Additionally, the World Bank, in its Ease of Doing Business Index, 2015 ranked India 137 out of 189 countries on the 'ease of resolving insolvency' based on varying elements. In 2019, this ranking improved considerably as India was ranked 108 out of 190 countries.

It has been three years since the promulgation of the Code and these three years have seen a montage of changes in creditor behaviour and the debt resolution and recovery framework of India. Before the conceptualization of the IBC, the structure of the bankruptcy and insolvency process in India was varied and multi-layered. Moreover, being covered by multiple laws, with different fora for adjudication, the process was wrought with delay and other inadequacies. Furthermore, in a debtor centric system, where the flailing companies continued to be in control, creditors were known to have arguably weaker rights which often materialized in low recovery rates, thus, making them averse to lend security. Thus, a move was made to cement the concept of 'creditor in control' as opposed to the 'debtor in possession', in order to ensure higher chances of resolution of the insolvency of a firm.

With this in mind, the IBC was formulated with the fundamental idea of encouraging resolution to boost the value enhancement of the corporate debtor and its assets. It was framed in a manner that would meet the interests of the creditor, whilst balancing the needs of the debtor, to successfully negotiate its entrepreneurial viability, without fear of debt recovery enforcement and its consequent demise. The soul of the code was stated to be in ensuring the resolution of the insolvency of a firm, wherein a collective attempt was to be made to keep an insolvent firm as a going concern and to maximize the value of its assets. The effort was to embellish a system where the focus was to ensure a partnership of creditors, who would work together to not only recover their dues, but also fortify the life and health of the insolvent company. This was as opposed to a system where recovery was the preferred course of action by the economic and legal set up.

Recovery is termed to be an individual effort by the creditor. It pits the creditor and debtor on opposite sides and also creates a competition of interests between the various creditors. This often leads to a scenario where neither equitable distribution of resources is ensured, nor is the best plan of action arrived at, often inevitably bleeding the company to its own death. The philosophy of the IBC is to ensure that the end of an economic entity is brought about only as a last resort. This is so, as a focus on individual recovery destroys organisational capital and renders resources idle. With greater scope of an inequitable outcome, the ethos behind the promulgation of the IBC was to avail recourse to liquidation and recovery, only when the process of resolution failed to yield results.

With the IBC providing a robust framework for market driven and time bound resolution processes, since its inception, 80 cases have been resolved by accepted resolution plans and an amount of Rs. 60,000 crores has been realised through these resolution plans. The change is behavioural too. Having created an apprehension in the minds of the management of companies of losing control over their companies, various promoters have been prompted to settle or resolve their dues before a formal process is started. Further, promoters are eager to re-negotiate/ restructure debt at the earliest sign of distress, which helps in the value preservation of the corporate entity. This has also provided an impetus to corporate entities partnering with new investors to resolve earlier signs of distress, before approaching the NCLT. This is witnessed in the 3300 cases that have been disposed of by the Adjudicating Authority, based on out-of-court settlements between corporate debtors and creditors, which led to recovery of amounts over INR 1,20,390 crores.

The thought behind the Code is best captured by Mr. MS Sahoo, Chairman of IBBI, who has consistently maintained that the IBC does not rule out recovery, but it prioritises reorganization vis-à-vis recovery. It is his belief that recovery should happen from the future earnings of the reorganized firm.

The central promise of the IBC has been to guarantee a time bound resolution of bad debt, which, if left unresolved for extensive periods of time, can have a degrading effect on lenders, investors, liquidity and market sentiment. The Code attempts to strike a balance between creditors' interests and the debt ridden company, by not only providing for a partial recovery of dues, but also recovering the maximum assets of a failing company, after meeting debt obligations, thereby allowing the company to start afresh.

This has been explicitly noted by the Supreme Court in a plethora of recent decisions. In State Bank of India v. Ramakrishna, the Supreme Court observed that the whole idea behind the conceptualisation of the IBC was that the history of debt recovery had shown the former regime to be biased as it immensely favored corporate debtors, due to which, outstanding dues to creditors often remained unpaid. Therefore, in order to strike a balance between creditor interests and debtors securities, in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., it was observed that the IBC, in its true essence, was a beneficial legislation, which attempts to keep a corporate debtor alive as a going concern as opposed to solely being a recovery legislation for creditors. As a matter of fact, in M/s Nowfloats Technologies Pvt. Ltd. v. Getit Infoservices Pvt. Ltd., a Special Bench of the NCLT Delhi observed that the point behind the concept of resolution as delineated in the IBC was to make it a beneficial and representative process of recovery for all creditors, and not just one. This was again reiterated in the Supreme Court's recent decision on whether or not homebuyers were financial creditors under the IBC – Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., where it was perceived that the IBC was never meant to solely be a debt recovery mechanism to recover creditors' dues.

