Journal of Corporate Affairs

“Praxis: where theory meets practice” Annual Publication of Indian Institute of Corporate Affiairs

Volume - 1 | Issue - 1 content

MANAGING BOARD

MESSAGE FROM THE PATRON

NOTE FROM THE ISSUE EDITOR

ARTICLES Optimizing Insolvency Resolutions - from the Lens of a Practitioner 1 Anurag Das

Guarantors and Guarantees under the Insolvency & Bankruptcy Code, 2016 - Contemporary Developments 17 Aparna Ravi

An Analysis of the Insolvency and Bankruptcy code via the Lens of Behavioural Economics 29 Dr. Anuradha Guru

Creditor Rights under the Insolvency & Bankruptcy Code, 2016 45 Nikhil Shah, Khushboo Vaish & Anshul Dhanuka

Debt Default, Recovery and Resolution in a Pandemic : What to Expect in the new Normal 69 Bhargavi Zaveri

PMLA Actions against Company Property during the CIRP 79 Misha & Shreya Prakash

Fresh Start Policy : An Ephemeral Palliative or an Enduring Rescue Mechanism 91 Urvashi Shahi

Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Painting the Insolvency Canvas in White Texture 101 Rishika Jain & Daksh Aggarwal

Green Bonds : An Instrument for Financing a Sustainable Future 137 Dr. S.K. Gupta

Book Review : Dr. Sameer Sharma's “Text Book on Urban Planning and Geography” 166 Dr. Neeti Shikha

2 content

MANAGING BOARD

MESSAGE FROM THE PATRON

NOTE FROM THE ISSUE EDITOR

ARTICLES Optimizing Insolvency Resolutions - from the Lens of a Practitioner 1 Anurag Das

Guarantors and Guarantees under the Insolvency & Bankruptcy Code, 2016 - Contemporary Developments 17 Aparna Ravi

An Analysis of the Insolvency and Bankruptcy code via the Lens of Behavioural Economics 29 Dr. Anuradha Guru

Creditor Rights under the Insolvency & Bankruptcy Code, 2016 45 Nikhil Shah, Khushboo Vaish & Anshul Dhanuka

Debt Default, Recovery and Resolution in a Pandemic : What to Expect in the new Normal 69 Bhargavi Zaveri

PMLA Actions against Company Property during the CIRP 79 Misha & Shreya Prakash

Fresh Start Policy : An Ephemeral Palliative or an Enduring Rescue Mechanism 91 Urvashi Shahi

Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Painting the Insolvency Canvas in White Texture 101 Rishika Jain & Daksh Aggarwal

Green Bonds : An Instrument for Financing a Sustainable Future 137 Dr. S.K. Gupta

Book Review : Dr. Sameer Sharma's “Text Book on Urban Planning and Geography” 166 Dr. Neeti Shikha

2 Journal of Corporate Affairs - 2021

Managing Board l Patron - Dr. Sameer Sharma, DG & CEO, IICA l Managing Editor - Dr. Niraj Gupta l Issue Editor - Dr. Neeti Shikha l Executive Editor (Publishing Coordination) – Dr. Lata Suresh, Head, KRC, IICA

Advisory Committee

Internal Members l Chair Professor - IEPFA, Dr. K N Singh l Chair Professor - RBI Shri. Sarat Malik l Chair Professor - IBBI l Chair Professor - CCI

External members l Prof Ranvir Singh, VC , NLU, New Delhi (Academician Category) l Prof Venkata Rao, ex VC, NLU, Bangalore (Academician Category) l Mr U. K Sinha, Ex Chairman SEBI ( Industry Category) l Mr Vinod Kumar Dhall, Ex Chairman, CCI ( Industry Category) Journal of Corporate Affairs - 2021

Managing Board

l Patron - Dr. Sameer Sharma, DG & CEO, IICA l Managing Editor - Dr. Niraj Gupta l Issue Editor - Dr. Neeti Shikha l Executive Editor (Publishing Coordination) – Dr. Lata Suresh, Head, KRC, IICA

Advisory Committee

Internal Members l Chair Professor - IEPFA, Dr. K N Singh l Chair Professor - RBI Shri. Sarat Malik l Chair Professor - IBBI l Chair Professor - CCI

External members l Prof Ranvir Singh, VC , NLU, New Delhi (Academician Category) l Prof Venkata Rao, ex VC, NLU, Bangalore (Academician Category) l Mr U. K Sinha, Ex Chairman SEBI ( Industry Category) l Mr Vinod Kumar Dhall, Ex Chairman, CCI ( Industry Category) Journal of Corporate Affairs - 2021 MESSAGE FROM THE PATRON for the inaugural issue

As an institute, we try to anticipate and meet needs of learners in a way no one else does. Our values are based on what we bring to our classes by combining theory and practice through a unique learning model called the IICA way of learning. The unique way of learning unlocks the growth potential residing in every learner. The IICA way of learning compels us to be agile, engage in constant exploration and prevents us from being complacent. Through this way of learning we handcraft the next phase of the career growth of participants.

Encouraging research scholarship is a natural progression to our way of learning. Well-conducted research is vital to the success of research think tank. Not only does research form the foundation of program development and policies all over the world, but it can also be translated into effective training programs. Research draws its power from the fact that it is novel, empirical and contemporary. It should not merely theorize about what might be effective or what could work. Research should be deeply investigated and should be data driven so as to give policymakers hard data on which they can base their decisions. Furthermore, good research utilizes methodologies that can be replicated, produces results that are examinable by peers, and creates knowledge that can be applied to real-world situations.

The Journal of Corporate Affairs (JCA) aims to establish itself as a reputed publication of IICA with scholarly research contributions of academia and industry professionals in the domain of Corporate Affairs. We hope to contribute to the development of corporate affairs by focusing on applied research and practice that focuses on, and straddles across, the disciplines of corporate governance, competition law, market regulation, valuation financial capability of investors, ESG and corporate governance (e.g. CSR, BHR etc) and emerging eco-system of insolvency and bankruptcy.

It is one of its kind of Journal that focuses on various paradigm of corporate affairs including competition and market regulation, insolvency and bankruptcy, independent directors, valuation and application of technology to Journal of Corporate Affairs - 2021 MESSAGE FROM THE PATRON for the inaugural issue

As an institute, we try to anticipate and meet needs of learners in a way no one else does. Our values are based on what we bring to our classes by combining theory and practice through a unique learning model called the IICA way of learning. The unique way of learning unlocks the growth potential residing in every learner. The IICA way of learning compels us to be agile, engage in constant exploration and prevents us from being complacent. Through this way of learning we handcraft the next phase of the career growth of participants.

Encouraging research scholarship is a natural progression to our way of learning. Well-conducted research is vital to the success of research think tank. Not only does research form the foundation of program development and policies all over the world, but it can also be translated into effective training programs. Research draws its power from the fact that it is novel, empirical and contemporary. It should not merely theorize about what might be effective or what could work. Research should be deeply investigated and should be data driven so as to give policymakers hard data on which they can base their decisions. Furthermore, good research utilizes methodologies that can be replicated, produces results that are examinable by peers, and creates knowledge that can be applied to real-world situations.

The Journal of Corporate Affairs (JCA) aims to establish itself as a reputed publication of IICA with scholarly research contributions of academia and industry professionals in the domain of Corporate Affairs. We hope to contribute to the development of corporate affairs by focusing on applied research and practice that focuses on, and straddles across, the disciplines of corporate governance, competition law, market regulation, valuation financial capability of investors, ESG and corporate governance (e.g. CSR, BHR etc) and emerging eco-system of insolvency and bankruptcy.

It is one of its kind of Journal that focuses on various paradigm of corporate affairs including competition and market regulation, insolvency and bankruptcy, independent directors, valuation and application of technology to Journal of Corporate Affairs - 2021 NOTE FROM THE ISSUE EDITOR

financial reporting, business human rights, building financial capability of In the past few years, research in India has gained considerable traction, as it has investors, valuation, corporate social responsibility and developing an Indian elsewhere around the world. This journal aims to champion public discourse in way of corporate governance. the area of corporate affairs that can drive evidence-based policy changes in the country. The Journal will cater to the professionals working in the field of corporate affairs and governance by fostering 'Learning from practice to inform practice'. It will add voice to the academic discourse through its research and scholarship. I am confident that the Journal will emerge as one of the best scholarship in the Articles from various actors in the corporate legal sphere, including the field of corporate affairs in times to come. regulators, the judiciary, legal practitioners, and scholars offer an insight into the issues and challenges on the ground and lead to path-breaking reforms in the Sameer Sharma, PhD, DLitt Indian corporate arena. This journal makes a substantial and meaningful contribution to the literature in the field.

We would like to thank all editorial board members of the Journal, reviewers, authors, and research staff at IICA for their encouragement.

The aim of the journal is to meet the need for continuous discourse in corporate affairs and allied areas and to publish articles of excellence. As we believe that research has no borders, papers from many parts of the world are welcomed for publication in the journal.

We are sure that our journal will provide top-quality original papers, articles, case reports, and book reviews that will continue to help everyone interested in pathology. We, again, hope that the journal will continue to be an important conduit for corporate affairs information on a very broad international level.

For this edition, the focus has been on contemporary issues in insolvency laws in India. Insolvency law is one of the biggest economic reforms creating a one- stop solution for the resolution of distressed assets in India. The government has been very proactive in plugging the loopholes and adapting the law as per market need. At this point, it is pertinent to keep the momentum on and further the discourse through research scholarship.

Neeti Shikha, PhD Journal of Corporate Affairs - 2021 NOTE FROM THE ISSUE EDITOR

financial reporting, business human rights, building financial capability of In the past few years, research in India has gained considerable traction, as it has investors, valuation, corporate social responsibility and developing an Indian elsewhere around the world. This journal aims to champion public discourse in way of corporate governance. the area of corporate affairs that can drive evidence-based policy changes in the country. The Journal will cater to the professionals working in the field of corporate affairs and governance by fostering 'Learning from practice to inform practice'. It will add voice to the academic discourse through its research and scholarship. I am confident that the Journal will emerge as one of the best scholarship in the Articles from various actors in the corporate legal sphere, including the field of corporate affairs in times to come. regulators, the judiciary, legal practitioners, and scholars offer an insight into the issues and challenges on the ground and lead to path-breaking reforms in the Sameer Sharma, PhD, DLitt Indian corporate arena. This journal makes a substantial and meaningful contribution to the literature in the field.

We would like to thank all editorial board members of the Journal, reviewers, authors, and research staff at IICA for their encouragement.

The aim of the journal is to meet the need for continuous discourse in corporate affairs and allied areas and to publish articles of excellence. As we believe that research has no borders, papers from many parts of the world are welcomed for publication in the journal.

We are sure that our journal will provide top-quality original papers, articles, case reports, and book reviews that will continue to help everyone interested in pathology. We, again, hope that the journal will continue to be an important conduit for corporate affairs information on a very broad international level.

For this edition, the focus has been on contemporary issues in insolvency laws in India. Insolvency law is one of the biggest economic reforms creating a one- stop solution for the resolution of distressed assets in India. The government has been very proactive in plugging the loopholes and adapting the law as per market need. At this point, it is pertinent to keep the momentum on and further the discourse through research scholarship.

Neeti Shikha, PhD Optimizing Insolvency Resolutions - from the Lens of a Practitioner

Anurag Das

1 Mr. Anurag Das is the Managing Director & CEO of International Asset Reconstruction Company. First draft of the paper was published at the IBBI Annual Publication, under the title “Manufacturing Better Resolutions: A Practitioner's Perspective”. Optimizing Insolvency Resolutions - from the Lens of a Practitioner

Anurag Das

1 Mr. Anurag Das is the Managing Director & CEO of International Asset Reconstruction Company. First draft of the paper was published at the IBBI Annual Publication, under the title “Manufacturing Better Resolutions: A Practitioner's Perspective”. Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

Abstract Finally, a wealth of clarificatory jurisprudence, in particular at the hand of India's Supreme Court, has laid a solid foundation for a modern bankruptcy regime to take The enactment of the Insolvency & Bankruptcy Code, 2016 has marked a root. The author is of the opinion that the Indian insolvency framework has come a monumental shift in the insolvency framework of India. However, an evident long way, and the days when recovering dues from debtors superseded product- parameter to gauge the success of any law is the quality of outcome it is producing. market considerations are fading quickly on the horizon. Keeping the same in mind, the author tries to evaluate the importance and potential impact of achieving optimum outcomes in the insolvency resolution A mere five years ago, most discussions of bankruptcy in the Indian context were processes. Further, the author, as a practitioner after basing his decision on the focused on its jurisdictional quagmire of piecemeal laws that debased creditor qualitative judgments and observations of the present state of insolvency rescue, interests. In a testament to its success as written law, the Code has successfully shows how superior or optimum outcomes in insolvency processes might be shifted this discussion to the minutiae of procedure and rules. In a sign of its achieved. coming of age, recent dialogue is shifting into a distinctly higher qualitative stratum. Alongside the topical issues of the day such as the Code's limited Keywords – Insolvency Outcomes; Insolvency & Bankruptcy Code, 2016; suspension owing to Covid-19 crisis,4 the resolution of financial institutions, and Liquidation v. Resolution; Optimum outcomes. alternative resolution mechanisms, the locus of such debates is now advancing further to substantive aspects such as capital investment, value recovery, and INTRODUCTION insolvency resolution outcomes. "Don't judge each day by the harvest you reap but by the seeds that you plant." In view of the aforesaid, as a practitioner of distress investing centered on the - Robert Louis Stevenson, Admiral Guinea, 1884 bankruptcy system, the author attempts to evaluate the importance of achieving optimal outcomes by means of the insolvency resolution process. The assessments India's insolvency framework has taken a dramatic step forward with the herein draw strongly on observations of the present state of the insolvency enactment of the Insolvency & Bankruptcy Code, 2016 (“the Code”). From re- ecosystem and present practices to explore how superior resolution outcomes prioritizing a market-based and creditor-controlled evaluation of revival prospects might be achieved. over a wasteful, painful and dragged out liquidation, IBC has ensured that a robust insolvency framework is finally taking shape in India. The country's leap to 63rd in IMPLICATIONS AND SIGNIFICANCE OF EFFICIENT RESOLUTION the World Bank's 2019 Ease of Doing Business rankings from 130th in the year is a OUTCOMES testament to the improvement, and also reflective of the potential for further progress that behoves a major economy with high aspirations. “The market is not a very accommodating machine; it won't provide high returns just because you need them.” India's enactment of the Code planted long-necessary seeds of deep, structural reform of its credit ecosystem. Its design, with a “default test” for the initiation of - Peter Bernstein insolvency proceedings against a corporate debtor, has created a strong Excellent resolution outcomes precede the true success of an insolvency law. disincentive to the errant behavior of debtors that slower processes of the past India's sizable problem of non-performing assets (NPAs) and the predominance of encouraged. In addition, the steely political will behind provisions such as section public-sector banks mean the nation's exchequer and businesses alike suffer the 29A3 has led, almost unimaginably, under the aegis of the Code, to the transfer of brunt of sub-optimal insolvency outcomes, with worrisome socio-economic ownership of large debtors such as Bhushan Steel, Essar Steel and Binani Cement. consequences. As of March, 2020, reported insolvency data looks troublesome at

2 https://www.doingbusiness.org/en/data/exploreeconomies/india 3 Section 29A of the Code excludes certain people, as resolution applicants, from making a bid to buy the 4 The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2020; subsequently replaced by the distressed corporate debtor. Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020.

2 3 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

Abstract Finally, a wealth of clarificatory jurisprudence, in particular at the hand of India's Supreme Court, has laid a solid foundation for a modern bankruptcy regime to take The enactment of the Insolvency & Bankruptcy Code, 2016 has marked a root. The author is of the opinion that the Indian insolvency framework has come a monumental shift in the insolvency framework of India. However, an evident long way, and the days when recovering dues from debtors superseded product- parameter to gauge the success of any law is the quality of outcome it is producing. market considerations are fading quickly on the horizon. Keeping the same in mind, the author tries to evaluate the importance and potential impact of achieving optimum outcomes in the insolvency resolution A mere five years ago, most discussions of bankruptcy in the Indian context were processes. Further, the author, as a practitioner after basing his decision on the focused on its jurisdictional quagmire of piecemeal laws that debased creditor qualitative judgments and observations of the present state of insolvency rescue, interests. In a testament to its success as written law, the Code has successfully shows how superior or optimum outcomes in insolvency processes might be shifted this discussion to the minutiae of procedure and rules. In a sign of its achieved. coming of age, recent dialogue is shifting into a distinctly higher qualitative stratum. Alongside the topical issues of the day such as the Code's limited Keywords – Insolvency Outcomes; Insolvency & Bankruptcy Code, 2016; suspension owing to Covid-19 crisis,4 the resolution of financial institutions, and Liquidation v. Resolution; Optimum outcomes. alternative resolution mechanisms, the locus of such debates is now advancing further to substantive aspects such as capital investment, value recovery, and INTRODUCTION insolvency resolution outcomes. "Don't judge each day by the harvest you reap but by the seeds that you plant." In view of the aforesaid, as a practitioner of distress investing centered on the - Robert Louis Stevenson, Admiral Guinea, 1884 bankruptcy system, the author attempts to evaluate the importance of achieving optimal outcomes by means of the insolvency resolution process. The assessments India's insolvency framework has taken a dramatic step forward with the herein draw strongly on observations of the present state of the insolvency enactment of the Insolvency & Bankruptcy Code, 2016 (“the Code”). From re- ecosystem and present practices to explore how superior resolution outcomes prioritizing a market-based and creditor-controlled evaluation of revival prospects might be achieved. over a wasteful, painful and dragged out liquidation, IBC has ensured that a robust insolvency framework is finally taking shape in India. The country's leap to 63rd in IMPLICATIONS AND SIGNIFICANCE OF EFFICIENT RESOLUTION the World Bank's 2019 Ease of Doing Business rankings from 130th in the year is a OUTCOMES testament to the improvement, and also reflective of the potential for further progress that behoves a major economy with high aspirations. “The market is not a very accommodating machine; it won't provide high returns just because you need them.” India's enactment of the Code planted long-necessary seeds of deep, structural reform of its credit ecosystem. Its design, with a “default test” for the initiation of - Peter Bernstein insolvency proceedings against a corporate debtor, has created a strong Excellent resolution outcomes precede the true success of an insolvency law. disincentive to the errant behavior of debtors that slower processes of the past India's sizable problem of non-performing assets (NPAs) and the predominance of encouraged. In addition, the steely political will behind provisions such as section public-sector banks mean the nation's exchequer and businesses alike suffer the 29A3 has led, almost unimaginably, under the aegis of the Code, to the transfer of brunt of sub-optimal insolvency outcomes, with worrisome socio-economic ownership of large debtors such as Bhushan Steel, Essar Steel and Binani Cement. consequences. As of March, 2020, reported insolvency data looks troublesome at

2 https://www.doingbusiness.org/en/data/exploreeconomies/india 3 Section 29A of the Code excludes certain people, as resolution applicants, from making a bid to buy the 4 The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2020; subsequently replaced by the distressed corporate debtor. Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020.

2 3 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

first sight; it points to approximately 57 percent of the 914 closed insolvency cases answer in many situations where a corporate debtor's assets are best redeployed under the Code ending up in liquidation, as compared to approximately 14 percent towards more valuable use outside of the debtor entity.8 5 that achieved an initial resolution via the insolvency resolution process. A simple analogy may illustrate why this may well be the case in the context of the Breaking the cycle in the context requires not only better resolution, but also far recent bankruptcy cohorts in India. If we imagine bankrupt companies as oranges, better job of lending in the first instance, i.e. a dramatic reduction in the Indian very little juice extraction from a batch may be due to lazy, weak or inexpert banking system's going rate of NPA creation per unit of credit extended. fingers; or a bad juicer; or simply because the fruit had run dry. The bankruptcy Even before Covid-19 disruptions, this was both necessary and important. It is now cohorts relating to India's March, 2020, data include a preponderance of zombie critical to prevent the problem from compounding. The Reserve Bank of India now companies, with over 70 percent of these defunct or former BIFR cases. Stripped expects, in its baseline scenario, that the gross NPA ratio for all scheduled banks bare over years before entering the insolvency process under the Code, these may will increase to 13.5 per cent by September 2021, and that for public sector banks to simply have met their delayed, yet deserved, fate. 16.2 per cent. In the event of severe macroeconomic stress, the ratios are expected Original lenders, anchored in their original underwriting case, tend to avoid to be 14.8 per cent and 17.6 per cent.6 additional investment to support flailing borrowers and also defer liquidation Better bankruptcy resolution outcomes are also highly desirable since a resolution decisions during the early phases of corporate stress. Once fatigued with a debtor's in itself delivers a better outcome relative to liquidation, and prospective delinquency, they then tend towards liquidation and the associated faster recovery stakeholders engage to pursue the best outcomes in a creative and competitive rather than the pursuit of a rescue or turnaround with their inherent uncertainties. A process. Beginning with improved recoveries for creditors, this leads on to a more high liquidation rate is thus of testament to the fact that by the time a bankruptcy efficient redeployment of resources. The impact of better resolution outcomes thus resolution process becomes available to rescue debtors from the wolves, there may 9 runs deep and wide, via the mathematics of banking, and into the broader financial well remain nothing to rescue. system. The ensuing feedback loop lowers interest rates and creates a Frequent liquidation also creates a deterrent effect on the supply of capital for a consistent supply of appropriately priced credit. Indirect effects ripple farther, rescue or an insolvency resolution effort. This is partly due to the less frequent fueling sustainable economic growth. occurrence of attractive resolution outcomes, and partly due to the lower recovery as opposed to that available from the typical occurrence of successful LIQUIDATION – THE RIGHT CHOICE? reorganization across a cohort. An additional risk specific to India is that of the loss of control upon liquidation, with the estate handed over to liquidators working for “Take the money and run! no one in particular. This fear of being consigned to a rudderless vessel, or one - Unknown subject to hijack, causes investors to step away entirely, or at least set their hurdles A major, if not the primary, purpose of modern bankruptcy law is to help reduce the much higher. impediments in the movement of assets to their highest-and-best use.7 Therefore, In the usual reflexivity of finance, the resultant lack of rescue capital in the event of while liquidations provide lower recoveries and dissipate business value on distress is anticipated ex-ante, and factored into credit extension and pricing average as compared to successful resolution outcomes, they are yet the right decisions. The negative impact on both the supply and the price of regular credit is a costly burden on the wider economy. Additionally, and very importantly, the lack of a sufficiently competitive market for the control of insolvent businesses, or for 5 https://www.financialexpress.com/economy/bankruptcy-resolution-in-ibc-liquidation-an-overwhelming- outcome-rather-than-revival/1972086/. 6 Reserve Bank of India, (2021, January), Financial Stability Report (Issue No. 22). Available at https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1162, accessed on 30-11-2020. 8 Economics of Bankruptcy, Michelle J. White,The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, Edited by Francesco Parisi, April, 2017, Page 3. 7 Jackson, Thomas H. and Skeel, David A. Jr., "Bankruptcy and Economic Recovery" (2013). Faculty Scholarship at Penn Law. 476. https://scholarship.law.upenn.edu/faculty_scholarship/476 9 Barry E. Adler, The Creditors' Bargain Revisited, 166 U. PA. L. REV. 1853 (2018), 1863.

4 5 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

first sight; it points to approximately 57 percent of the 914 closed insolvency cases answer in many situations where a corporate debtor's assets are best redeployed under the Code ending up in liquidation, as compared to approximately 14 percent towards more valuable use outside of the debtor entity.8 5 that achieved an initial resolution via the insolvency resolution process. A simple analogy may illustrate why this may well be the case in the context of the Breaking the cycle in the context requires not only better resolution, but also far recent bankruptcy cohorts in India. If we imagine bankrupt companies as oranges, better job of lending in the first instance, i.e. a dramatic reduction in the Indian very little juice extraction from a batch may be due to lazy, weak or inexpert banking system's going rate of NPA creation per unit of credit extended. fingers; or a bad juicer; or simply because the fruit had run dry. The bankruptcy Even before Covid-19 disruptions, this was both necessary and important. It is now cohorts relating to India's March, 2020, data include a preponderance of zombie critical to prevent the problem from compounding. The Reserve Bank of India now companies, with over 70 percent of these defunct or former BIFR cases. Stripped expects, in its baseline scenario, that the gross NPA ratio for all scheduled banks bare over years before entering the insolvency process under the Code, these may will increase to 13.5 per cent by September 2021, and that for public sector banks to simply have met their delayed, yet deserved, fate. 16.2 per cent. In the event of severe macroeconomic stress, the ratios are expected Original lenders, anchored in their original underwriting case, tend to avoid to be 14.8 per cent and 17.6 per cent.6 additional investment to support flailing borrowers and also defer liquidation Better bankruptcy resolution outcomes are also highly desirable since a resolution decisions during the early phases of corporate stress. Once fatigued with a debtor's in itself delivers a better outcome relative to liquidation, and prospective delinquency, they then tend towards liquidation and the associated faster recovery stakeholders engage to pursue the best outcomes in a creative and competitive rather than the pursuit of a rescue or turnaround with their inherent uncertainties. A process. Beginning with improved recoveries for creditors, this leads on to a more high liquidation rate is thus of testament to the fact that by the time a bankruptcy efficient redeployment of resources. The impact of better resolution outcomes thus resolution process becomes available to rescue debtors from the wolves, there may 9 runs deep and wide, via the mathematics of banking, and into the broader financial well remain nothing to rescue. system. The ensuing feedback loop lowers interest rates and creates a Frequent liquidation also creates a deterrent effect on the supply of capital for a consistent supply of appropriately priced credit. Indirect effects ripple farther, rescue or an insolvency resolution effort. This is partly due to the less frequent fueling sustainable economic growth. occurrence of attractive resolution outcomes, and partly due to the lower recovery as opposed to that available from the typical occurrence of successful LIQUIDATION – THE RIGHT CHOICE? reorganization across a cohort. An additional risk specific to India is that of the loss of control upon liquidation, with the estate handed over to liquidators working for “Take the money and run! no one in particular. This fear of being consigned to a rudderless vessel, or one - Unknown subject to hijack, causes investors to step away entirely, or at least set their hurdles A major, if not the primary, purpose of modern bankruptcy law is to help reduce the much higher. impediments in the movement of assets to their highest-and-best use.7 Therefore, In the usual reflexivity of finance, the resultant lack of rescue capital in the event of while liquidations provide lower recoveries and dissipate business value on distress is anticipated ex-ante, and factored into credit extension and pricing average as compared to successful resolution outcomes, they are yet the right decisions. The negative impact on both the supply and the price of regular credit is a costly burden on the wider economy. Additionally, and very importantly, the lack of a sufficiently competitive market for the control of insolvent businesses, or for 5 https://www.financialexpress.com/economy/bankruptcy-resolution-in-ibc-liquidation-an-overwhelming- outcome-rather-than-revival/1972086/. 6 Reserve Bank of India, (2021, January), Financial Stability Report (Issue No. 22). Available at https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1162, accessed on 30-11-2020. 8 Economics of Bankruptcy, Michelle J. White,The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, Edited by Francesco Parisi, April, 2017, Page 3. 7 Jackson, Thomas H. and Skeel, David A. Jr., "Bankruptcy and Economic Recovery" (2013). Faculty Scholarship at Penn Law. 476. https://scholarship.law.upenn.edu/faculty_scholarship/476 9 Barry E. Adler, The Creditors' Bargain Revisited, 166 U. PA. L. REV. 1853 (2018), 1863.

4 5 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

their most optimal liquidation, produces inefficient outcomes even when unlikely to materialize. resolution does occur. It thus appears safe to conclude that, based on structural considerations and benchmarked against expectations, the insolvency resolution process appears to be BETTER FIXES IN INSOLVENCY delivering less attractive resolution outcomes than one might have hoped for. It is "The universe is full of magical things patiently waiting for our wits to grow in this backdrop that the author attempts to understand the causes of these sub- sharper." optimal insolvency outcomes, and examine whether this performance may be due - Eden Philpotts, A Shadow Passes, 1919 to any specific characteristics of India's insolvency ecosystem. However, before proceeding to assess the ecosystem's suitability for the creation of better resolution A critically important aspect of resolution pertains to the quality of resolution outcomes, it is pertinent to briefly survey the salient characteristics of the outcomes, relative to their intrinsic potential. This element is sometimes distressed debt and rescue capital investment arena. overlooked because the process itself, with all its minutiae, tends to preoccupy a variety of participants and in other situations since such intrinsic potential is THE ESSENCE OF RESCUE FINANCE invariably subjective. However, two qualitative aspects of the state of insolvency resolutions in India make it quite likely that the resolution outcomes achieved as “The herd applies optimism at the top and pessimism at the bottom… we must yet are falling short of the optimum. be…skeptical of the pessimism that prevails at the bottom.” The first relates to the structural underpinnings of economic growth in India, - Howard Marks, Touchstones, 2009 buttressed by demographics that should support virtually indestructible medium- Complexity and uncertainty are natural companions in rescue and distressed term growth in demand. In general, in economies and sectors with excess capacity investments. Successful distress investing also demands responsiveness to or declining demand, it is very difficult for a reorganized company, once displaced problems, an ability to swing between the smallest detail and the big picture, a during distress, to regain its footing. By contrast, clawing back market share from careful balance between strategic and tactical approaches, and of course solid competitors is much easier when there is growing demand. India's higher secular execution. These latter characteristics are also particular, but not unique, to the growth potential should therefore provide an attractive context for better resolution arena. outcomes in general, and fuel a stronger appetite for distressed entities and assets. A few other aspects of distressed debt and rescue capital investment, though, make The second aspect pertains to the lack of investor interest in insolvency assets it a relatively unique end of the investment and business spectrum. The distressed available via the insolvency resolution process. This is evident from the data as of investor's ken is not unlike a trauma surgeon's, requiring the practitioner to straddle March, 2020, with approximately 57 percent of 715 debtors that were in other disciplines, and work flexibly to best suit a very specific situation. As with liquidation (or had been liquidated) having seen no buyer interest at all during the trauma surgery, the rescue investment arena is also highly specialized, and resolution process. Further, a decision to liquidate was taken in another 37 percent inherently inter-disciplinary and cross-functional. This holds true both for the of insolvency cases during the resolution process itself. Fewer than 6% of the cases design and execution of a distressed investment, and for the overall revival effort. involved the rejection of a resolution bid.10 Anecdotally, a large majority of Furthermore, just as general healthfulness is not the predominant determinant of successful resolutions see only a single bidder. At times, even the successful bids outcomes following trauma, rescue outcomes are frequently less dependent on the are set up to fail, with thinly capitalized bidders offering negligible cash payments company's industry or geography, and more on idiosyncratic factors linked to the in the near term, and with the vast majority of consideration due years later and company itself. The comparison with trauma surgery is illuminative of the unique elements of distress investing relative to other investment disciplines. Following road or other 10 https://www.financialexpress.com/economy/bankruptcy-resolution-in-ibc-liquidation-an-overwhelming- accidents, trauma triage must prioritize patients for treatment, transport and venue outcome-rather-than-revival/1972086/

6 7 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

their most optimal liquidation, produces inefficient outcomes even when unlikely to materialize. resolution does occur. It thus appears safe to conclude that, based on structural considerations and benchmarked against expectations, the insolvency resolution process appears to be BETTER FIXES IN INSOLVENCY delivering less attractive resolution outcomes than one might have hoped for. It is "The universe is full of magical things patiently waiting for our wits to grow in this backdrop that the author attempts to understand the causes of these sub- sharper." optimal insolvency outcomes, and examine whether this performance may be due - Eden Philpotts, A Shadow Passes, 1919 to any specific characteristics of India's insolvency ecosystem. However, before proceeding to assess the ecosystem's suitability for the creation of better resolution A critically important aspect of resolution pertains to the quality of resolution outcomes, it is pertinent to briefly survey the salient characteristics of the outcomes, relative to their intrinsic potential. This element is sometimes distressed debt and rescue capital investment arena. overlooked because the process itself, with all its minutiae, tends to preoccupy a variety of participants and in other situations since such intrinsic potential is THE ESSENCE OF RESCUE FINANCE invariably subjective. However, two qualitative aspects of the state of insolvency resolutions in India make it quite likely that the resolution outcomes achieved as “The herd applies optimism at the top and pessimism at the bottom… we must yet are falling short of the optimum. be…skeptical of the pessimism that prevails at the bottom.” The first relates to the structural underpinnings of economic growth in India, - Howard Marks, Touchstones, 2009 buttressed by demographics that should support virtually indestructible medium- Complexity and uncertainty are natural companions in rescue and distressed term growth in demand. In general, in economies and sectors with excess capacity investments. Successful distress investing also demands responsiveness to or declining demand, it is very difficult for a reorganized company, once displaced problems, an ability to swing between the smallest detail and the big picture, a during distress, to regain its footing. By contrast, clawing back market share from careful balance between strategic and tactical approaches, and of course solid competitors is much easier when there is growing demand. India's higher secular execution. These latter characteristics are also particular, but not unique, to the growth potential should therefore provide an attractive context for better resolution arena. outcomes in general, and fuel a stronger appetite for distressed entities and assets. A few other aspects of distressed debt and rescue capital investment, though, make The second aspect pertains to the lack of investor interest in insolvency assets it a relatively unique end of the investment and business spectrum. The distressed available via the insolvency resolution process. This is evident from the data as of investor's ken is not unlike a trauma surgeon's, requiring the practitioner to straddle March, 2020, with approximately 57 percent of 715 debtors that were in other disciplines, and work flexibly to best suit a very specific situation. As with liquidation (or had been liquidated) having seen no buyer interest at all during the trauma surgery, the rescue investment arena is also highly specialized, and resolution process. Further, a decision to liquidate was taken in another 37 percent inherently inter-disciplinary and cross-functional. This holds true both for the of insolvency cases during the resolution process itself. Fewer than 6% of the cases design and execution of a distressed investment, and for the overall revival effort. involved the rejection of a resolution bid.10 Anecdotally, a large majority of Furthermore, just as general healthfulness is not the predominant determinant of successful resolutions see only a single bidder. At times, even the successful bids outcomes following trauma, rescue outcomes are frequently less dependent on the are set up to fail, with thinly capitalized bidders offering negligible cash payments company's industry or geography, and more on idiosyncratic factors linked to the in the near term, and with the vast majority of consideration due years later and company itself. The comparison with trauma surgery is illuminative of the unique elements of distress investing relative to other investment disciplines. Following road or other 10 https://www.financialexpress.com/economy/bankruptcy-resolution-in-ibc-liquidation-an-overwhelming- accidents, trauma triage must prioritize patients for treatment, transport and venue outcome-rather-than-revival/1972086/