That the arrival of the Insolvency and Bankruptcy Code signaled a heavier emphasis on resolution of the insolvency of the firm, can be evidenced from some of the following examples, in the form of legislative provisions, as well as subsequent amendments to the Code:

• The strict enforcements of time lines:

Time is the worst enemy for a company in distress. As it spends more time in a state of distress and loss, the value of its assets falls, its credibility falls and it becomes tougher to induct experts to manage a situation that may already be a lost cause. To cater to this aspect, strict time lines were sought to be enforced by the Code.

As per Section 12 of the Code, the corporate insolvency resolution process is to be completed within 180 days from the filing of an application. An extension of 90 days, upon filing an application for the same was to be allowed, only if a certain percentage of the committee of creditors voted for the same.

A point of difference arose with respect to time spent in legal proceedings, and whether that would be counted as part of the 270 day period, with a few judicial pronouncements holding against the proposition.

In this respect, S. 4 of the Amendment Act of 2019 was brought about, which amended S. 12 of the Code to lay down that the entire resolution process could only span over 330 days, including the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

• The consolidation of the framework for insolvency:

An aspect of ensuring time bound resolution and maximization of value of assets was witnessed in the withdrawal, by the RBI, of various circulars and other modes and mechanisms that previously prevailed for the resolution of stressed assets. This included the withdrawal of the circulars on Corporate Debt Restructuring, Strategic Debt Restructuring, the Flexible Structuring of Existing Long Term Project Loans, etc. Further, the Joint Lenders' Forum, as an institutional mechanism, for the resolution of stressed assets was also discontinued.

• The continued supply of essential goods or services to the corporate debtor during the corporate insolvency resolution process:

A key element of a modern corporate insolvency resolution processes is the provision of 'breathing space' to a debtor to enable assessment of its viability and sale of its assets or restructuring of its debts. In this period, therefore, the aim is to help businesses continue trading, while a resolution that maximizes value for all creditors, is reached.

To enable this, it is key that 'critical suppliers', without the supply of whose goods and services the debtor cannot function, continue their supplies without interruption.

Insolvency proceedings under the Code typically involve two kinds of critical supplies, (a) non-input 'essential goods and services' covered by section 14(2) and (b) other critical supplies. Supply of essential goods and services, as defined in the Regulations, is mandated under section 14(2) of the Code. Supply of critical supplies other than those covered under the definition of 'essential goods and services', is not mandated but has to be negotiated and secured by the resolution professional. As per the scheme of the Code, payment for the same is to be included as a part of Interim Resolution Professional costs, to be accorded weightage in the resolution plan.

• The binding nature of resolution plans agreed upon, on all stakeholders, including the Central Government, the State Government or any local authority, to whom a debt is owed by a distressed company.

This latter aspect, of the resolution plan being binding on the governments and authorities was introduced by way of Section 7 of the Amendment Act of 2019, amending Section 31 of the Principal Code.

• Provision for mutual settlement after the admission of a case under the Code: Insolvency proceedings are mandatory and collective proceedings that are initiated to resolve the distress of a debtor.

However, in some cases, even where the tests for initiating an insolvency resolution are met, the debtor may not be in distress. For instance, under the Code, even where default is proven by a creditor, it may be that the corporate debtor has sufficient funds to service this debt as it falls due and its assets are generally sufficient to cover the liabilities. The default may have occurred due to an extraneous reason and the debtor may be willing to remedy the default.

In such cases, a balance needs to be drawn between two competing objectives- ensuring that the collective rights of the stakeholders are not compromised and ensuring that a company does not have to undergo an insolvency resolution process where the pre-condition of insolvency itself is not satisfied.

Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that "The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission." This provision allows for the withdrawal of the application before it is admitted. However, there was originally no provision allowing for withdrawal due to mutual settlement once the insolvency resolution process was admitted.

Pursuant to several judicial pronouncements on this point, and recommendations to the Insolvency Law Committee, S. 12A in the IBC was inserted, by way of S. 9 of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. This amendment allowed post-admission withdrawal based on "an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors."