6 7 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

up front, making decisions with the information available, and apply skill and discipline, respectively towards bankruptcy reorganization; business rescue, resources appropriately. To save lives, it is critical to speedily bring a patient in turnaround or liquidation; and financial restructuring. Negotiating these twists in crisis to the right surgeon and the right treatment venue. The allocation decision the context of a capital allocation decision is a defining element of the specialty. enjoys an error rate that could be better; but is superior to the alternatives, and The second tripod is of three distinct players, each performing a specialized delivers positive outcomes overall. Similarly, if companies are to be brought back function. A distressed investor will then incorporate these players– a bankruptcy from the brink of bankruptcy, rescue efforts must be prompt, and must be applied lawyer, a restructuring adviser, and management – among others, into a cross- with the requisite resources and expertise. functional rescue or revival effort. Alternative strategies and tactics are then dynamically assessed through a market-based lens to allocate capital along the way Based on these characteristics of distress, successful insolvency investments are in what is essentially a specialized corner of the capital market. rarely forged without three essential ingredients –a contrarian mindset; new capital; and expertise that is specialized, inter-disciplinary and cross-functional. The essence of distressed or rescue capital investing, incorporating the above elements, thus lies in its idiosyncratic, contrarian, and specialized nature, and its The first essential ingredient reflects the inherently contrarian nature of rescue reliance on a niche market. Investing in such situations requires agility and speed, finance or distress investing, with investors attempting the revival of an enterprise as well as flexibility in order to provide the requisite customized rescue effort and that has been mostly abandoned by other “regular” investors.11 Distress investors capital. tend to favor the deep value, or large discounts to intrinsic value, that come with embracing underlying problems and out-of-favor situations. As a logical As fiduciaries, typically allocating discretionary capital, and given the inherent extension, they pay greater attention than many other investors to alternative risks and uncertainty in the arena, distress investors entering an insolvency means to realize value, including the redeployment or liquidation of assets. jurisdiction expect access to information, a reliable legal process, flexibility in how they choose to solve problems, and control over their investments.13 A lack of these The second essential ingredient of rescue investing follows from empirical key contextual factors repels capital providers. evidence, with successful insolvency fixes almost always involving the injection of new capital into an asset or business. As a company slips into making losses or Keeping these elements in mind, it is worthwhile to evaluate the existing design towards insolvency, most capital providers choose to stay away. This denial of and performance of certain key elements of the evolving Indian insolvency liquidity creates its own problems, and compounds others. Investing incremental ecosystem. capital in the face of trouble is psychologically challenging, and overcoming this hurdle is a key element of investing in distress. THE INDIAN INSOLVENCY ECOSYSTEM TODAY The final critical ingredient of distress investing entails a curious version of super- The insolvency resolution outcomes achieved under the Code thus far include specialization – across two three-legged stools, and a specialty capital market.12 several spectacular successes that demonstrate the many merits and overall The first of the underlying tripods traverses three disciplines. Almost every potential of the Code and accompanying reforms. The overall resolution successful distressed investment is conceived and executed at the intersection of performance, however, suggests that there is still ample scope for further law, economics and finance. Regular companies live in a context of relatively improvement. It is thus pertinent to examine at this stage whether, and how, the normal business operations and strategy, corporate and investment finance, and Indian insolvency ecosystem may manufacture better resolutions. corporate and commercial laws. Insolvency involves an anomalous twist in each Given the many inherent uncertainties in distressed situations, specialized investors are reluctant to assume risks that can be mitigated by the design of an insolvency regime. The author therefore intends to evaluate the Indian insolvency 11 The Role of Distressed Investing and Hedge Funds in Turnarounds and Buyouts and How This Affects Middle-Market Companies, By Jay Krasoff and John O'Neill, The Journal of Private Equity , Spring 2006, Vol. 9, No. 2, Special Turnaround Management Issue (Spring 2006), pp. 17-22, published by Euromoney 13 Institutional Investor PLC. Considerations for Investors Before Investing in Bankrupt Companies, By Warren H. Feder and Patrick C. Lagrange, The Journal of Private Equity, Fall 2002, Vol. 5, No. 4, Special: Turnaround Management Issue 12 Id. (Fall 2002), pp. 38-41, published by Euromoney Institutional Investor PLC.

8 9 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

up front, making decisions with the information available, and apply skill and discipline, respectively towards bankruptcy reorganization; business rescue, resources appropriately. To save lives, it is critical to speedily bring a patient in turnaround or liquidation; and financial restructuring. Negotiating these twists in crisis to the right surgeon and the right treatment venue. The allocation decision the context of a capital allocation decision is a defining element of the specialty. enjoys an error rate that could be better; but is superior to the alternatives, and The second tripod is of three distinct players, each performing a specialized delivers positive outcomes overall. Similarly, if companies are to be brought back function. A distressed investor will then incorporate these players– a bankruptcy from the brink of bankruptcy, rescue efforts must be prompt, and must be applied lawyer, a restructuring adviser, and management – among others, into a cross- with the requisite resources and expertise. functional rescue or revival effort. Alternative strategies and tactics are then dynamically assessed through a market-based lens to allocate capital along the way Based on these characteristics of distress, successful insolvency investments are in what is essentially a specialized corner of the capital market. rarely forged without three essential ingredients –a contrarian mindset; new capital; and expertise that is specialized, inter-disciplinary and cross-functional. The essence of distressed or rescue capital investing, incorporating the above elements, thus lies in its idiosyncratic, contrarian, and specialized nature, and its The first essential ingredient reflects the inherently contrarian nature of rescue reliance on a niche market. Investing in such situations requires agility and speed, finance or distress investing, with investors attempting the revival of an enterprise as well as flexibility in order to provide the requisite customized rescue effort and that has been mostly abandoned by other “regular” investors.11 Distress investors capital. tend to favor the deep value, or large discounts to intrinsic value, that come with embracing underlying problems and out-of-favor situations. As a logical As fiduciaries, typically allocating discretionary capital, and given the inherent extension, they pay greater attention than many other investors to alternative risks and uncertainty in the arena, distress investors entering an insolvency means to realize value, including the redeployment or liquidation of assets. jurisdiction expect access to information, a reliable legal process, flexibility in how they choose to solve problems, and control over their investments.13 A lack of these The second essential ingredient of rescue investing follows from empirical key contextual factors repels capital providers. evidence, with successful insolvency fixes almost always involving the injection of new capital into an asset or business. As a company slips into making losses or Keeping these elements in mind, it is worthwhile to evaluate the existing design towards insolvency, most capital providers choose to stay away. This denial of and performance of certain key elements of the evolving Indian insolvency liquidity creates its own problems, and compounds others. Investing incremental ecosystem. capital in the face of trouble is psychologically challenging, and overcoming this hurdle is a key element of investing in distress. THE INDIAN INSOLVENCY ECOSYSTEM TODAY The final critical ingredient of distress investing entails a curious version of super- The insolvency resolution outcomes achieved under the Code thus far include specialization – across two three-legged stools, and a specialty capital market.12 several spectacular successes that demonstrate the many merits and overall The first of the underlying tripods traverses three disciplines. Almost every potential of the Code and accompanying reforms. The overall resolution successful distressed investment is conceived and executed at the intersection of performance, however, suggests that there is still ample scope for further law, economics and finance. Regular companies live in a context of relatively improvement. It is thus pertinent to examine at this stage whether, and how, the normal business operations and strategy, corporate and investment finance, and Indian insolvency ecosystem may manufacture better resolutions. corporate and commercial laws. Insolvency involves an anomalous twist in each Given the many inherent uncertainties in distressed situations, specialized investors are reluctant to assume risks that can be mitigated by the design of an insolvency regime. The author therefore intends to evaluate the Indian insolvency 11 The Role of Distressed Investing and Hedge Funds in Turnarounds and Buyouts and How This Affects Middle-Market Companies, By Jay Krasoff and John O'Neill, The Journal of Private Equity , Spring 2006, Vol. 9, No. 2, Special Turnaround Management Issue (Spring 2006), pp. 17-22, published by Euromoney 13 Institutional Investor PLC. Considerations for Investors Before Investing in Bankrupt Companies, By Warren H. Feder and Patrick C. Lagrange, The Journal of Private Equity, Fall 2002, Vol. 5, No. 4, Special: Turnaround Management Issue 12 Id. (Fall 2002), pp. 38-41, published by Euromoney Institutional Investor PLC.

8 9 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

ecosystem from a functional standpoint, and with the perspective of a practitioner. that asked of prospective investors themselves. Absent reliable and comprehensive In doing so, we will visit the law itself, related regulations applicable to information, recovery prospects decline as investors demand a lower price or participation in rescue and resolution, the practicalities attaching thereto, and refrain altogether from participation. assess whether specific elements of the ecosystem are supportive of or detract from Third, good resolution outcomes require a multiplicity of voices at the table. When the achievement of optimal insolvency outcomes. investors compete creatively with their best ideas, and bet with their pocketbooks, Looking back upon the initial mega-auctions, it was heartening to see the game- better solutions tend to emerge, as do better prices for exiting creditors. As more changing impact of even a small 'market-of-two' on auction prices, with large original lenders exit from the loans of a debtor they are tired of, new investors bring companies changing hands following an insolvency resolution process. It is well a fresh, and more optimistic perspective. The original lenders' inherent bias understood, and also somewhat obvious, that a larger number of capable towards liquidation– anchored in their original loan at face value – tends to take a participants bring a diversity of solutions to a given problem. Alack of wider back seat. With banks selling only to a limited extent, this liquidation bias participation is therefore a disappointment. Some hurdles to such participation are predominates, and deters resolution. based on the nascence of the ecosystem. Others practical deterrents have appeared Lastly, pre-conceived notions or even systemic biases against distressed due to the rapid, and skewed, evolution of the ecosystem and are impeding efficient companies pose impediments to effective resolution outcomes. Instances include resolution outcomes. reluctance in providing working capital facilities to supplement rescue Firstly, the insolvency resolution process under the Code has become overly investments, and a lack of experienced management teams willing to take the mechanistic, with the creeping burden of procedural compliances having grown plunge to run and revive companies acquired out of distress, among others. manifold. In a typical principal-agent problem, insolvency professionals, legal However, some positive changes on this front are noticeable in recent times. advisors and original lenders are leaning further into a check-box approach, with In India, banking regulation has been adapted and extended into the non- limited sensitivity to the directly deleterious impact on investor participation and performing loan arena. Prudential norms of banking regulation are intended to resolution outcomes. The substantive work that principal investors need to secure financial stability, safeguarding depositors and the financial system at large. undertake for the rescue of inherently difficult situations – with real capital at risk – Its architecture is known to be unduly restrictive and ill-suited to the resolution of suffers due to this agent-driven agenda. The rigid approach also flies in the face of stressed assets – detailed and rigid prescriptions jeopardize the specialized effort the spirit and design of the Code: a creditor-led resolution effort, permitting required to deliver timely, creative and tailored solutions to rescue troubled tremendous flexibility for market participants to creatively arrive upon the best companies. The distractions of a procedure-bound mode lead to lower investor resolution outcomes. The entry toll may be acceptable to investors in a small subset participation at systematically lower prices for distressed debt, and take a large toll of large investments. However, specialized distressed investors, who evaluate and on resolution outcomes. invest in a multitude of complex situations, cannot afford to deal with such impediments. Furthermore, unsuitable restrictions of one kind or another are reflective of an outmoded paradigm and actively limit the availability of rescue capital. Examples Secondly, information asymmetry is typical in insolvency, and adds to the abound. For one, acquiring the debt and funding the capital needs of a troubled 14 inefficiency of resolution outcomes. A major lacuna today lies in the information Indian company – with an incomplete project, and both domestic and foreign being made available to investors. Many a times, the information provided in an borrowings – requires three to four separate legal entities with separate 15 information memorandum in the insolvency resolution process is exceeded by registrations or licenses. For another, while banks are not equipped to provide solutions to distressed borrowers, most distress investors are permitted to step in 14 Economics of Bankruptcy, By Michelle J. White,The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, Edited by Francesco Parisi, April, 2017 only after the loans have been classified as non-performing by the original bank. 15 As per Section 5(10) of the Insolvency & Bankruptcy Code, 2016, information memorandum refers to a Further restrictions limit incremental rescue capital to 25 percent of the acquisition memorandum prepared by the resolution professional, containing inter alia information about the corporate cost of distressed loans – virtually ruling out the investment of last mile finance for debtor, for the use of the resolution applicant and/or committee of creditors.

10 11 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

ecosystem from a functional standpoint, and with the perspective of a practitioner. that asked of prospective investors themselves. Absent reliable and comprehensive In doing so, we will visit the law itself, related regulations applicable to information, recovery prospects decline as investors demand a lower price or participation in rescue and resolution, the practicalities attaching thereto, and refrain altogether from participation. assess whether specific elements of the ecosystem are supportive of or detract from Third, good resolution outcomes require a multiplicity of voices at the table. When the achievement of optimal insolvency outcomes. investors compete creatively with their best ideas, and bet with their pocketbooks, Looking back upon the initial mega-auctions, it was heartening to see the game- better solutions tend to emerge, as do better prices for exiting creditors. As more changing impact of even a small 'market-of-two' on auction prices, with large original lenders exit from the loans of a debtor they are tired of, new investors bring companies changing hands following an insolvency resolution process. It is well a fresh, and more optimistic perspective. The original lenders' inherent bias understood, and also somewhat obvious, that a larger number of capable towards liquidation– anchored in their original loan at face value – tends to take a participants bring a diversity of solutions to a given problem. Alack of wider back seat. With banks selling only to a limited extent, this liquidation bias participation is therefore a disappointment. Some hurdles to such participation are predominates, and deters resolution. based on the nascence of the ecosystem. Others practical deterrents have appeared Lastly, pre-conceived notions or even systemic biases against distressed due to the rapid, and skewed, evolution of the ecosystem and are impeding efficient companies pose impediments to effective resolution outcomes. Instances include resolution outcomes. reluctance in providing working capital facilities to supplement rescue Firstly, the insolvency resolution process under the Code has become overly investments, and a lack of experienced management teams willing to take the mechanistic, with the creeping burden of procedural compliances having grown plunge to run and revive companies acquired out of distress, among others. manifold. In a typical principal-agent problem, insolvency professionals, legal However, some positive changes on this front are noticeable in recent times. advisors and original lenders are leaning further into a check-box approach, with In India, banking regulation has been adapted and extended into the non- limited sensitivity to the directly deleterious impact on investor participation and performing loan arena. Prudential norms of banking regulation are intended to resolution outcomes. The substantive work that principal investors need to secure financial stability, safeguarding depositors and the financial system at large. undertake for the rescue of inherently difficult situations – with real capital at risk – Its architecture is known to be unduly restrictive and ill-suited to the resolution of suffers due to this agent-driven agenda. The rigid approach also flies in the face of stressed assets – detailed and rigid prescriptions jeopardize the specialized effort the spirit and design of the Code: a creditor-led resolution effort, permitting required to deliver timely, creative and tailored solutions to rescue troubled tremendous flexibility for market participants to creatively arrive upon the best companies. The distractions of a procedure-bound mode lead to lower investor resolution outcomes. The entry toll may be acceptable to investors in a small subset participation at systematically lower prices for distressed debt, and take a large toll of large investments. However, specialized distressed investors, who evaluate and on resolution outcomes. invest in a multitude of complex situations, cannot afford to deal with such impediments. Furthermore, unsuitable restrictions of one kind or another are reflective of an outmoded paradigm and actively limit the availability of rescue capital. Examples Secondly, information asymmetry is typical in insolvency, and adds to the abound. For one, acquiring the debt and funding the capital needs of a troubled 14 inefficiency of resolution outcomes. A major lacuna today lies in the information Indian company – with an incomplete project, and both domestic and foreign being made available to investors. Many a times, the information provided in an borrowings – requires three to four separate legal entities with separate 15 information memorandum in the insolvency resolution process is exceeded by registrations or licenses. For another, while banks are not equipped to provide solutions to distressed borrowers, most distress investors are permitted to step in 14 Economics of Bankruptcy, By Michelle J. White,The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, Edited by Francesco Parisi, April, 2017 only after the loans have been classified as non-performing by the original bank. 15 As per Section 5(10) of the Insolvency & Bankruptcy Code, 2016, information memorandum refers to a Further restrictions limit incremental rescue capital to 25 percent of the acquisition memorandum prepared by the resolution professional, containing inter alia information about the corporate cost of distressed loans – virtually ruling out the investment of last mile finance for debtor, for the use of the resolution applicant and/or committee of creditors.

10 11 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

projects that are less than 80 percent complete. Similarly, recently proposed rules have oftentimes been counterproductively misinterpreted, though the for the sale of bank loans impose requirements of objective measures, external jurisprudence is evolving favorably. Until recently, a rigid and potentially flawed valuations, etc. on investors with mandates that are based on their own varying of the notion of a 'going concern' has derailed sensible resolution alternatives. investment approaches. Banks and regulation also repeatedly refer to 'price Some resolution professionals have also misinterpreted their duty to “preserve and discovery' almost as if it were a free service to be provided by potential buyers even protect the assets” of the debtor, including its “continued business operations” and in the absence of a serious sale process. A preoccupation with enabling aggregation attempted long-term business revivals, to the detriment of the manageable and of debt, and allowing rights of first refusal to existing debt holders, is no longer immediate task at hand: resolution of the entity's insolvency by determining relevant given the provisions of the Code, but continues to deter the application of claims, and disseminating quality information to attract wider participation. effort by new entrants. A mandatory inter-creditor agreement scheme now seeks to The liquidation cliff is another strong deterrent to the entry of rescue capital. The impose a cram-down without the benefit of a court's supervision. Such disbandment of the committee of creditors upon the failure to confirm a resolution impingements plainly deter the participation of investors with the expertise and plan was intended to incentivize a timely resolution. Ironically, the potential loss of experience to weigh the relative impact of these impediments on their rescue control in the event of a failure to arrive upon an acceptable resolution plan investment efforts. dissuades potential investors from participation at the very outset. As far as the law and its interpretation is concerned, a basically solid law and serial The aforementioned hurdles to optimal resolution, fall broadly in two categories, litigation followed by landmark Supreme Court decisions have cleared the path with some overlap. The first category includes challenges that can be met by remarkably. However, some related deterrents have proved to be detrimental to the modifications of law, regulation, or practice. The second set of challenges is not as process and limit competition. easily amenable to a fix in the near term, but is contingent on the further, and Firstly, including creditors with potentially conflicting interests into a single appropriate, evolution of the Indian insolvency ecosystem. creditor class deters participation, as investors find it difficult to evaluate, ex-ante, the risk of being voted down by a majority with divergent interests. Secondly, TIME FOR IBC ECOSYSTEM 2.0? cram-down becomes a serious concern in the absence of separate, voting creditor “Nature, to be commanded, must be obeyed.” classes. A third issue, though of limited impact due to the low recoveries for unsecured claims as yet, is the lack of clarity around the termination of contracts - Sir Francis Bacon, Novum Organum, 1620 and leases, and the determination of claims. In addition, to smoothen the process, it The IBC ecosystem has developed greatly over the past four years. As the new may now be worth incorporating effective devices such as administrative claims, paradigm evolves, it is now time for Ecosystem 2.0so that superior resolution critical vendor claims, etc. Finally, it remains unclear how interim finance claims outcomes – a core objective of India's insolvency reforms, and with widespread will be treated in liquidation, which has virtually eliminated the availability of positive socio-economic consequences – may become more achievable. The capital to debtors during the resolution process, and on balance also discourages author is of the opinion that requisite changes in the insolvency ecosystem fall into rescue efforts prior to insolvency. The law relating to the resolution of financial three broad categories. institutions is another matter that remains deserving of further attention. Firstly, potential amendments need to be made to the Code, as discussed earlier, so In the following segment, certain nuances of the interpretation of law by various as to catch up with the sophistication of the financial system and its consequential practitioners, and of regulations that are posing potential hurdles to investor needs. With advancements in India's insolvency jurisprudence, and in the practice participation, are evaluated in more detail. of insolvency, it is important to equip the regime to better handle the distressed For good insolvency outcomes, the resolution exercise must be responsive, situations currently at hand, and to lower barriers to entry for investors. flexible, and driven by the commercial judgment of creditors with capital, Secondly, it is time for a fundamental shift towards a light-touch regulatory expertise, and a stake in the outcome. Relative to this need, elements of the Code approach to distressed debt investment and turnaround fund management.