This recommendation was also relied on by the Supreme Court in Swiss Ribbons Ltd. v. Union of India . The Court held that once an application to trigger the corporate insolvency resolution process is admitted, the proceeding becomes a proceeding in rem and it becomes necessary to have the approval of the committee of creditors before any individual claim may be settled. However, the Court went on to clarify that where the committee of creditors has not been constituted yet, "a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement…This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case."

Some further developments and suggestions

• While keeping resolution on the fore, the Courts were aware of the need to widen the array of stakeholders that would get a say in the resolution process. With the latest judicial pronouncement, the definition of financial creditors has been widened to even include home buyers, in order to make the resolution plan a more inclusive one. At the same time, a balance needs to be struck. A widening of the concept of creditors contributes to an increase in timelines, while arriving at a viable plan; however, non-inclusion of important stakeholders delays the process, with such stakeholders approaching judicial fora in an attempt to get justice.

• Another aspect, which has been tried in the United Kingdom (though removed from the proposal to the changes in insolvency laws, currently), to ensure the value of assets of distressed companies remains intact for a longer period of time is an insolvency process where the groundwork for resolution is conducted confidentially, prior to the commencement of formal proceedings. This process, however, becomes binding on all stakeholders through a quick court approval, and is subject to scrutiny ex post.

A glimpse at the jurisprudence of other countries also brings about an interesting perspective in this debate of recovery v. resolution in the insolvency regime, showing how the various jurisdictions have brought about a balance in this respect.

RECOVERY AND RESOLUTION PROCEEDINGS ACROSS OTHER JURISDICTIONS.

There are several marked differences in the way different countries approach the debate between Recovery and Resolution. Often, it is evident that a number of factors; from the sector in play to the kind of services offered, inform this debate.

THE EUROPEAN UNION

The EU Bank Recovery and Resolution Directive covers resolution, while liquidation is regulated by national insolvency laws. This two-tier framework was conceived as part of a conscious effort to introduce the need to tailor solutions to the problems faced. This lead to the introduction of two factors that were to be considered while formulating a strategy for liquidation or resolution: whether the services provided were 'critical/essential services' and if they were in 'public interest'.

FRANCE

There are three proceedings available to troubled companies;

1. Safeguard (Sauvegarde) is a procedure available to companies which are solvent on a cash flow basis, enabling the restricting of the business as a preventive measure. This was most famously used in the restructuring of Eurotunnel.

2. Rehabilitation proceedings are available to an insolvent company provided its rescue appears possible. The aims of rehabilitation in order of priority are first to save a company's activities; secondly to protect jobs and thirdly to pay creditors. A rehabilitation plan is prepared by management and must be approved by different classes of creditors and the court.

3. The most common procedure in France, however, is judicial liquidation, controlled by the court and run by a court appointed liquidator. Priority is given to saving the business and jobs, and employee and tax creditors rank ahead of other creditors, so returns to ordinary creditors can be poor.

GERMANY

• There is a unified insolvency procedure in Germany. Directors must file in Court within three weeks of a company becoming 'liquid'. This strict rule has a much higher rate of company failure than other European states. The Court will then start an observation period where a preliminary administrator enquires into the financial status of the company.

• The German state provides finance for wages in this period and its common practice for the preliminary administrator to obtain powers from the Court to trade on and sell the business and assets as a going concern. The insolvency proceedings are then formally opened and an administrator appointed – the Court will only appoint persons as administrator who have no prior connection with the debtor or its creditors – this means that pre packed sales are virtually impossible.

• The administrator agrees an insolvency plan, which could either provide for the rescue of the debtor or liquidation of its assets and distribution to creditors. The administrator has wide powers to use secured assets and collect in financed debts. There are no preferential creditors in a German insolvency, but group company claims are subordinated to rank behind other creditors.

UK

• The framework for corporate insolvency in England and Wales remained unchanged for 15 years. In 2016, Teresa May's government commissioned a review of the corporate insolvency framework. In 2018, after extensive consultations, the Government published a Response Paper outlining proposed reforms to both corporate governance regulation and the domestic insolvency regime, including a new "restructuring plan" for companies in distress.

• The Government's proposal for a new restructuring plan, or "super-scheme", essentially takes the form of an amended scheme of arrangement: It will be for the debtor to categorise classes of shareholder and creditor, which (subject to objections) a court will accept and order that the parties convene for a vote on a specified date. If the required thresholds are met by the vote, the court will confirm the plan and make it binding on all creditors and shareholders. Key takeaways from the proposal include:

a) The UK Government is set to introduce a new restructuring plan which will enable debtors to propose a restructuring plan to all of its creditors and shareholders in one proceeding. The UK court will have the power to impose a cross-class cramdown and disregard the absolute priority rule in certain circumstances.

b) A new moratorium will be available to companies prior to the onset of insolvency.

c) Insolvency termination clauses will no longer be enforceable in certain circumstances in the event of insolvency proceedings.

d) The proposals, when implemented, could result in a significant change in direction for the UK restructuring market, away from creditor-driven processes and in favour of debtor-led proceedings.

The implementation of these proposals again has been stalled with Brexit and the Conservative Party's election of Boris Johnson to be Prime Mister. He is yet to (formally) announce his stand on the proposals and place legislation before Parliament.

USA

• The primary statute that governs restructuring and insolvency proceedings in the United States is the Bankruptcy Code. The United States is considered to be debtor friendly. The fact that the debtor remains in possession (ie, it stays under the control of its existing board and management), and for an initial period retains the exclusive right to propose a plan of reorganisation, is a principal reason that the United States is considered debtor friendly.

• In addition, the Bankruptcy Code provides several tools that promote a fresh start, such as automatic stay, discharge and the ability to cram down creditors and equity interest holders. However, a balance is truck between competing interests through:

a) strict priority of distributions to creditors and equality of distributions to similarly situated creditors;

b) honouring of subordination agreements; and

c) limiting the duration of a debtor's exclusive right to propose a plan.

There are also sector specific reliefs envisaged.

• Specific entities are not eligible to file for relief under the Bankruptcy Code, including insurance companies (to which state law applies) and certain banking institutions. In addition, certain entities are entitled to file only for Chapter 7 (liquidation) relief, including broker dealers and commodity brokers (each of which has its own separate federal statues under which they may liquidate) and certain uninsured banks. Railways are eligible only reorganisations.

• Although there are no sector-specific regimes relating to corporate insolvencies, certain types of case may result in additional parties becoming involved. Defined pension plans are subject to regulation by the Pension Benefit Guarantee Corporation, which can act to terminate plans, even when the sponsoring corporation is a debtor under the Bankruptcy Code.

The American Bankruptcy Institute established the Commission to Study the Reform of Chapter 11 to comprehensively evaluate US business reorganisation laws. On December 8 2014, the commission released its final report and recommendation. Although congressional hearings have been held on the proposed reforms, no specific legislation is pending and it is unclear whether it will gain any traction in Fall 2019.

Success Cases:

India

JK Paper Mills Ltd. acquiring Sirpur Paper Mills Limited

• The Sirpur Paper Mills Ltd, located at Kagazhnagar in Telangana district is an integrated paper mill which commenced its operations in 1938 under the Nizam rule and was functioning well till about a few years when it began to see a downward slide in its business, leading to a piling up of dues and the erosion of its net worth erosion.

• M/s. Rama Road Line (Operational Creditor) triggered the corporate insolvency resolution process in respect of the Sirpur Paper Mills Ltd, and the CIRP was started by the Adjudicating Authority on 18.9.2017. An Interim Resolution Professional was appointed, and eventually, as per the recommendation of the Committee of Creditors, a Resolution Professional, Mr. Ram Ratan Kanoongo, was appointed.

• An advertisement was published in the newspapers, calling for an Expression of Interest, for consequential submission of Resolution Plans from prospective Resolution Applicants. Seven Resolution Applicants expressed interest, out of which 3 resolution Applicants visited the site. However, only M/s. JK Paper Limited submitted its Resolution Plan before the deadline. It was noted that this Resolution Plan was contingent upon the various benefits and concessions that had been promised by the Govt. of Telangana to the Resolution Applicant. These concessions, were in fact given, to attract Resolution Applicants and a resolution Plan! Tailor made concessions and benefits were granted to the Resolution Applicant, M/s. JK Paper Limited, by the Govt. of Telangana.