12 13 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

projects that are less than 80 percent complete. Similarly, recently proposed rules have oftentimes been counterproductively misinterpreted, though the for the sale of bank loans impose requirements of objective measures, external jurisprudence is evolving favorably. Until recently, a rigid and potentially flawed valuations, etc. on investors with mandates that are based on their own varying of the notion of a 'going concern' has derailed sensible resolution alternatives. investment approaches. Banks and regulation also repeatedly refer to 'price Some resolution professionals have also misinterpreted their duty to “preserve and discovery' almost as if it were a free service to be provided by potential buyers even protect the assets” of the debtor, including its “continued business operations” and in the absence of a serious sale process. A preoccupation with enabling aggregation attempted long-term business revivals, to the detriment of the manageable and of debt, and allowing rights of first refusal to existing debt holders, is no longer immediate task at hand: resolution of the entity's insolvency by determining relevant given the provisions of the Code, but continues to deter the application of claims, and disseminating quality information to attract wider participation. effort by new entrants. A mandatory inter-creditor agreement scheme now seeks to The liquidation cliff is another strong deterrent to the entry of rescue capital. The impose a cram-down without the benefit of a court's supervision. Such disbandment of the committee of creditors upon the failure to confirm a resolution impingements plainly deter the participation of investors with the expertise and plan was intended to incentivize a timely resolution. Ironically, the potential loss of experience to weigh the relative impact of these impediments on their rescue control in the event of a failure to arrive upon an acceptable resolution plan investment efforts. dissuades potential investors from participation at the very outset. As far as the law and its interpretation is concerned, a basically solid law and serial The aforementioned hurdles to optimal resolution, fall broadly in two categories, litigation followed by landmark Supreme Court decisions have cleared the path with some overlap. The first category includes challenges that can be met by remarkably. However, some related deterrents have proved to be detrimental to the modifications of law, regulation, or practice. The second set of challenges is not as process and limit competition. easily amenable to a fix in the near term, but is contingent on the further, and Firstly, including creditors with potentially conflicting interests into a single appropriate, evolution of the Indian insolvency ecosystem. creditor class deters participation, as investors find it difficult to evaluate, ex-ante, the risk of being voted down by a majority with divergent interests. Secondly, TIME FOR IBC ECOSYSTEM 2.0? cram-down becomes a serious concern in the absence of separate, voting creditor “Nature, to be commanded, must be obeyed.” classes. A third issue, though of limited impact due to the low recoveries for unsecured claims as yet, is the lack of clarity around the termination of contracts - Sir Francis Bacon, Novum Organum, 1620 and leases, and the determination of claims. In addition, to smoothen the process, it The IBC ecosystem has developed greatly over the past four years. As the new may now be worth incorporating effective devices such as administrative claims, paradigm evolves, it is now time for Ecosystem 2.0so that superior resolution critical vendor claims, etc. Finally, it remains unclear how interim finance claims outcomes – a core objective of India's insolvency reforms, and with widespread will be treated in liquidation, which has virtually eliminated the availability of positive socio-economic consequences – may become more achievable. The capital to debtors during the resolution process, and on balance also discourages author is of the opinion that requisite changes in the insolvency ecosystem fall into rescue efforts prior to insolvency. The law relating to the resolution of financial three broad categories. institutions is another matter that remains deserving of further attention. Firstly, potential amendments need to be made to the Code, as discussed earlier, so In the following segment, certain nuances of the interpretation of law by various as to catch up with the sophistication of the financial system and its consequential practitioners, and of regulations that are posing potential hurdles to investor needs. With advancements in India's insolvency jurisprudence, and in the practice participation, are evaluated in more detail. of insolvency, it is important to equip the regime to better handle the distressed For good insolvency outcomes, the resolution exercise must be responsive, situations currently at hand, and to lower barriers to entry for investors. flexible, and driven by the commercial judgment of creditors with capital, Secondly, it is time for a fundamental shift towards a light-touch regulatory expertise, and a stake in the outcome. Relative to this need, elements of the Code approach to distressed debt investment and turnaround fund management.

12 13 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

Effective insolvency resolution outcomes require the creation of a real market for platform for stressed assets as suggested by the Sashakt Committee17 may help distressed debt, and for the control of troubled companies. Being a complex arena create better insolvency infrastructure for Ecosystem 2.0, with the centralization with the characteristics discussed earlier, a bank-oriented regulatory paradigm and better dissemination of stressed asset and insolvency information. dramatically lowers the efficiency of stressed asset revival efforts. While oversight For now, it is possible to argue that a core problem in insolvency resolution today is is desirable in the context of a non-performing loan problem centered on public- not that of market failure, but of the failure to create a market. And absent such a sector banks, the efficient resolution of insolvencies requires flexibility and speed. market, the rest is a veritable charade relative to the realization of superior In line with international practice, wide operating latitude should be combined outcomes. As noted earlier, a market does not deliver an outcome just because it is with a high bar on who may participate, with qualified end-investors reasonably needed. However, in a truism, finding faith in markets, with appropriate controls protected against malfeasance. To realize the virtues of the Code, the regulatory for market failure, should deliver better outcomes than any top-down alternative. and policy frameworks should provide room for creative market-driven solutions Further, it is suggested that simplified procedural obligations will go a long way in to maximize the value of stressed assets and businesses. creating an incentive for distress investors to bring both capital and expertise to Third, the Indian insolvency ecosystem needs to borrow more heavily from the more effectively restructure and revive stressed assets. success of the American bankruptcy system, which has probably been the best In conclusion, it is time to unleash the magic of markets in delivering better across the world in “separating the consequences of insolvency from impeding the resolution outcomes. Over time, the wider financial system and economy will placement of assets in their most productive use”. This success is widely attributed benefit greatly from a consistent, and appropriately priced, supply of credit to to two key elements of the American system. Firstly, the adherence to the rule of sustain high growth; and a self-sufficient, and stable banking system. law, meaning that the rules of insolvency resolution are clearly set out and known in advance to all participants, and are adhered to in reality, in both determining their actions and in the decisions of the bankruptcy courts. Secondly, various innovations have emerged and have led to the use of bankruptcy as a utilitarian tool in the United States.16 It is time for India to adopt several such facilitatory rules – for example, for multiple creditor classes, for inter se priority, and for the termination of contracts and the assumption or rejection of executory contracts to create a more utilitarian tool for the creation of superior resolution outcomes. Last but by no means the least, and even though difficult, it is critical that Indian banks begin to adapt, and recognize the merits of specialization, with stressed assets trading into the right hands at an early stage. This requires a much lower compliance burden, and far greater flexibility to attract specialized investors. The banking system would benefit from more competition and consequently better prices for the distressed loans they sell, and from greater expertise applied in achieving superior resolution outcomes. Desirable improvements in system capacity would naturally follow these developments. In this regard, a trading

16 Jackson, Thomas H. and Skeel, David A. Jr., "Bankruptcy and Economic Recovery" (2013). Faculty 17 Committee headed by Sunil Mehta, Non-Executive Chairman of Punjab National Bank, constituted in 2018 Scholarship at Penn Law. 476.https://scholarship.law.upenn.edu/faculty_scholarship/476 to help consolidate stressed assets.

14 15 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Optimizing Insvolcenc2 y Resolutions - from the Lens of a Practitioner

Effective insolvency resolution outcomes require the creation of a real market for platform for stressed assets as suggested by the Sashakt Committee17 may help distressed debt, and for the control of troubled companies. Being a complex arena create better insolvency infrastructure for Ecosystem 2.0, with the centralization with the characteristics discussed earlier, a bank-oriented regulatory paradigm and better dissemination of stressed asset and insolvency information. dramatically lowers the efficiency of stressed asset revival efforts. While oversight For now, it is possible to argue that a core problem in insolvency resolution today is is desirable in the context of a non-performing loan problem centered on public- not that of market failure, but of the failure to create a market. And absent such a sector banks, the efficient resolution of insolvencies requires flexibility and speed. market, the rest is a veritable charade relative to the realization of superior In line with international practice, wide operating latitude should be combined outcomes. As noted earlier, a market does not deliver an outcome just because it is with a high bar on who may participate, with qualified end-investors reasonably needed. However, in a truism, finding faith in markets, with appropriate controls protected against malfeasance. To realize the virtues of the Code, the regulatory for market failure, should deliver better outcomes than any top-down alternative. and policy frameworks should provide room for creative market-driven solutions Further, it is suggested that simplified procedural obligations will go a long way in to maximize the value of stressed assets and businesses. creating an incentive for distress investors to bring both capital and expertise to Third, the Indian insolvency ecosystem needs to borrow more heavily from the more effectively restructure and revive stressed assets. success of the American bankruptcy system, which has probably been the best In conclusion, it is time to unleash the magic of markets in delivering better across the world in “separating the consequences of insolvency from impeding the resolution outcomes. Over time, the wider financial system and economy will placement of assets in their most productive use”. This success is widely attributed benefit greatly from a consistent, and appropriately priced, supply of credit to to two key elements of the American system. Firstly, the adherence to the rule of sustain high growth; and a self-sufficient, and stable banking system. law, meaning that the rules of insolvency resolution are clearly set out and known in advance to all participants, and are adhered to in reality, in both determining their actions and in the decisions of the bankruptcy courts. Secondly, various innovations have emerged and have led to the use of bankruptcy as a utilitarian tool in the United States.16 It is time for India to adopt several such facilitatory rules – for example, for multiple creditor classes, for inter se priority, and for the termination of contracts and the assumption or rejection of executory contracts to create a more utilitarian tool for the creation of superior resolution outcomes. Last but by no means the least, and even though difficult, it is critical that Indian banks begin to adapt, and recognize the merits of specialization, with stressed assets trading into the right hands at an early stage. This requires a much lower compliance burden, and far greater flexibility to attract specialized investors. The banking system would benefit from more competition and consequently better prices for the distressed loans they sell, and from greater expertise applied in achieving superior resolution outcomes. Desirable improvements in system capacity would naturally follow these developments. In this regard, a trading

16 Jackson, Thomas H. and Skeel, David A. Jr., "Bankruptcy and Economic Recovery" (2013). Faculty 17 Committee headed by Sunil Mehta, Non-Executive Chairman of Punjab National Bank, constituted in 2018 Scholarship at Penn Law. 476.https://scholarship.law.upenn.edu/faculty_scholarship/476 to help consolidate stressed assets.

14 15 2 2 Guarantors and Guarantees under the Insolvency & Bankruptcy Code, 2016 - Contemporary Developments

Aparna Ravi

1 Ms. Aparna Ravi is a partner at Samvad Partners. The author would like to thank Ms. Ramya Katti, Associate, Samvad Partners for her research assistance for this article. Guarantors and Guarantees under the Insolvency & Bankruptcy Code, 2016 - Contemporary Developments

Aparna Ravi

1 Ms. Aparna Ravi is a partner at Samvad Partners. The author would like to thank Ms. Ramya Katti, Associate, Samvad Partners for her research assistance for this article. Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

Abstract the IBC. The author, in this article, intends to review the treatment of personal and corporate guarantors under the IBC to identify areas of discord and ambiguity. In On 1st December, 2019, the Central Government notified the provisions pertaining particular, the author emphasizes on two broad issues that the evolving to Part III of the Insolvency and Bankruptcy Code, 2016 but only with respect to jurisprudence in this area has been dealing with: (a) simultaneous proceedings and one category of individual debtors – Personal Guarantors. Pursuant to this treatment of claims against the CD and guarantor, and (b) rights of a guarantor and notification, insolvency proceedings against the personal guarantors of corporate its creditors' post-approval of a resolution plan for the CD. Finally, the author also debtors can now be initiated in the same bench of the National Company Law pre-empts certain shortcomings in the regulations, particularly in the context of Tribunal, where the insolvency or liquidation proceedings of the corporate debtor PGs. are going on. However, there is a lot of ambiguity on this issue, particularly on the interplay of proceedings against the corporate debtor and its personal guarantors. THE AMBIT OF GUARANTORS AND GUARANTEES UNDER IBC The author, in this article, intends to review the treatment of personal and corporate guarantors under the Insolvency and Bankruptcy Code, 2016 to identify At the outset, it is pertinent to examine the treatment of guarantors and guarantees areas of discord and ambiguity. In particular, the author emphasizes on two broad under the IBC. Firstly, a guarantee is treated as a financial debt under section issues that the evolving jurisprudence in this area has been dealing with: (a) 5(8)(I) of the IBC and, by extension, the beneficiary of a guarantee is a financial simultaneous proceedings and treatment of claims against the corporate debtor creditor (FC) of the guarantor. The treatment of a guarantee as a financial debt and guarantor, and (b) rights of a guarantor and its creditors' post-approval of a stems from the fact that, as per section 127 of the Indian Contract Act, 1872 resolution plan for the corporate debtor. Finally, the author also pre-empts certain (Contract Act), the liability of a surety or guarantor is co-extensive with, and shortcomings in the regulations, particularly in the context of personal independent of, the liability of the principal borrower. In other words, in case of a guarantors. default by the principal borrower, a creditor may proceed against the guarantor Keywords – Insolvency & Bankruptcy Code, Personal Guarantors, Simultaneous without first having to exhaust its remedies against the principal borrower. Proceedings, Guarantor and principal borrower, principle of co-extensive Secondly, the guarantor or the guarantor's assets are not protected by the terms of liability. the moratorium under section 14 of the IBC, in case a corporate insolvency resolution process (CIRP) is admitted against the principal borrower or the INTRODUCTION corporate debtor. Even though initially there was slight confusion surrounding the The Indian Insolvency & Bankruptcy framework recently underwent a significant applicability of the moratorium to the guarantor as courts had taken differing 2 change when Part III of the Insolvency and Bankruptcy Code, 2016 (IBC), stands, the IBC (Second Amendment) Act, 2018, based on the recommendations pertaining to insolvency and bankruptcy of individuals and partnership firms, was of the Insolvency Law Committee clarified that beneficiaries of the guarantee may notified with respect to one category of individual debtors–Personal Guarantors initiate separate enforcement actions against the guarantor (including initiating a (PGs) on 1st December, 2019. Insolvency proceedings against the PGs of CIRP) while the CIRP of the CD is ongoing. Corporate Debtors (CDs) can now be initiated in the same bench of the National Thirdly, according to Section 60(2) of the IBC, the application for CIRP or Company Law Tribunal (NCLT), where the insolvency or liquidation proceedings liquidation of a personal or corporate guarantor of such CD must be filed before the of the CD are going on. While this change in the IBC received a mixed response same bench of NCLT, where the CIRP or liquidation against the CD is in process. from the relevant stakeholders, it is safe to say that there is much in the process that Similarly, under section 60(3) of the IBC, if the CIRP or liquidation of a PG or remains to be clarified, particularly on the interplay of proceedings against the CD corporate guarantor is pending before a different bench of the NCLT, the and its PGs.

This ambiguity can also be accredited to the meandering and often contradictory 2 In State Bank of India v. V. Ramakrishnan and Veeson Energy Systems, Company Appeal (AT) (Insolvency) jurisprudence that has emerged on the corporate guarantors and guarantees under No.213/2017, NCLAT and Sanjeev Shriyav. State Bank of India, 2017(9) ADJ 723, Allahabad High Court, it

18 19 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

Abstract the IBC. The author, in this article, intends to review the treatment of personal and corporate guarantors under the IBC to identify areas of discord and ambiguity. In On 1st December, 2019, the Central Government notified the provisions pertaining particular, the author emphasizes on two broad issues that the evolving to Part III of the Insolvency and Bankruptcy Code, 2016 but only with respect to jurisprudence in this area has been dealing with: (a) simultaneous proceedings and one category of individual debtors – Personal Guarantors. Pursuant to this treatment of claims against the CD and guarantor, and (b) rights of a guarantor and notification, insolvency proceedings against the personal guarantors of corporate its creditors' post-approval of a resolution plan for the CD. Finally, the author also debtors can now be initiated in the same bench of the National Company Law pre-empts certain shortcomings in the regulations, particularly in the context of Tribunal, where the insolvency or liquidation proceedings of the corporate debtor PGs. are going on. However, there is a lot of ambiguity on this issue, particularly on the interplay of proceedings against the corporate debtor and its personal guarantors. THE AMBIT OF GUARANTORS AND GUARANTEES UNDER IBC The author, in this article, intends to review the treatment of personal and corporate guarantors under the Insolvency and Bankruptcy Code, 2016 to identify At the outset, it is pertinent to examine the treatment of guarantors and guarantees areas of discord and ambiguity. In particular, the author emphasizes on two broad under the IBC. Firstly, a guarantee is treated as a financial debt under section issues that the evolving jurisprudence in this area has been dealing with: (a) 5(8)(I) of the IBC and, by extension, the beneficiary of a guarantee is a financial simultaneous proceedings and treatment of claims against the corporate debtor creditor (FC) of the guarantor. The treatment of a guarantee as a financial debt and guarantor, and (b) rights of a guarantor and its creditors' post-approval of a stems from the fact that, as per section 127 of the Indian Contract Act, 1872 resolution plan for the corporate debtor. Finally, the author also pre-empts certain (Contract Act), the liability of a surety or guarantor is co-extensive with, and shortcomings in the regulations, particularly in the context of personal independent of, the liability of the principal borrower. In other words, in case of a guarantors. default by the principal borrower, a creditor may proceed against the guarantor Keywords – Insolvency & Bankruptcy Code, Personal Guarantors, Simultaneous without first having to exhaust its remedies against the principal borrower. Proceedings, Guarantor and principal borrower, principle of co-extensive Secondly, the guarantor or the guarantor's assets are not protected by the terms of liability. the moratorium under section 14 of the IBC, in case a corporate insolvency resolution process (CIRP) is admitted against the principal borrower or the INTRODUCTION corporate debtor. Even though initially there was slight confusion surrounding the The Indian Insolvency & Bankruptcy framework recently underwent a significant applicability of the moratorium to the guarantor as courts had taken differing 2 change when Part III of the Insolvency and Bankruptcy Code, 2016 (IBC), stands, the IBC (Second Amendment) Act, 2018, based on the recommendations pertaining to insolvency and bankruptcy of individuals and partnership firms, was of the Insolvency Law Committee clarified that beneficiaries of the guarantee may notified with respect to one category of individual debtors–Personal Guarantors initiate separate enforcement actions against the guarantor (including initiating a (PGs) on 1st December, 2019. Insolvency proceedings against the PGs of CIRP) while the CIRP of the CD is ongoing. Corporate Debtors (CDs) can now be initiated in the same bench of the National Thirdly, according to Section 60(2) of the IBC, the application for CIRP or Company Law Tribunal (NCLT), where the insolvency or liquidation proceedings liquidation of a personal or corporate guarantor of such CD must be filed before the of the CD are going on. While this change in the IBC received a mixed response same bench of NCLT, where the CIRP or liquidation against the CD is in process. from the relevant stakeholders, it is safe to say that there is much in the process that Similarly, under section 60(3) of the IBC, if the CIRP or liquidation of a PG or remains to be clarified, particularly on the interplay of proceedings against the CD corporate guarantor is pending before a different bench of the NCLT, the and its PGs.

This ambiguity can also be accredited to the meandering and often contradictory 2 In State Bank of India v. V. Ramakrishnan and Veeson Energy Systems, Company Appeal (AT) (Insolvency) jurisprudence that has emerged on the corporate guarantors and guarantees under No.213/2017, NCLAT and Sanjeev Shriyav. State Bank of India, 2017(9) ADJ 723, Allahabad High Court, it

18 19 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

proceeding is to be transferred to the NCLT bench hearing the CIRP or liquidation for simultaneous proceedings against the principal borrower and guarantor. On this of the principal borrower. issue, various benches of the NCLT as well as the National Company Law Appellate Tribunal (NCLAT) have held that a FC may commence a section 7 Lastly, section 31 of the IBC states that a resolution plan, upon approval by the proceeding against a guarantor without first having to commence a proceeding adjudicating authority, shall be binding on corporate debtor and its employees, against the principal borrower and may also, if it chooses, initiate proceedings members, creditors, including the Central Government, any State Government or against the guarantor and the principal borrower in parallel.4 Even though this any local authority to whom a debt in respect of the payment of dues arising under lends clarity to the fact that a creditor may initiate simultaneous proceedings any law for the time being in force, such as authorities to whom statutory dues are against the guarantor and the principal borrower, it is still not clear as to how these owed, guarantors and other stakeholders involved in the resolution plan. This two proceedings will concurrently pan out, in the context of IBC. Further, the provision, particularly as to the resolution plan's binding effect on guarantors, has NCLAT, in the case of Vishnu Kumar Agarwal v. Piramal Enterprises (hereinafter been interpreted extensively by courts and tribunals as to what it means for claims 'Piramal'), held that a Section 7 application under IBC, once admitted against one by and against guarantors once a resolution plan with respect to the principal 3 of the guarantors, is not maintainable against other guarantors for the same claim borrower has been approved. and stated - . Hence, the IBC framework, pertaining to the treatment of guarantors, reflects that "There is no bar in the 'I&B Code' for filing simultaneously two the obligations of guarantors are independent of the liability of the principal applications under Section 7 against the 'Principal Borrower' as well as borrowers and that FCs should be able to proceed against the guarantor in the same the 'Corporate Guarantor(s)' or against both the 'Guarantors'. However, way as they would against the principal borrower. However, the provisions of once for same set of claim application under Section 7 filed by the section 60 (2) and 60(3) of IBC also require some sort of coordination in the CIRP 'Financial Creditor' is admitted against one of the 'Corporate Debtor' or liquidation proceedings of the principal borrower and guarantor, although no ('Principal Borrower' or 'Corporate Guarantor(s)'), second application further clarity on such kind of for this has been set out in the IBC or the regulations by the same 'Financial Creditor' for same set of claim and default cannot Owing to this unclear legislative framework for guarantors and the claims against be admitted against the other 'Corporate Debtor' (the 'Corporate them, the courts or different benches of NCLT have differently interpreted the Guarantor(s)' or the 'Principal Borrower'). Further, though there is a provisions, which has further led to contradictory decisions and amplification of provision to file joint application under Section 7 by the 'Financial ambiguity created by law.. These ambiguities are only likely to be further Creditors', no application can be filed by the 'Financial Creditor' against exacerbated with insolvency proceedings against PGs (its process is quite distinct two or more 'Corporate Debtors' on the ground of joint liability from the CIRP) coming into the picture. ('Principal Borrower' and one 'Corporate Guarantor', or 'Principal Borrower' or two 'Corporate Guarantors' or one 'Corporate Guarantor' CONTENTIOUS ISSUES and other 'Corporate Guarantor'), till it is shown that the 'Corporate Simultaneous Proceedings Against Guarantors and Principal Borrowers Debtors' combined are joint venture company." The provisions of section 14 of the IBC explicitly state that the moratorium, The principle laid down by the court in the Piramal has since been duly followed triggered on the initiation of CIRP proceedings against the CD, will not be and relied on by various benches of the NCLT as well as by the NCLAT in several applicable to the guarantor's assets. This in turn grants leeway to the creditors to file subsequent cases like State Bank of India v. Visa International Limited,5 where the NCLAT stated that a CIRP against a guarantor could not be admitted as a CIRP 3 Yet another reference to guarantors in the IBC is that one of the categories of persons that are not eligible to against another guarantor for the same claim had already been admitted. Quite submit resolution plans under section 29A of the IBC are guarantors of CDs, to the extent that the guarantee has been invoked and remains partly or wholly unpaid. This last context relates to guarantors as resolution applicants and is not dealt with in detail in this article as it is not as relevant to the treatment of guarantors and 4 Company Appeal (AT) Insolvency No. 346 of 2018. guarantees in CIRPs(or insolvency resolution processes in the case of PGs) or liquidation or bankruptcy 5 process. Company Appeal (AT) Insolvency No. 179 of 2019.

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proceeding is to be transferred to the NCLT bench hearing the CIRP or liquidation for simultaneous proceedings against the principal borrower and guarantor. On this of the principal borrower. issue, various benches of the NCLT as well as the National Company Law Appellate Tribunal (NCLAT) have held that a FC may commence a section 7 Lastly, section 31 of the IBC states that a resolution plan, upon approval by the proceeding against a guarantor without first having to commence a proceeding adjudicating authority, shall be binding on corporate debtor and its employees, against the principal borrower and may also, if it chooses, initiate proceedings members, creditors, including the Central Government, any State Government or against the guarantor and the principal borrower in parallel.4 Even though this any local authority to whom a debt in respect of the payment of dues arising under lends clarity to the fact that a creditor may initiate simultaneous proceedings any law for the time being in force, such as authorities to whom statutory dues are against the guarantor and the principal borrower, it is still not clear as to how these owed, guarantors and other stakeholders involved in the resolution plan. This two proceedings will concurrently pan out, in the context of IBC. Further, the provision, particularly as to the resolution plan's binding effect on guarantors, has NCLAT, in the case of Vishnu Kumar Agarwal v. Piramal Enterprises (hereinafter been interpreted extensively by courts and tribunals as to what it means for claims 'Piramal'), held that a Section 7 application under IBC, once admitted against one by and against guarantors once a resolution plan with respect to the principal 3 of the guarantors, is not maintainable against other guarantors for the same claim borrower has been approved. and stated - . Hence, the IBC framework, pertaining to the treatment of guarantors, reflects that "There is no bar in the 'I&B Code' for filing simultaneously two the obligations of guarantors are independent of the liability of the principal applications under Section 7 against the 'Principal Borrower' as well as borrowers and that FCs should be able to proceed against the guarantor in the same the 'Corporate Guarantor(s)' or against both the 'Guarantors'. However, way as they would against the principal borrower. However, the provisions of once for same set of claim application under Section 7 filed by the section 60 (2) and 60(3) of IBC also require some sort of coordination in the CIRP 'Financial Creditor' is admitted against one of the 'Corporate Debtor' or liquidation proceedings of the principal borrower and guarantor, although no ('Principal Borrower' or 'Corporate Guarantor(s)'), second application further clarity on such kind of for this has been set out in the IBC or the regulations by the same 'Financial Creditor' for same set of claim and default cannot Owing to this unclear legislative framework for guarantors and the claims against be admitted against the other 'Corporate Debtor' (the 'Corporate them, the courts or different benches of NCLT have differently interpreted the Guarantor(s)' or the 'Principal Borrower'). Further, though there is a provisions, which has further led to contradictory decisions and amplification of provision to file joint application under Section 7 by the 'Financial ambiguity created by law.. These ambiguities are only likely to be further Creditors', no application can be filed by the 'Financial Creditor' against exacerbated with insolvency proceedings against PGs (its process is quite distinct two or more 'Corporate Debtors' on the ground of joint liability from the CIRP) coming into the picture. ('Principal Borrower' and one 'Corporate Guarantor', or 'Principal Borrower' or two 'Corporate Guarantors' or one 'Corporate Guarantor' CONTENTIOUS ISSUES and other 'Corporate Guarantor'), till it is shown that the 'Corporate Simultaneous Proceedings Against Guarantors and Principal Borrowers Debtors' combined are joint venture company." The provisions of section 14 of the IBC explicitly state that the moratorium, The principle laid down by the court in the Piramal has since been duly followed triggered on the initiation of CIRP proceedings against the CD, will not be and relied on by various benches of the NCLT as well as by the NCLAT in several applicable to the guarantor's assets. This in turn grants leeway to the creditors to file subsequent cases like State Bank of India v. Visa International Limited,5 where the NCLAT stated that a CIRP against a guarantor could not be admitted as a CIRP 3 Yet another reference to guarantors in the IBC is that one of the categories of persons that are not eligible to against another guarantor for the same claim had already been admitted. Quite submit resolution plans under section 29A of the IBC are guarantors of CDs, to the extent that the guarantee has been invoked and remains partly or wholly unpaid. This last context relates to guarantors as resolution applicants and is not dealt with in detail in this article as it is not as relevant to the treatment of guarantors and 4 Company Appeal (AT) Insolvency No. 346 of 2018. guarantees in CIRPs(or insolvency resolution processes in the case of PGs) or liquidation or bankruptcy 5 process. Company Appeal (AT) Insolvency No. 179 of 2019.

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contrastingly, there is a single case which deviates from the principle adopted by The co-extensive and independent nature of the liability of guarantor and principal the NCLAT in Piramal case, which is the decision of the NCLT, Chennai Bench in borrower is one of the crucial principles on the basis of which the contract of Indian Bank v. Jeppiar Cements Private Limited,6 where the CIRP application guarantee persists, meaning thereby that the lender must have the choice of against a guarantor was admitted, even though a CIRP application against the proceeding against either or both of them. However, prohibiting a CIRP principal borrower had been admitted for the same claim. Further, the NCLAT, in proceeding for a guarantor from continuing, following the admission of the the case of Edelweiss Asset Reconstruction Company Pvt. Ltd. v. Sachet application against the principal borrower and vice versa, jeopardizes the essential Infrastructure Pvt Ltd. and Others,7 took a different stand from the Piramal case tenet of the guarantee principles. Henceforth, the Piramal judgment not only takes principle and admitted the CIRP applications against a consortium of CDs, which away this right of lenders under contracts of guarantees, but also leads to various had extended guarantees to each other, as not admitting the group insolvency anomalies. process against the five different entities or CDs would have jeopardized the For instance, the inapplicability of the moratorium to the contracts of guarantee sanctity of the resolution process. ensures that there is no bar to initiation of any kind of proceedings against the It is also worthwhile to take into account the fact that the Piramal decision itself is guarantor. An interesting viewpoint of Piramal judgment is that the beneficiary now pending in appeal in before the Hon’ble Supreme Court (SC), whose decision cannot proceed against the guarantor under the IBC (assuming that the beneficiary might give a conclusive stand to this contentious issue. has commenced an IBC proceeding against the principal borrower which has been Prima facie, the rational of the NCLAT in Piramal matter, stemming from the admitted). However, the beneficiary may also proceed to take enforcement action principle of no double dipping, appears to be sound as a creditor, if it has already against the guarantor under any other law, including by invoking the guarantee or recovered its claim against one of the obligors, it cannot also recover from another enforcing the security under the provisions of Section 13 of the Securitization and obligor for the same claim. However, it is important to remember that a single Reconstruction of Financial Assets and Enforcement of Security Interest Act, creditor, even though has the power to initiate the CIRP proceedings under the IBC, 2002.This leads to a peculiar result that a lender may pursue simultaneous cannot be guaranteed his entire credit claim or assurance of no haircut on its claims, proceedings against the guarantor and the principal borrower, as long as they are as the final decision to determine the distribution of resolution proceeds rests with both not under the IBC. To the contrary, this way, the requisite proceedings would the Committee of Creditors (CoC), and not with the individual creditor which likely allow for greater coordination and preservation of value if both proceedings initiated the entire process. Keeping this in mind, it will not be problematic to say were under the IBC. that the Piramal decision is premature because the creditor, by filing applications It is, of course, important to ensure that the two parallel CIRP proceedings against a against both the obligors, would be necessarily recovering more than the original principal borrower and a guarantor or against two guarantors are coordinated and amount of its claim. As the NCLT, Chennai bench stated in Indian Bank v. Jeppiar no creditor receives an amount in excess of what it is owed. This problem can be Cements Pvt. Ltd.: addressed by additional regulations or a market practice on consolidating or Two same claims against one insolvent is not possible, but same claim coordinating such related proceedings and is (as discussed in more detail below) an before insolvent borrower and before insolvent guarantors is not issue that needs to be considered. However, not permitting simultaneous prohibited under Rule against Double proof or under the Contract Act or proceedings against the CD and the guarantor goes against the principle of under the Insolvency laws. The only rider is the creditor should not guarantees and contradicts the position of guarantees under the IBC. The NCLAT continue against any one of the obligants or against the obligant, once the in Edelweiss has already suggested that the Piramal ratio would not hold in obligation is fully discharged by any of the obligants. situations where the entities are so inter-related that a consolidated CIRP would be required for a successful resolution. It is hoped that the SC goes beyond this to state that simultaneous proceedings against a guarantor and principal borrower can 6 IBA/685/2019. continue in other circumstances as well. 7 Company Appeal (AT) (Insolvency) Nos. 377, 378, 379, 380, 381, 382, 383, 384 and 385 of 2019.

22 23 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

contrastingly, there is a single case which deviates from the principle adopted by The co-extensive and independent nature of the liability of guarantor and principal the NCLAT in Piramal case, which is the decision of the NCLT, Chennai Bench in borrower is one of the crucial principles on the basis of which the contract of Indian Bank v. Jeppiar Cements Private Limited,6 where the CIRP application guarantee persists, meaning thereby that the lender must have the choice of against a guarantor was admitted, even though a CIRP application against the proceeding against either or both of them. However, prohibiting a CIRP principal borrower had been admitted for the same claim. Further, the NCLAT, in proceeding for a guarantor from continuing, following the admission of the the case of Edelweiss Asset Reconstruction Company Pvt. Ltd. v. Sachet application against the principal borrower and vice versa, jeopardizes the essential Infrastructure Pvt Ltd. and Others,7 took a different stand from the Piramal case tenet of the guarantee principles. Henceforth, the Piramal judgment not only takes principle and admitted the CIRP applications against a consortium of CDs, which away this right of lenders under contracts of guarantees, but also leads to various had extended guarantees to each other, as not admitting the group insolvency anomalies. process against the five different entities or CDs would have jeopardized the For instance, the inapplicability of the moratorium to the contracts of guarantee sanctity of the resolution process. ensures that there is no bar to initiation of any kind of proceedings against the It is also worthwhile to take into account the fact that the Piramal decision itself is guarantor. An interesting viewpoint of Piramal judgment is that the beneficiary now pending in appeal in before the Hon’ble Supreme Court (SC), whose decision cannot proceed against the guarantor under the IBC (assuming that the beneficiary might give a conclusive stand to this contentious issue. has commenced an IBC proceeding against the principal borrower which has been Prima facie, the rational of the NCLAT in Piramal matter, stemming from the admitted). However, the beneficiary may also proceed to take enforcement action principle of no double dipping, appears to be sound as a creditor, if it has already against the guarantor under any other law, including by invoking the guarantee or recovered its claim against one of the obligors, it cannot also recover from another enforcing the security under the provisions of Section 13 of the Securitization and obligor for the same claim. However, it is important to remember that a single Reconstruction of Financial Assets and Enforcement of Security Interest Act, creditor, even though has the power to initiate the CIRP proceedings under the IBC, 2002.This leads to a peculiar result that a lender may pursue simultaneous cannot be guaranteed his entire credit claim or assurance of no haircut on its claims, proceedings against the guarantor and the principal borrower, as long as they are as the final decision to determine the distribution of resolution proceeds rests with both not under the IBC. To the contrary, this way, the requisite proceedings would the Committee of Creditors (CoC), and not with the individual creditor which likely allow for greater coordination and preservation of value if both proceedings initiated the entire process. Keeping this in mind, it will not be problematic to say were under the IBC. that the Piramal decision is premature because the creditor, by filing applications It is, of course, important to ensure that the two parallel CIRP proceedings against a against both the obligors, would be necessarily recovering more than the original principal borrower and a guarantor or against two guarantors are coordinated and amount of its claim. As the NCLT, Chennai bench stated in Indian Bank v. Jeppiar no creditor receives an amount in excess of what it is owed. This problem can be Cements Pvt. Ltd.: addressed by additional regulations or a market practice on consolidating or Two same claims against one insolvent is not possible, but same claim coordinating such related proceedings and is (as discussed in more detail below) an before insolvent borrower and before insolvent guarantors is not issue that needs to be considered. However, not permitting simultaneous prohibited under Rule against Double proof or under the Contract Act or proceedings against the CD and the guarantor goes against the principle of under the Insolvency laws. The only rider is the creditor should not guarantees and contradicts the position of guarantees under the IBC. The NCLAT continue against any one of the obligants or against the obligant, once the in Edelweiss has already suggested that the Piramal ratio would not hold in obligation is fully discharged by any of the obligants. situations where the entities are so inter-related that a consolidated CIRP would be required for a successful resolution. It is hoped that the SC goes beyond this to state that simultaneous proceedings against a guarantor and principal borrower can 6 IBA/685/2019. continue in other circumstances as well. 7 Company Appeal (AT) (Insolvency) Nos. 377, 378, 379, 380, 381, 382, 383, 384 and 385 of 2019.