• The final Resolution Plan was submitted and was scrutinized by the CoC. To secured financial creditors, for an admitted claim of Rs. 533.39 crores, Rs. 340 crores were slotted for payment. Against Rs. 16.89 crores of workmen dues, 10 crores were slotted for payment. For employees dues, out of an admitted claim of Rs. 27.60 crores, Rs. 0.67 crores was decided to given and 8.72 crores was decided to be given as retiral benefits of employees, when none was sought. To Operational creditors, who claimed 95.71 crores, 9.50 crores was resolved to be paid. Hence, for a total admitted claim of Rs. 673.59 crores, Rs. 371.04 crores was decided to be paid, as per the Resolution Plan. For the payment of these dues, money was sought to be raised from various avenues, as- (1) equity brought in by the Resolution Applicant, (2) equity/long dated securities as permitted by law and financial covenants, (3) equity shares to be issued to secured financial creditors, (4) preference shares to secured financial creditors, (5) debt/advance/security deposit from the resolution applicant/banks/financial institutions, (6) incentive from the Govt. of Telangana. [An extension of 90 days, over and above the 180 days statutorily mandated was sought for the submission of the resolution plan]

• This plan was approved by the CoC, with 80.66% votes (under S. 30(4) of the Code, no less than 75% votes from the CoC is required) being cast in favour of the Resolution Plan. This plan got accepted by the NCLT, Telangana Bench. As per the resolution plan, the revival covers a total outlay of ₹782 crore, including settlement of dues of about ₹371 crore against a claim of ₹673.59 crore and investment of about ₹400 crore, towards revival and capacity augmentation. With this, M/s. JK Paper Mills Ltd acquired 76.37 per cent stake comprising 13,90,00,000 shares of face value of Rs 10 each of Sirpur Paper Mills Ltd.

• With this, a mill that had been shut for 4 years is in the midst of renovations etc., and is slated to restart production by 2019. This will not only revive the mill, but also bringing hope to the labour living in this district of Telangana. After the lenders lifted the seizure of the paper mills, the paper mill was opened again, which will play a major role in the revival of the economy in the newly carved out Kumarm Bheem Asifabad district, where the mill is located.

A consortium: United Tradeco TZC and QVC Exports Private Limited acquiring Cosmic Ferro Alloys

• Cosmic Ferro Alloys Limited is a manufacturer and exporter of ferro alloys, a major raw material for the steel industry.

• It was incorporated in July 2003 under the Companies Act, 1956. One of its financial creditors – Citi Bank NA, initiated the Corporate Insolvency Resolution Process against Cosmic Ferro Alloys as it had been unable to pay a debt of over Rs. 13 crores towards a loan granted and disbursed.

• On 16 January 2018, pursuant to an order of the NCLT, Kolkata Bench, the Insolvency Resolution Process of the Company began. From this date onwards, the appointed Resolution Professional assumed powers of the management of the Company. Subsequently, one of the Resolution Applicants i.e. a consortium of United Tradeco TZC and QVC Exports Private Limited submitted a Resolution Plan for the Company. As this plan contained the prerequisites of (1) payment of insolvency resolution process costs, (2) repayment of debts of operational creditors, (3) modalities for the management of the affairs of the Company and (4) an effective mechanism of implementation and supervision of the resolution plan, the same was approved by the NCLT on 11 October 2018.

• As per the approved Resolution Plan, the Resolution Applicant, i.e. the Consortium was to invest in and acquire control of the Company. Further, the Consortium was to subscribe to the equity share capital of the Company on a preferential basis. Additionally, United Tradeco FZC was to provide additional funds in the form of an unsecured loan upto Rs. 25 crore.

• Furthermore, it was specified that during the course of implementation of the Resolution Plan, the Consortium was to subscribe to 85% of the equity share capital of the Company and the remainder of the equity share capital was to be held by the Cosmic Ferro Alloys Limited Employee Stock Option Trust.

• It was ensured that the aggregate funds received in terms of the approved Resolution Plan would be used to settle the existing debts of the Company. This included insolvency resolution process costs, workmen dues, secured financial creditors, unsecured financial creditors and operational creditors dues.

• Interestingly, the entire process of ensuring resolution vis-à-vis insolvency under the IBC hit a few hurdles. For instance, Financial Creditors such as Daimler Financial Services India Pvt. Ltd. claimed that this Resolution Plan, which had been approved, discriminated between similarly situated Financial Creditors, thus went against the order of the NCLAT in Binani Industries Ltd. v. Bank of Baroda & Anr.

• The NCLAT stayed the implementation of the Resolution Plan, subject to the outcome of this appeal. However, the said appeal was withdraw on the ground that the parties had settled the matter internally.

• Even since the final approval of the Resolution Plan, Cosmic seems to be a going concern.