22 23 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

Legitimacy of Claims by or against Guarantors on Conclusion of CIRP guarantee after a resolution plan with respect to the principal borrower had been Another issue that has arisen is the fate of claims by or against a guarantor, once the approved. However, this issue came up more recently before the SC in the Essar CIRP has been completed and a resolution plan for the principal borrower has been Steel matter, wherein it appears to have deliberately left this question unanswered approved. In this situation, there are potentially two questions. First, once a on the basis that the banks in Essar Steel Limited were pursuing independent resolution plan has been approved, can a personal/corporate guarantor, whose actions against the PGs. Technically, there is no bar under the IBC for a creditor guarantee has been invoked, seek to recover its claim against the CD, based on the continuing to pursue a claim against the guarantor once the CIRP of the principal principles of subrogation? Second, can a FC, which receives a portion (but not the borrower has been completed and a resolution plan has been approved. Further, as entire amount) of its original claim through the resolution plan, make a claim section 127 of the Contract Act provides that the liability of the guarantor is against the guarantor for the remaining portion of its claim? independent of the obligation of the principal debtor, it can be argued that the claim against the guarantor remains, even though the creditor can no longer make any 8 The NCLAT, in the case of Lalit Misra & Ors. v. Sharon Bio Medicine Ltd. and the claim against the principal borrower. On the other hand, the guarantor can utilize Supreme Court in the case of State Bank of India v. V. Ramakrishnan and also more this position held by the Courts to its benefit by contending that, since its right of recently in the landmark judgment of Committee of Creditors of Essar Steel subrogation under section 140 of the Contract Act is no longer available after the 9 Limited v. Satish Kumar (Hereinafter 'Essar Steel') had clarified the first approval of the resolution plan, , it should similarly have no liability to the creditors aforementioned question stating that a guarantor cannot exercise its right of of the CD. Furthermore, the guarantor could also argue that, since the creditor has subrogation against the CD once a resolution plan has been approved. voluntarily initiated the CIRP process, and has thereby effectively agreed to the Further, the Hon'ble SC in the case of Essar Steel relied on Section 31(1) of the IBC commercial wisdom of the CoC, pertaining to the amount to be realized in to hold that once a resolution plan is approved, it is binding on all stakeholders satisfaction of its claims, hence, there arises no claim of the creditor against the concerned, including the guarantor and hence the guarantor is precluded from guarantor against any amount of the debt. Given the grey area in this regard, it is proceeding against the CD, post the completion of CIRP, on the ground that the important that this issue on extinguishment (or not) of claims against a guarantor, IBC or the CIRP process is meant to provide a fresh start to the insolvent entity, and post approval of a resolution plan, is clarified by courts. allowing the claims of the guarantor would pressure or place the CD under a burden of claims. SHORTCOMINGS IN THE LAW AND ITS APPLICATION This principle is also consistent with the idea that once the CIRP is completed, the Post the notification, pertaining to the application of Part III of the IBC with respect debts of the CD are discharged in full and its creditors cannot bring claims against it to the PGs, there has been paucity of guidance from the government as to the for dues that arose before the commencement of the CIRP. The IBC (Amendment) modalities of the conduct of such simultaneous proceedings against the personal or Act, 2020 which added section 32A to the IBC, further reiterates the importance of corporate guarantors and their principal borrowers., For instance, the provisions of ring-fencing the CD from liabilities for past dues once a resolution plan has been section 60(2) and 60(3) of the IBC provide that such simultaneous proceedings are approved. to be mandatorily heard before the same bench of the NCLT. Similarly, rules and Additionally, the second aforementioned question was answered in the affirmative regulations relating to PGs, viz. Insolvency and Bankruptcy (Application to by the Calcutta High Court in the case of Gauri Shankar Jain v. Punjab National Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Bank & Anr,10 which involved the question of whether a FC can invoke a personal Corporate Debtors) Rules, 2019, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, and Insolvency and Bankruptcy Board of India (Bankruptcy

8 Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 Company Appeal Insolvency no.164 of 2018.

9 (collectively, Personal Guarantor Rules and Regulations), provide that in Civil Appeal No. 8866-67 of 2019 and others.

10 situations where a CIRP has already commenced against the CD associated with W.P. No. 10147 (W) of 2019

24 25 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

Legitimacy of Claims by or against Guarantors on Conclusion of CIRP guarantee after a resolution plan with respect to the principal borrower had been Another issue that has arisen is the fate of claims by or against a guarantor, once the approved. However, this issue came up more recently before the SC in the Essar CIRP has been completed and a resolution plan for the principal borrower has been Steel matter, wherein it appears to have deliberately left this question unanswered approved. In this situation, there are potentially two questions. First, once a on the basis that the banks in Essar Steel Limited were pursuing independent resolution plan has been approved, can a personal/corporate guarantor, whose actions against the PGs. Technically, there is no bar under the IBC for a creditor guarantee has been invoked, seek to recover its claim against the CD, based on the continuing to pursue a claim against the guarantor once the CIRP of the principal principles of subrogation? Second, can a FC, which receives a portion (but not the borrower has been completed and a resolution plan has been approved. Further, as entire amount) of its original claim through the resolution plan, make a claim section 127 of the Contract Act provides that the liability of the guarantor is against the guarantor for the remaining portion of its claim? independent of the obligation of the principal debtor, it can be argued that the claim against the guarantor remains, even though the creditor can no longer make any 8 The NCLAT, in the case of Lalit Misra & Ors. v. Sharon Bio Medicine Ltd. and the claim against the principal borrower. On the other hand, the guarantor can utilize Supreme Court in the case of State Bank of India v. V. Ramakrishnan and also more this position held by the Courts to its benefit by contending that, since its right of recently in the landmark judgment of Committee of Creditors of Essar Steel subrogation under section 140 of the Contract Act is no longer available after the 9 Limited v. Satish Kumar (Hereinafter 'Essar Steel') had clarified the first approval of the resolution plan, , it should similarly have no liability to the creditors aforementioned question stating that a guarantor cannot exercise its right of of the CD. Furthermore, the guarantor could also argue that, since the creditor has subrogation against the CD once a resolution plan has been approved. voluntarily initiated the CIRP process, and has thereby effectively agreed to the Further, the Hon'ble SC in the case of Essar Steel relied on Section 31(1) of the IBC commercial wisdom of the CoC, pertaining to the amount to be realized in to hold that once a resolution plan is approved, it is binding on all stakeholders satisfaction of its claims, hence, there arises no claim of the creditor against the concerned, including the guarantor and hence the guarantor is precluded from guarantor against any amount of the debt. Given the grey area in this regard, it is proceeding against the CD, post the completion of CIRP, on the ground that the important that this issue on extinguishment (or not) of claims against a guarantor, IBC or the CIRP process is meant to provide a fresh start to the insolvent entity, and post approval of a resolution plan, is clarified by courts. allowing the claims of the guarantor would pressure or place the CD under a burden of claims. SHORTCOMINGS IN THE LAW AND ITS APPLICATION This principle is also consistent with the idea that once the CIRP is completed, the Post the notification, pertaining to the application of Part III of the IBC with respect debts of the CD are discharged in full and its creditors cannot bring claims against it to the PGs, there has been paucity of guidance from the government as to the for dues that arose before the commencement of the CIRP. The IBC (Amendment) modalities of the conduct of such simultaneous proceedings against the personal or Act, 2020 which added section 32A to the IBC, further reiterates the importance of corporate guarantors and their principal borrowers., For instance, the provisions of ring-fencing the CD from liabilities for past dues once a resolution plan has been section 60(2) and 60(3) of the IBC provide that such simultaneous proceedings are approved. to be mandatorily heard before the same bench of the NCLT. Similarly, rules and Additionally, the second aforementioned question was answered in the affirmative regulations relating to PGs, viz. Insolvency and Bankruptcy (Application to by the Calcutta High Court in the case of Gauri Shankar Jain v. Punjab National Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Bank & Anr,10 which involved the question of whether a FC can invoke a personal Corporate Debtors) Rules, 2019, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, and Insolvency and Bankruptcy Board of India (Bankruptcy

8 Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 Company Appeal Insolvency no.164 of 2018.

9 (collectively, Personal Guarantor Rules and Regulations), provide that in Civil Appeal No. 8866-67 of 2019 and others.

10 situations where a CIRP has already commenced against the CD associated with W.P. No. 10147 (W) of 2019

24 25 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

the PG, the application for the PG must be filed with the same bench of the NCLT However, the jurisprudence on guarantees under the IBC has, to date, been where the CD's case is being considered. In other situations, insolvency contradictory in several cases. Further certain ambiguities and gaps in the process applications for the PG must be filed before the relevant bench of the Debt remain. It is hoped that these are clarified in the coming months through a Recovery Tribunal. However, no provision of the law i.e. either the IBC or the combination of case-law and regulatory interventions. Personal Guarantor Rules and Regulations or the CIRP Regulations clarify the aspect of simultaneous proceedings or any form of coordination between both proceedings with each other at all. This issue is particularly relevant for PGs given that the resolution process for PGs follows an entirely different scheme from that of corporate applicant. For instance, there is no CoC for individual insolvency and any repayment plan for a PG would have to be done only with the consent of the PG (in stark contrast to the resolution plan approval process for CDs). This lacuna in the IBC gives rise to several questions. Can an IBC application against a personal or corporate guarantor be filed at any time during the CIRP of the principal borrower or do the proceedings need to start within a certain number of days of each other? How will the overlapping claims against the principal borrower and the guarantor be managed and coordinated? If the CIRP of the principal borrower is completed, does this automatically bring the CIRP of the guarantor (or insolvency resolution process in the case of a PG) to an end? Some of these questions will no doubt be resolved through market practice and case-law. However, for stakeholders to realize the full potential of being able to bring IBC proceedings against the principal borrower and guarantors and to maximize value for the benefit of all stakeholders, there is a need for regulations on how these proceedings are to be coordinated. The rules, in this regard, would be different for personal and corporate guarantors.

THE ROAD AHEAD Guarantees are one of the most common tools relied on by lenders when extending credit and have specific meanings and rights associated with them both under the Contract Act as well as market practice. Further, the SC's February, 2020 decision in the insolvency of Jaypee Infratech Limited (JIL-JAL Case),11 has resulted in a clear distinction in treatment between guarantors and other third- party security providers under the IBC. While a beneficiary of a guarantee is a FC of the guarantor under the IBC, the holding in the JIL-JAL Case makes clear that a beneficiary of third-party security, such as a mortgage, would not be considered a FC of the third- party security provider. In light of this judgment, guarantees, both personal and

corporate, are likely to become even more popular in financing structures. 11 Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank, (Civil Appeal Nos. 8512- 8527 of 2019.

26 27 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Guarantors and Guarantees2 Under the Insolvency & Bankruptcy Code, 2016

the PG, the application for the PG must be filed with the same bench of the NCLT However, the jurisprudence on guarantees under the IBC has, to date, been where the CD's case is being considered. In other situations, insolvency contradictory in several cases. Further certain ambiguities and gaps in the process applications for the PG must be filed before the relevant bench of the Debt remain. It is hoped that these are clarified in the coming months through a Recovery Tribunal. However, no provision of the law i.e. either the IBC or the combination of case-law and regulatory interventions. Personal Guarantor Rules and Regulations or the CIRP Regulations clarify the aspect of simultaneous proceedings or any form of coordination between both proceedings with each other at all. This issue is particularly relevant for PGs given that the resolution process for PGs follows an entirely different scheme from that of corporate applicant. For instance, there is no CoC for individual insolvency and any repayment plan for a PG would have to be done only with the consent of the PG (in stark contrast to the resolution plan approval process for CDs). This lacuna in the IBC gives rise to several questions. Can an IBC application against a personal or corporate guarantor be filed at any time during the CIRP of the principal borrower or do the proceedings need to start within a certain number of days of each other? How will the overlapping claims against the principal borrower and the guarantor be managed and coordinated? If the CIRP of the principal borrower is completed, does this automatically bring the CIRP of the guarantor (or insolvency resolution process in the case of a PG) to an end? Some of these questions will no doubt be resolved through market practice and case-law. However, for stakeholders to realize the full potential of being able to bring IBC proceedings against the principal borrower and guarantors and to maximize value for the benefit of all stakeholders, there is a need for regulations on how these proceedings are to be coordinated. The rules, in this regard, would be different for personal and corporate guarantors.

THE ROAD AHEAD Guarantees are one of the most common tools relied on by lenders when extending credit and have specific meanings and rights associated with them both under the Contract Act as well as market practice. Further, the SC's February, 2020 decision in the insolvency of Jaypee Infratech Limited (JIL-JAL Case),11 has resulted in a clear distinction in treatment between guarantors and other third- party security providers under the IBC. While a beneficiary of a guarantee is a FC of the guarantor under the IBC, the holding in the JIL-JAL Case makes clear that a beneficiary of third-party security, such as a mortgage, would not be considered a FC of the third- party security provider. In light of this judgment, guarantees, both personal and corporate, are likely to become even more popular in financing structures. 11 Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank, (Civil Appeal Nos. 8512- 8527 of 2019.

26 27 2 2 An Analysis of the Insolvency and Bankruptcy code via the Lens of Behavioural Economics

Dr. Anuradha Guru

1 Dr. Anuradha Guru is an Executive Director, Insolvency & Bankruptcy Board of India. The author is grateful for the assistance provided by Ms. Medha Shekar, Ms. Surbhi Kapur and Ms. Pihu Mishra, her colleagues in the Research Division of IBBI, and Mr. Tushar Kumar, Research Associate, Indian Institute of Corporate Affairs, for their research assistance. An Analysis of the Insolvency and Bankruptcy code via the Lens of Behavioural Economics

Dr. Anuradha Guru

1 Dr. Anuradha Guru is an Executive Director, Insolvency & Bankruptcy Board of India. The author is grateful for the assistance provided by Ms. Medha Shekar, Ms. Surbhi Kapur and Ms. Pihu Mishra, her colleagues in the Research Division of IBBI, and Mr. Tushar Kumar, Research Associate, Indian Institute of Corporate Affairs, for their research assistance. Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

Abstract instrumental in deciding the framework or design of a particular legislation in a society, as it facilitates in the determination of what is a desirable action and what is The author, in this article, has attempted to analyze the Insolvency & Bankruptcy a not-so-desirable action. It also influences the structure of incentives and Code, 2016 (“the Code”) through the lens of economics and behavioural deterrents in the law, which in turn encourages socially desirable actions and tendencies of the stakeholders involved. According to the author, the Code has penalizes non-desirable actions.4 In other words, it helps to put fetters on an made an impact in the way repayment of debts are being viewed and treated by individual's freewill and behaviour in the interest of harmonious social existence. promoters and management of the defaulting firms. The author observes that, even Roscoe Pound, an acclaimed American legal scholar, posits law as an applied though an individual's choices are influenced by various kinds of biases, the science serving as a tool for resolving individual and social problems. He called enactment of the Code in India has effectively nudged the requisite stakeholders to 'jurists' as 'social engineers' who are tasked with balancing the competing interests achieve the intended objectives of the Code like, prioritizing the resolution of the in the society in such a way that there is production of minimum friction.. The firm in distress, maximization of the asset value, protecting the firm under theory of social engineering is based on the notion of laws serving as a means to resolution from its incumbent management and death by liquidation. Further, the shape society and regulate an individual's behaviour.5 Pound made a reference to Code has also been successful in “leveraging loss aversion” as it divests the the term engineering because according to him, legal formulas, or at least those to promoters of the control of their company, as soon as a Corporate Insolvency be found in the reports and commentaries on legislative texts, are formulations of Resolution Process (CIRP) is initiated, which has, in turn, effectuated fear experience no less than those of the engineer. The materials of legal experience are amongst them, thus maneuvering them towards avoiding defaults. Lastly, the as objective and as valid for scientific treatment as those of engineering experience. author contends that the Code strives to address the stigma associated with However, as Pound observes, there are several significant differences between financial failure by various measures, like providing a structured and swift engineering and law that allow them to be related by analogy only, since, legal mechanism for resolution, enabling provisions for fast track insolvency resolution formulas are put to a test to which the engineer's formulas are not subjected. The to pave the way for promotion of the burgeoning entrepreneurial and investment formulas of engineering have sharp and definite limits, while the limits of law are sentiment in India, facilitating an easy option for smaller firms to exit and start hazy and indefinite. Even more important, however, is the fact that legal formulas afresh and disclosure of outcomes of the procedures under the Code, which can operate to restrain behavior, whereas engineering formulas are used to make action have a demonstrative impact on the potential stakeholders in future. possible.6 Thus, Roscoe Pound's theory of 'social engineering' contends that law is Keywords – Insolvency & Bankruptcy Code, 2016; Law and economics; an attempt to mould the behaviour of humans. Further, its effectiveness can be Behavioural Economics; Nudge Theory. judged by the behavioural changes it is able to bring about. David Friedman also -Roscoe Pound argued on similar lines and suggested that 'legal rules are to be judged by the structure of incentives they establish and the consequences of people altering their INTRODUCTION behavior in response to those incentives.'7 The Marxist theory3 states that the legal system of a society is a component of its 'superstructure' being influenced and, thereby influencing the society's base or

substructure comprising of 'the forces and relations of production through which 4 Thomas J. Miceli, The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts, the necessities of life are produced'. The collective thinking of the society is Edited by Francesco Parisi, April, 2017, Page 2. 3 Linus J. McManaman, Social Engineering: The Legal Philosophy of Roscoe Pound, 33 St. JOHN's L. REV. 1 (1958), 13.

6 2 Roscoe Pound's Theory Of Interests And The Furtherance Of Western Civilization, By Edward B. Mclean, Il Pound Roscoe(1942). Social Control through Law. Journal of Philosophy, 39 (20), pp. 559-560. 3 Politico , Marzo 1976, Vol. 41, No. 1 (Marzo 1976), Pp. 5-34, available at The Marxist theory suggests that a capitalist society consists of the base (or substructure) and superstructure. https://www.jstor.org/stable/43209883 The substructure which includes the forces and relations of production through which the necessities of life are produced, determines society's other relationships and ideas to comprise its superstructure, including its 7 FriedmanD. David (2000). Law's Order: What Economics Has to Do with Law and Why It Matters. culture, institutions, political power structures, laws, rituals, and state. Princeton University Press, 2000.

30 31 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

Abstract instrumental in deciding the framework or design of a particular legislation in a society, as it facilitates in the determination of what is a desirable action and what is The author, in this article, has attempted to analyze the Insolvency & Bankruptcy a not-so-desirable action. It also influences the structure of incentives and Code, 2016 (“the Code”) through the lens of economics and behavioural deterrents in the law, which in turn encourages socially desirable actions and tendencies of the stakeholders involved. According to the author, the Code has penalizes non-desirable actions.4 In other words, it helps to put fetters on an made an impact in the way repayment of debts are being viewed and treated by individual's freewill and behaviour in the interest of harmonious social existence. promoters and management of the defaulting firms. The author observes that, even Roscoe Pound, an acclaimed American legal scholar, posits law as an applied though an individual's choices are influenced by various kinds of biases, the science serving as a tool for resolving individual and social problems. He called enactment of the Code in India has effectively nudged the requisite stakeholders to 'jurists' as 'social engineers' who are tasked with balancing the competing interests achieve the intended objectives of the Code like, prioritizing the resolution of the in the society in such a way that there is production of minimum friction.. The firm in distress, maximization of the asset value, protecting the firm under theory of social engineering is based on the notion of laws serving as a means to resolution from its incumbent management and death by liquidation. Further, the shape society and regulate an individual's behaviour.5 Pound made a reference to Code has also been successful in “leveraging loss aversion” as it divests the the term engineering because according to him, legal formulas, or at least those to promoters of the control of their company, as soon as a Corporate Insolvency be found in the reports and commentaries on legislative texts, are formulations of Resolution Process (CIRP) is initiated, which has, in turn, effectuated fear experience no less than those of the engineer. The materials of legal experience are amongst them, thus maneuvering them towards avoiding defaults. Lastly, the as objective and as valid for scientific treatment as those of engineering experience. author contends that the Code strives to address the stigma associated with However, as Pound observes, there are several significant differences between financial failure by various measures, like providing a structured and swift engineering and law that allow them to be related by analogy only, since, legal mechanism for resolution, enabling provisions for fast track insolvency resolution formulas are put to a test to which the engineer's formulas are not subjected. The to pave the way for promotion of the burgeoning entrepreneurial and investment formulas of engineering have sharp and definite limits, while the limits of law are sentiment in India, facilitating an easy option for smaller firms to exit and start hazy and indefinite. Even more important, however, is the fact that legal formulas afresh and disclosure of outcomes of the procedures under the Code, which can operate to restrain behavior, whereas engineering formulas are used to make action have a demonstrative impact on the potential stakeholders in future. possible.6 Thus, Roscoe Pound's theory of 'social engineering' contends that law is Keywords – Insolvency & Bankruptcy Code, 2016; Law and economics; an attempt to mould the behaviour of humans. Further, its effectiveness can be Behavioural Economics; Nudge Theory. judged by the behavioural changes it is able to bring about. David Friedman also -Roscoe Pound argued on similar lines and suggested that 'legal rules are to be judged by the structure of incentives they establish and the consequences of people altering their INTRODUCTION behavior in response to those incentives.'7 The Marxist theory3 states that the legal system of a society is a component of its 'superstructure' being influenced and, thereby influencing the society's base or substructure comprising of 'the forces and relations of production through which 4 Thomas J. Miceli, The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts, the necessities of life are produced'. The collective thinking of the society is Edited by Francesco Parisi, April, 2017, Page 2. 3 Linus J. McManaman, Social Engineering: The Legal Philosophy of Roscoe Pound, 33 St. JOHN's L. REV. 1 (1958), 13.

6 2 Roscoe Pound's Theory Of Interests And The Furtherance Of Western Civilization, By Edward B. Mclean, Il Pound Roscoe(1942). Social Control through Law. Journal of Philosophy, 39 (20), pp. 559-560. 3 Politico , Marzo 1976, Vol. 41, No. 1 (Marzo 1976), Pp. 5-34, available at The Marxist theory suggests that a capitalist society consists of the base (or substructure) and superstructure. https://www.jstor.org/stable/43209883 The substructure which includes the forces and relations of production through which the necessities of life are produced, determines society's other relationships and ideas to comprise its superstructure, including its 7 FriedmanD. David (2000). Law's Order: What Economics Has to Do with Law and Why It Matters. culture, institutions, political power structures, laws, rituals, and state. Princeton University Press, 2000.

30 31 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

While law seeks enforcement of a certain kind of behaviour in a society, emphasized for bringing about the much needed cultural shift in the dynamics or economics, in particular behavioural economics, helps explain an economic relationships between lenders and borrowers, and promoters and creditors. The agent's choice behavior from the menu of choices presented to him. Behavioral Code has made an impact in the way repayment of debts are being viewed and economics uses variants of traditional economic assumptions (often with a treated by promoters and management of the defaulting firms. The early or first psychological motivation) to explain and predict behavior, and to provide policy signals of distress now serve as early warnings for the incumbent management of prescriptions.8 The evolution of the law and economics movement, established the the corporate debtor to quickly take measures to remedy the situation and prevent paradigm style for the economic analysis of law. This approach to law theorises the occurrence of defaults. This is also in consonance with an important economic that legal rules are best analysed and understood in light of standard economic objective of corporate bankruptcy, which is to prevent corporate managers from principles. Gary Becker,9 referring to such principles, postulates that '…human wasting the corporation's assets. behavior can be viewed as involving participants who maximize their utility, from a In other words, the Code can be viewed as a behavioural law aiming to draw stable set of preferences and accumulate an optimal amount of information and various stakeholders of the entity in distress to work together, in a non-adversarial other inputs in a variety of markets.' Appropriately designed legislation and manner, towards the intent behind the enactment of the Code viz.'…reorganisation efficient enforcement can incentivize the the most desirable outcome, or, in the and insolvency resolution of corporate persons, partnership firms and individuals language of economics, the most efficient outcome for an agent, who is often faced in a time bound manner for maximisation of value of assets of such persons, to with choices. Even Judge Richard Posner, in his economic analysis of law, also promote entrepreneurship, availability of credit and balance the interests of all the advocated for the fact that economics may be used to determine the extent to which stakeholders…'.13 the common law is a coherent system of rules concerned with promoting efficiency. To sum it up, the economic analysis of law involves the determination of the This article explores the interplay between the insolvency & bankruptcy law and implications of such utility maximizing behaviour of individuals for the entire aspects of behavioural economics in an attempt to elucidate upon the choice that economic ecosystem. To that end, it is pertinent to examine and analyze the the architecture of the law offers, in order to drive the stakeholders in the system economic behaviour or tendencies of economic agents under different towards envisaged outcomes. It examines the Code through the lens of economic circumstances. The Code serves as a good example to understand the interplay behavioural principles to assess how it is using these principles to 'socially between law and economics. engineer' a particular behaviour amongst the key players in the insolvency and bankruptcy framework.14 In particular, being inspired by Chapter 2 of the The Code is undoubtedly a very historic reform in the Indian economic sector, Economic Survey 2018-19,15 the article focuses on various 'behavioural nudges' in having reformed the much-needed exit mechanism for corporates, to start with, the Code which are steering the stakeholders in an insolvency process towards 11 and having addressed an important aspect of ease of doing business in the country, overall utility maximizing outcomes. where India had earlier been ranked at 136 out of 189 economies in terms of 12 resolving insolvencies in 2016. The law, being preventive in nature, is also being THE PROBLEM OF INFORMATION ASYMMETRIES IN CREDIT MARKETS JUSTIFYING THE ENACTMENT OF AN INSOLVENCY LAW 8 Principles of (Behavioral) Economics, By David Laibson and John A. List, The American Economic Review, MAY 2015, Vol. 105, No. 5, Papers And Proceedings of the One Hundred Twenty-Seventh Annual Meeting of Ease of access to credit is the cornerstone of economic development of any the American Economic Association (May 2015), Pp. 385-390, available at https://www.jstor.org/stable/43821914. country. An established body of literature points to the positive influence of well- 9 BeckerS. Gary (1976).The Economic Approach to Human Behavior. University of Chicago Press Books. 10 1 Richard A. Posner, Economic Analysis of Law (New York: Little, Brown and Co., 1973). 13 The Insolvency & Bankruptcy Code, 2016, the Preamble. 11 Abhishek Saxena & Akshay Sachthey, The Insolvency and Bankruptcy Code, 2016 - A Fresh Start for 14 Sreyan Chatterjee, Gausia Shaikh & Bhargavi Zaveri, An Empirical Analysis of the Early Days of the India's Insolvency Regime, 10 Insolvency & Restructuring INT'l 22 (2016) Insolvency and Bankruptcy Code, 2016, 30 NAT'l L. Sch. INDIA REV. 89 (2018), Page 101. 12 World Bank's Doing Business Report for 2016. 15 Economic Survey 2018-19. Ministry of Finance. Government of India.

32 33 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

While law seeks enforcement of a certain kind of behaviour in a society, emphasized for bringing about the much needed cultural shift in the dynamics or economics, in particular behavioural economics, helps explain an economic relationships between lenders and borrowers, and promoters and creditors. The agent's choice behavior from the menu of choices presented to him. Behavioral Code has made an impact in the way repayment of debts are being viewed and economics uses variants of traditional economic assumptions (often with a treated by promoters and management of the defaulting firms. The early or first psychological motivation) to explain and predict behavior, and to provide policy signals of distress now serve as early warnings for the incumbent management of prescriptions.8 The evolution of the law and economics movement, established the the corporate debtor to quickly take measures to remedy the situation and prevent paradigm style for the economic analysis of law. This approach to law theorises the occurrence of defaults. This is also in consonance with an important economic that legal rules are best analysed and understood in light of standard economic objective of corporate bankruptcy, which is to prevent corporate managers from principles. Gary Becker,9 referring to such principles, postulates that '…human wasting the corporation's assets. behavior can be viewed as involving participants who maximize their utility, from a In other words, the Code can be viewed as a behavioural law aiming to draw stable set of preferences and accumulate an optimal amount of information and various stakeholders of the entity in distress to work together, in a non-adversarial other inputs in a variety of markets.' Appropriately designed legislation and manner, towards the intent behind the enactment of the Code viz.'…reorganisation efficient enforcement can incentivize the the most desirable outcome, or, in the and insolvency resolution of corporate persons, partnership firms and individuals language of economics, the most efficient outcome for an agent, who is often faced in a time bound manner for maximisation of value of assets of such persons, to with choices. Even Judge Richard Posner, in his economic analysis of law, also promote entrepreneurship, availability of credit and balance the interests of all the advocated for the fact that economics may be used to determine the extent to which stakeholders…'.13 the common law is a coherent system of rules concerned with promoting efficiency. To sum it up, the economic analysis of law involves the determination of the This article explores the interplay between the insolvency & bankruptcy law and implications of such utility maximizing behaviour of individuals for the entire aspects of behavioural economics in an attempt to elucidate upon the choice that economic ecosystem. To that end, it is pertinent to examine and analyze the the architecture of the law offers, in order to drive the stakeholders in the system economic behaviour or tendencies of economic agents under different towards envisaged outcomes. It examines the Code through the lens of economic circumstances. The Code serves as a good example to understand the interplay behavioural principles to assess how it is using these principles to 'socially between law and economics. engineer' a particular behaviour amongst the key players in the insolvency and bankruptcy framework.14 In particular, being inspired by Chapter 2 of the The Code is undoubtedly a very historic reform in the Indian economic sector, Economic Survey 2018-19,15 the article focuses on various 'behavioural nudges' in having reformed the much-needed exit mechanism for corporates, to start with, the Code which are steering the stakeholders in an insolvency process towards 11 and having addressed an important aspect of ease of doing business in the country, overall utility maximizing outcomes. where India had earlier been ranked at 136 out of 189 economies in terms of 12 resolving insolvencies in 2016. The law, being preventive in nature, is also being THE PROBLEM OF INFORMATION ASYMMETRIES IN CREDIT MARKETS JUSTIFYING THE ENACTMENT OF AN INSOLVENCY LAW 8 Principles of (Behavioral) Economics, By David Laibson and John A. List, The American Economic Review, MAY 2015, Vol. 105, No. 5, Papers And Proceedings of the One Hundred Twenty-Seventh Annual Meeting of Ease of access to credit is the cornerstone of economic development of any the American Economic Association (May 2015), Pp. 385-390, available at https://www.jstor.org/stable/43821914. country. An established body of literature points to the positive influence of well- 9 BeckerS. Gary (1976).The Economic Approach to Human Behavior. University of Chicago Press Books. 10 1 Richard A. Posner, Economic Analysis of Law (New York: Little, Brown and Co., 1973). 13 The Insolvency & Bankruptcy Code, 2016, the Preamble. 11 Abhishek Saxena & Akshay Sachthey, The Insolvency and Bankruptcy Code, 2016 - A Fresh Start for 14 Sreyan Chatterjee, Gausia Shaikh & Bhargavi Zaveri, An Empirical Analysis of the Early Days of the India's Insolvency Regime, 10 Insolvency & Restructuring INT'l 22 (2016) Insolvency and Bankruptcy Code, 2016, 30 NAT'l L. Sch. INDIA REV. 89 (2018), Page 101. 12 World Bank's Doing Business Report for 2016. 15 Economic Survey 2018-19. Ministry of Finance. Government of India.

32 33 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

functioning credit markets on economic performance. Further, creditors also put is a significant problem in corporate finance. It refers to the fact that everyone does money into debt investments in return for the promise of fixed future cash flows. not have access to the same information. Different people having access to However, the returns expected on these investments are in any case uncertain different information results in, what is usually referred to as, ' asymmetries ' of because at the time of repayment, the seller (debtor) may make repayments as information. If one party to a transaction is better informed than another, the price promised, or he may default and does not make the payment. When this happens, at which the transaction will take place will not be right or the transaction will the debtor is considered insolvent. simply not take place.20 Conversely, it is also results in two potential concerns. One Often, an enterprise may be a successful business model while still failing to repay is 'adverse selection' as the creditor charges an interest rate commensurate with the its creditors. A sound bankruptcy process is one that helps creditors and debtors average risk-profile of all the debtors in the market as it has difficulties, in view of realise and agree on whether the entity is facing financial failure and business incomplete information, in correctly assessing the risk of lending to a debtor or for 21 failure. This is important to allow both parties to realize the maximum value of the a purpose. Further, small trade creditors suffer not only from information business in the insolvency.16 asymmetries in relation to banks but also from a lack of economies of scale. Banks, who repeat play (with regard to small as well as large loans), who operate with Further, effective insolvency regimes, while coming into play at the end of the large volumes of lending and who offer longer terms of credit than trade creditors, business life cycle, have a resounding impact on the commencement of the cycle, tend to make extensive use of security, to have specialist advisers and to have lower ensuring that the either of the parties i.e. the lenders or the borrowers are not set-up and monitoring costs. This all increases their bargaining power in relation to 17 hesitant in entering the economy and availing some form of risk. The Cork other creditors. Henceforth, the high-risk borrowers find the rate to be attractive Committee, which was tasked to redraft the UK Insolvency Law in 1982, and borrow willingly, while the low risk borrowers exit the market, leaving behind succinctly noted the importance of effective insolvency regimes in the following a high-risk 'lemons'22 market. words: 'It is important to recognize that the world in which we live and the creation of wealth depends upon a system founded on credit and that such a system required The second concern is 'moral hazard' as the debtor, who has superior information, as a correlative, an insolvency procedure to cope with its casualties.'18 changes his behaviour after the credit is availed, while the creditor suffers the consequence of changed behaviour of the debtor.23 A creditor usually resorts to According to the UNCITRAL Legislative Guide on Insolvency, an effective secured lending to partially address both the concerns instead of meritocratic insolvency regime stipulates provisions for dealing effectively with the financial lending. distress of entities engaged in economic activities namely corporates; entrepreneurs (operating in the form of sole proprietorships or partnerships) and Thus, when the process begins, i.e. an insolvency process of a corporate debtor (CD) is triggered, there are asymmetries in information available to each of the other individuals without business. An insolvency law procedure would often aforementioned stakeholders. The next step of every stakeholder will be entail the participation of various stakeholders or economic agents like the essentially determined by the kind of information that is available to him/her and creditors, debtors, employees, Government etc., fostering a fair and equitable each step or utility maximizing behavior of the stakeholder will, in turn, influence distribution of funds of the defaulting entity. This process, crucially, hinges on the progress of the insolvency process. However, the mechanics of this game raise mutuality of information between these diverse economic agents. However, credit markets are often plagued by information asymmetries.19 Information asymmetry

20 The Assessment: Finance, Law, And Growth, By Colin Mayer And Oren Sussman, Oxford Review Of 16 The report of the Bankruptcy Law Reforms Committee (November 2015), available at Economic Policy , Winter 2001, Vol. 17, No. 4, Finance, Law, And Economic Growth (Winter 2001), Pp. 457- https://dea.gov.in/sites/default/files/BLRCReportVol1_04112015.pdf17 466,available at https://www.jstor.org/stable/23606714. 21 17 United Nations Commission on International Trade Law (“UNCITRAL”) Legislative Guide on Insolvency Id. Law, Page 10. 22 George A. Akerlof (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The 18 Report of the Review Committee on Insolvency Law and Practice, Cmnd. 8558 (1982). Quarterly Journal of Economics, Vol. 84, No. 3, pp. 488-500. 23 19 Economics of Bankruptcy, By Michelle J. White, The Oxford Handbook of Law and Economics: Volume 2: Robert K. Rasmussen, Behavioral Economics, the Economic Analysis Bankruptcy Law and the Pricing of Private and Commercial Law, Edited by Francesco Parisi, April 2017, Page 9. Credit , 51 VAND. L. REV. 1679 (1998).