Tata Steel Limited acquiring Bhushan Energy Limited

• Bhushan Energy, incorporated in 2005 and based in Odisha, previously used to be a subsidiary of Bhushan Steel. During its independent subsistence, it raked up a debt of over Rs. 4,000 crores, because of which, the State Bank of India filed a petition to initiate a corporate insolvency resolution process. During the course of the insolvency process, Tata Steel Ltd. bid over Rs. 800 crores to acquire Bhushan Energy Ltd. Noteworthily, this is Tata Steel's second acquisition from the Bhushan group as it had acquired Bhushan Steel in May 2018 for over Rs. 35,000 crores.

• The Corporate Insolvency Resolution Process was initiated against Bhushan Energy Limited by its financial creditor, the State Bank of India. Claims against Bhushan Energy Limited were collated by the Interim Resolution Professional to be to the tune of approximately Rs. 2,779 crores, from financial creditors and approximately Rs. 98 crores from operational creditors, as on 13.9.2018. No claims were received from workmen/employees and other creditors.

• Two potential resolution applicants expressed interest, of which Tata Steel Limited was one. The Resolution Professional appointed financial/professional advisors and legal advisors to assist in the entire process. Registered valuers were appointed to ascertain the liquidation value of the debtor. The Resolution Professional finally got only one resolution plan, from Tata Steel Limited. After such submission, this plan was discussed by the Committee of Creditors, which also had a core committee, consisting of the top 6 members of the CoC. After negotiations, an amended plan was submitted by Tata Steel Limited.

• By this time, the liquidation value of Bhushan Energy limited was found to be approximately Rs. 721 crores. Tata Steel's resolution plan, being the highest compliant plan, was approved.

• Tata Steel sought certain reliefs and concessions, as envisaged in the CoC approved resolution plan. In this plan, the BoD of Bhushan Energy Limited was suspended and the company was promised a continued supply of essential goods and services.

• As per the resolution plan, Tata Steel Limited proposed to pay INR 805 crores, with INR 730 crores going to the financial creditors and INR 25 crores as CIRP costs, and INR 50 crores to operational creditors. It promised to pump in Rs. 367 crores as equity capital to improve the operations of the corporate debtor. The entire proposal made by the Resolution Applicant was thus of upto INR 1,172 crore, with the promise of payment of Rs. 1,200 crores to Bhushan Energy's creditors.

• This resolution plan was accepted by the Principal bench of the NCLT at Delhi, on 30.5.2019 and w.e.f.31.5.2019, it was acquired by Tata Steel Limited, to becoe Tata Steel BSL Limited.

EXAMPLES OF SUCCESSFUL RESOLUTIONS - USA, GERMANY

I. GENERAL MOTORS

• After the financial crisis of 2008, one of the biggest American companies to go into bankruptcy was General Motors. The company filed for bankruptcy at the United States bankruptcy court for the Southern District of New York on June 1, 2009. The filing (limited to operations within the US) reported US$82.29 billion in assets and US$172.81 billion in debt

• The company received $33 billion in debtor -in-possession financing to complete the process. The United States government-endorsed sale enabled the newly formed entity NGMCO Inc. ("New GM") to purchase the continuing operational assets of the old GM.

• The US Government stepped in, directing and structuring its asseistancesuch that, normal operations, including employee compensation, warranties, and other customer service remained uninterrupted during the bankruptcy proceedings.

• In the final resolution plan submitted to the US Treasury on July 10, 2009, the new entity completed the purchase of continuing operations, assets and trademarks of GM as a part of the 'pre-packaged' Chapter 11 reorganization.

• This new entity with the backing of the United States Treasury was formed to acquire profitable assets, under Section 363 of the Bankruptcy Code, with the new company planning to issue an initial public offering(IPO) of stock in 2010. The remaining pre-petition creditors claims are paid from the former corporation's assets.

• The new General Motors is now named General Motors Company LLC which is separate and independent from the old corporation. The new company retains four of its major brands: Chevrolet, Cadillac, GMC, and Buick. The General Motors Company is now a smaller, restructured version of the former General Motors Corporation,

• In order to further bolster its re entry into the market, Through the Troubled Asset Relief Program the US Treasury invested a total $51 billion into the GM bankruptcy.

• Until December 10, 2013, the U. S. Treasury recovered $39 billion from selling its GM stake. The final direct cost to the Treasury of the GM bailout was $11-12 billion ($10.5 billion for General Motors and $1.5 billion for former GM financing GMAC, now known as Ally).

• Local tax incentives amounted to $1.7 billion, most of them in Michigan. A study by the Center for Automotive Research found that Government intervention in the GM bailout saved 1.2 million jobs and preserved $34.9 billion in tax revenue.

II. AMERICAN AIRLINES BAILOUT AND MERGER.

Beginning from the early 2000s, the US airline industry went through a massive phase of consolidation. In 2015, six major airlines held nearly 90% of the market share. This compares to 11 airlines holding 96% of the market share in 2005. These include:

a) 2005: US Airways merges with America West Airlines

b) 2009: Northwest Airlines merges with Delta Air Lines

c) 2010: United Airlines merges with Continental Airlines

d) 2011: AirTran Airways merges with Southwest Airlines

e) 2013: American Airlines merges with US Airways

One of the biggest mergers effected, was the merger of American Airlines and US Airways. American Airlines Group filed for Chapter 11 bankruptcy on November 29, 2011, in the United States Bankruptcy Court after suffering losses for about four consecutive years. Merger with a healthy competitor and combining operations was the strategy adopted in order to exit bankruptcy.

Soon after US Airways declared its intention to merge with American Airlines, AAL started working on its weak points. It began restructuring costs, which included job cuts. Its merger with US Airways helped both companies create a substantially larger network, giving the merged company the opportunity to offer competitive pricing on more routes.

AAL managed to cut costs and improve operating income as well as net income or profits in about three years. It turned profitable in 2014, and the numbers have improved since then.

A number of external factors helped with the turnaround. The overall recovery of the American economy was accompanied by the State Department negotiating easier access for American citizens to foreign countries in order to incentivize travel. As more files were booked, resulted in lesser pressure upon airlines to lower ticket prices.

A huge boost was also provided by the overall fall in crude oil prices. American Airlines was able to make around $4.5 billion in fuel savings in 2015.

These factors, have helped American Airlines use successfully use merger as a strategy to combat bankruptcy. After the merger, the new entity became one the world's leading airline in terms of fleet size, network, and finances. American Airlines stock recovered well and has risen more than 270% since 2011 when it filed for bankruptcy. Higher demand for travel, lower fuel prices, and savings from not using hedging strategies have all helped the airline boost performance and generate huge cash piles in the last few years.

GERMANY

Post the enactment of the new German Insolvency Code on 1.3.2012, two of the biggest success stories seen have been Centrotherm and Solarwatt.

• The listed German solar manufacturing company Centrotherm Photovoltaics AG, which emerged after only seven months in debtor-in-possession insolvency proceedings, with the creditors, through a trustee, taking control of 80 percent of the shares in return for a haircut of 70 percent of their claims.

• German solar module manufacturer Solarwatt AG restructured itself in six months through an insolvency plan that wiped out the old equity, gave 100 percent of the restructured equity to a new money investor, reinstated the secured bank debt, and left unsecured creditors with an immediate 16 percent dividend (with some upside) as opposed to an 11.2 percent dividend.

A very similar strategy was followed in the rescue of these two companies.

1. Early creditor involvement.

Under German law, when a company with an operating business of a size that fulfils two out of three criteria – €4.84m assets; €9.68m revenues; and an average of 50 employees, each per the prior fiscal year – files for insolvency, the Court has to appoint a preliminary creditors' committee. In addition, the court has to hear the preliminary creditors' committee before appointing a preliminary administrator.

The ability to partake in the election of the most influential person in the insolvency procedure from the filing (and in practice, often even before the filing), rather than having to accept whomever the court has appointed in its own discretion, has greatly strengthened creditor confidence in the German insolvency process.

2. Debtor-in-possession and 'protective shield'.

The restructuring of the German law has now provided companies with incentives to seek an early restructuring 'in court' rather than desperately attempting to achieve an out of court solution and then only file when the business has already suffered.

First, the management of a company in principal stays in charge of the business after filing, and will only be supervised by a trustee – under the previous law, the court would appoint an administrator who would take de facto control of the business.

U three-month moratorium to draft the plan of reorganisation, during which the company's management will continue to run the business under the supervision of a trustee which it can select, and can incur administrative expenses during that period.

3. Debt-equity-swaps in court.

A main driver for the reform's success is the newly introduced potential to impair the old, out-of-money equity through the plan of reorganisation, which allows for the swapping of pre-petition debt into new equity or the issuing of new shares to a new money investor.