34 35 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

functioning credit markets on economic performance. Further, creditors also put is a significant problem in corporate finance. It refers to the fact that everyone does money into debt investments in return for the promise of fixed future cash flows. not have access to the same information. Different people having access to However, the returns expected on these investments are in any case uncertain different information results in, what is usually referred to as, ' asymmetries ' of because at the time of repayment, the seller (debtor) may make repayments as information. If one party to a transaction is better informed than another, the price promised, or he may default and does not make the payment. When this happens, at which the transaction will take place will not be right or the transaction will the debtor is considered insolvent. simply not take place.20 Conversely, it is also results in two potential concerns. One Often, an enterprise may be a successful business model while still failing to repay is 'adverse selection' as the creditor charges an interest rate commensurate with the its creditors. A sound bankruptcy process is one that helps creditors and debtors average risk-profile of all the debtors in the market as it has difficulties, in view of realise and agree on whether the entity is facing financial failure and business incomplete information, in correctly assessing the risk of lending to a debtor or for 21 failure. This is important to allow both parties to realize the maximum value of the a purpose. Further, small trade creditors suffer not only from information business in the insolvency.16 asymmetries in relation to banks but also from a lack of economies of scale. Banks, who repeat play (with regard to small as well as large loans), who operate with Further, effective insolvency regimes, while coming into play at the end of the large volumes of lending and who offer longer terms of credit than trade creditors, business life cycle, have a resounding impact on the commencement of the cycle, tend to make extensive use of security, to have specialist advisers and to have lower ensuring that the either of the parties i.e. the lenders or the borrowers are not set-up and monitoring costs. This all increases their bargaining power in relation to 17 hesitant in entering the economy and availing some form of risk. The Cork other creditors. Henceforth, the high-risk borrowers find the rate to be attractive Committee, which was tasked to redraft the UK Insolvency Law in 1982, and borrow willingly, while the low risk borrowers exit the market, leaving behind succinctly noted the importance of effective insolvency regimes in the following a high-risk 'lemons'22 market. words: 'It is important to recognize that the world in which we live and the creation of wealth depends upon a system founded on credit and that such a system required The second concern is 'moral hazard' as the debtor, who has superior information, as a correlative, an insolvency procedure to cope with its casualties.'18 changes his behaviour after the credit is availed, while the creditor suffers the consequence of changed behaviour of the debtor.23 A creditor usually resorts to According to the UNCITRAL Legislative Guide on Insolvency, an effective secured lending to partially address both the concerns instead of meritocratic insolvency regime stipulates provisions for dealing effectively with the financial lending. distress of entities engaged in economic activities namely corporates; entrepreneurs (operating in the form of sole proprietorships or partnerships) and Thus, when the process begins, i.e. an insolvency process of a corporate debtor (CD) is triggered, there are asymmetries in information available to each of the other individuals without business. An insolvency law procedure would often aforementioned stakeholders. The next step of every stakeholder will be entail the participation of various stakeholders or economic agents like the essentially determined by the kind of information that is available to him/her and creditors, debtors, employees, Government etc., fostering a fair and equitable each step or utility maximizing behavior of the stakeholder will, in turn, influence distribution of funds of the defaulting entity. This process, crucially, hinges on the progress of the insolvency process. However, the mechanics of this game raise mutuality of information between these diverse economic agents. However, credit markets are often plagued by information asymmetries.19 Information asymmetry

20 The Assessment: Finance, Law, And Growth, By Colin Mayer And Oren Sussman, Oxford Review Of 16 The report of the Bankruptcy Law Reforms Committee (November 2015), available at Economic Policy , Winter 2001, Vol. 17, No. 4, Finance, Law, And Economic Growth (Winter 2001), Pp. 457- https://dea.gov.in/sites/default/files/BLRCReportVol1_04112015.pdf17 466,available at https://www.jstor.org/stable/23606714. 21 17 United Nations Commission on International Trade Law (“UNCITRAL”) Legislative Guide on Insolvency Id. Law, Page 10. 22 George A. Akerlof (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The 18 Report of the Review Committee on Insolvency Law and Practice, Cmnd. 8558 (1982). Quarterly Journal of Economics, Vol. 84, No. 3, pp. 488-500. 23 19 Economics of Bankruptcy, By Michelle J. White, The Oxford Handbook of Law and Economics: Volume 2: Robert K. Rasmussen, Behavioral Economics, the Economic Analysis Bankruptcy Law and the Pricing of Private and Commercial Law, Edited by Francesco Parisi, April 2017, Page 9. Credit , 51 VAND. L. REV. 1679 (1998).

34 35 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

fundamental questions concerning the nature of the insolvency process, as to norms. Some of these biases may play out in an unconscious and automated whether, the Code must guide its respective stakeholders towards any particular manner. These have been elaborated in following paragraphs. outcome or whether it seeks to provide incentives and choices to the economic The basis of this irrationality often lies in the fact that individuals may actually rely agents, drawing upon their behavioral aspects, and then eventually drives them too much on one piece of information, usually the first piece of information found, towards that outcome? The collective nature of insolvency and bankruptcy serving as an “anchor”, when taking decisions. This is what is termed as 'anchoring proceedings envisaged by the law requires it to be facilitative in correcting these bias'. Further, they would like to base their decisions only on that information problems of information asymmetries and molding the behavior of the economic which confirms to their pre-conceptions, ignoring any other contrary information, players in the resolution process to ensure its success. When a debtor is unable to thus being subjected to what is called the 'confirmation bias'.27 Another example of pay its debts as they become due, the diverse interests of a range of stakeholders a cognitive bias is called the 'loss aversion bias', i.e. the tendency of individuals to come into play. These stakeholders include the debtor; the owners and prefer avoiding losses as opposed to commensurate gains. Yet another form of a management of the debtor; the creditors, secured or unsecured; employees of the cognitive bias is the 'failure bias', under which individuals seem to be influenced by debtor, guarantors of debtors and suppliers of goods and services to the debtor in failures of a particular action that they see around them as opposed to the success default. stories which can lead to false conclusions. Since an insolvency regime cannot fully protect the interests of all parties, the legal These are only a few examples of some of the cognitive biases that afflict an regime must aim to provide collective satisfaction of all the requisite stakeholders 24 individual's decisions in his day to day life. With the exception of certain sub- involved. A balance must be sought to be achieved between the interests of the optimal outcomes, even the influence of cognitive biases that tend to violate the different stakeholders involved by reapportioning the risks of insolvency in a way tenets of rationality can often lead to acceptable outcomes with little experienced that also suits the economic, social and political goals. To explain this further, some 28 costs. aspects of behavioural economics can help throw some light on how the various players in a CIRP may behave. This is discussed in the next section. Behavioural law and economics explores the implications of actual, as opposed to hypothesised human behavior for the law. Behavioural economics provides a BEHAVIOURAL ECONOMICS AND ITS VARIOUS FACETS number of principles that can be used to positively use these cognitive biases in order to influence the behavior of individuals towards desirable outcomes.29 The basic assumption of neoclassic economic analysis is that economic agents are 'rational' in their choices, i.e. their decision-making process is based on making Nudge theory choices that result in an optimal level of benefit or utility. However, rationality is A relatively new area of behavioural economics is the 'nudge theory' suggesting not always embedded in an individual's decision or behavior. Drawing on aspects that "nudges" may be used to shape people's voluntary choices in order to lead them of both psychology and economics, the operating assumption of behavioral to the option they most prefer. In other words, Nudge theory is essentially an economics is that cognitive biases often prevent people from making rational indirect approach, which seeks to modify situations for people, arguing that if we decisions, despite their best efforts.25 The field of behavioural economics takes wish to alter people's behaviour in a particular direction, it can be more effectively cognizance of the fact that individuals often make irrational choices subject to done by encouraging positive choices rather than trying to restrict undesirable cognitive biases, emotions, and social influences.26 The theory suggests that in behavior with some kind of sanctions. practice individuals interpret situations and based on the same, take decisions, under influence of their individual belief systems, societal practices and cultural 27 Estrin, S., Mickiewicz, T. & Rebmann, A. Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations. Small Bus Econ 48, 977–997 (2017). https://doi.org/10.1007/s11187-016-9810-1

24 Id. 28 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6129743/

25 https://hbr.org/2009/07/the-end-of-rational-economics 29 J. Howard Beales II., Behavioral Economics and Credit Regulation, 11 J.L. ECON. & POL'y 349 (2015).

26 Loewenstein, G. and Sutherland, R. (2014). An Introduction to Behavioral Economics. The Behavioral 30 On Amir & Orly Lobel, Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, 108 Economics Guide. COLUM. L. REV. 2098 (2008).

36 37 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

fundamental questions concerning the nature of the insolvency process, as to norms. Some of these biases may play out in an unconscious and automated whether, the Code must guide its respective stakeholders towards any particular manner. These have been elaborated in following paragraphs. outcome or whether it seeks to provide incentives and choices to the economic The basis of this irrationality often lies in the fact that individuals may actually rely agents, drawing upon their behavioral aspects, and then eventually drives them too much on one piece of information, usually the first piece of information found, towards that outcome? The collective nature of insolvency and bankruptcy serving as an “anchor”, when taking decisions. This is what is termed as 'anchoring proceedings envisaged by the law requires it to be facilitative in correcting these bias'. Further, they would like to base their decisions only on that information problems of information asymmetries and molding the behavior of the economic which confirms to their pre-conceptions, ignoring any other contrary information, players in the resolution process to ensure its success. When a debtor is unable to thus being subjected to what is called the 'confirmation bias'.27 Another example of pay its debts as they become due, the diverse interests of a range of stakeholders a cognitive bias is called the 'loss aversion bias', i.e. the tendency of individuals to come into play. These stakeholders include the debtor; the owners and prefer avoiding losses as opposed to commensurate gains. Yet another form of a management of the debtor; the creditors, secured or unsecured; employees of the cognitive bias is the 'failure bias', under which individuals seem to be influenced by debtor, guarantors of debtors and suppliers of goods and services to the debtor in failures of a particular action that they see around them as opposed to the success default. stories which can lead to false conclusions. Since an insolvency regime cannot fully protect the interests of all parties, the legal These are only a few examples of some of the cognitive biases that afflict an regime must aim to provide collective satisfaction of all the requisite stakeholders 24 individual's decisions in his day to day life. With the exception of certain sub- involved. A balance must be sought to be achieved between the interests of the optimal outcomes, even the influence of cognitive biases that tend to violate the different stakeholders involved by reapportioning the risks of insolvency in a way tenets of rationality can often lead to acceptable outcomes with little experienced that also suits the economic, social and political goals. To explain this further, some 28 costs. aspects of behavioural economics can help throw some light on how the various players in a CIRP may behave. This is discussed in the next section. Behavioural law and economics explores the implications of actual, as opposed to hypothesised human behavior for the law. Behavioural economics provides a BEHAVIOURAL ECONOMICS AND ITS VARIOUS FACETS number of principles that can be used to positively use these cognitive biases in order to influence the behavior of individuals towards desirable outcomes.29 The basic assumption of neoclassic economic analysis is that economic agents are 'rational' in their choices, i.e. their decision-making process is based on making Nudge theory choices that result in an optimal level of benefit or utility. However, rationality is A relatively new area of behavioural economics is the 'nudge theory' suggesting not always embedded in an individual's decision or behavior. Drawing on aspects that "nudges" may be used to shape people's voluntary choices in order to lead them of both psychology and economics, the operating assumption of behavioral to the option they most prefer. In other words, Nudge theory is essentially an economics is that cognitive biases often prevent people from making rational indirect approach, which seeks to modify situations for people, arguing that if we decisions, despite their best efforts.25 The field of behavioural economics takes wish to alter people's behaviour in a particular direction, it can be more effectively cognizance of the fact that individuals often make irrational choices subject to done by encouraging positive choices rather than trying to restrict undesirable cognitive biases, emotions, and social influences.26 The theory suggests that in behavior with some kind of sanctions. practice individuals interpret situations and based on the same, take decisions, under influence of their individual belief systems, societal practices and cultural 27 Estrin, S., Mickiewicz, T. & Rebmann, A. Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations. Small Bus Econ 48, 977–997 (2017). https://doi.org/10.1007/s11187-016-9810-1

24 Id. 28 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6129743/

25 https://hbr.org/2009/07/the-end-of-rational-economics 29 J. Howard Beales II., Behavioral Economics and Credit Regulation, 11 J.L. ECON. & POL'y 349 (2015).

26 Loewenstein, G. and Sutherland, R. (2014). An Introduction to Behavioral Economics. The Behavioral 30 On Amir & Orly Lobel, Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, 108 Economics Guide. COLUM. L. REV. 2098 (2008).

36 37 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

The idea of 'nudging' falls between the two extremes of a laissez-faire economic Company Law Appellate Tribunal (NCLAT) held that, first and foremost, the Code policies which suggests that an individual's preferences are better known to the accords priority to the objective of resolution of the entity in distress. Further, the person himself and the concept of 'revealed preference' of an individual which is next end which the Code seems to serve pertains to maximization of value of essentially defined by what one chooses. While conventional economic policy assets of the CD and promoting entrepreneurship, availability of credit and provides 'economic' solutions (e.g. taxes, incentives, regulation) to issues arising balancing the interests. This order of objectives is sacrosanct. Further, the Hon'ble out of market failures such as information asymmetries, 'nudges', in contrast, Supreme Court (SC) in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India provide behavioural solutions to problems that apparently be seen to have arisen &Ors.33 held that the primary focus of the legislation is to ensure resolution, by from human decision made under the influence of cognitive biases. shielding it from its erstwhile management and preventing it from being into The principles of 'nudge theory', first articulated by James Wilk around 1995, were, liquidation. In an attempt to emphasise upon the policy shift in law, the SC also in some sense, rediscovered by Thaler and Sunstien31 in their renowned book observed that, with the enactment of the Code, the defaulter's paradise is lost and, 34 'Nudge: Improving Decisions About Health, Wealth, and Happiness' in 2008. They in its place, the economy's rightful position has been regained. This is, perhaps, an suggested that human behaviour can be influenced without any coercion as enunciation of the biggest evidence of outcome from 'nudge' in the form of a bar/ an 'libertarian paternalism', viz. the idea that it is legitimately possible for private and embargo being placed upon the erstwhile defaulting promoters' of the CD from public institutions to be able to influence an individual's behavior, while, at the making a backdoor entry through bidding. same time, respecting his/her freedom of choice. The principles of nudge theory Henceforth, the framework of the Code is designed in such a way that the requisite suggest creating a choice architecture with such features that influence the stakeholders inevitably strive towards the resolution of the CD in the very first decisions of people without changing their incentives or payoffs. The right 'nudge' instance. However, if the resolution is not successful, then the liquidation has been can, therefore, produce the desired outcomes. In the words of Thaler and Sunstien, provided as an alternative in the Code. This default choice is given to all the 'A nudge is any aspect of the choice architecture that alters people's behavior in a stakeholders. Thus, the Code is 'leveraging default rules', which is a behavioural predictable way without forbidding any options or significantly changing their principle given the 'anchoring bias' of individuals, by providing default choices to economic incentives.’ the economic agents, such that the default choice maximizes their own welfare and that of the society as a whole. THE INTERFACE OF BEHAVIOURAL NUDGES WITH THE The Code enables the best outcomes for all stakeholders by requiring them to first INSOLVENCY AND BANKRUTPCY CODE attempt a resolution of the entity in distress and creating a collective process where The Code's choice framework, though perhaps not envisaged ex-ante, in terms of the value of the firm is preserved by not allowing creditors to recover at the very behavioural principles can, ex-post, be seen as following these principles and first instance. The Code, in other words, works on the basic principles of the hence yielding some visible behavioural changes in the relationship of a debtor and insolvency and bankruptcy law, viz. incentivising socially optimal behavior of the a creditor. The subsequent part of the article has attempted to relate each of the stakeholders of the entity in distress in a cost efficient and optimal manner. This behavioral principles with the frameworkof the Code to understand how the Code would happen when the resolution process is time bound, fair and equitable, is effectively utilizing the principles of behavioral economics and, taking ensuring highest recovery to cost ratio. Further, it is paramount to take into advantage of cognitive biases of individuals, to 'nudge' the stakeholder(s) to consideration ex- ante efficiency which is an incentive-based device aimed at achieve the objectives of the Code. prompt filing of applications triggering insolvency resolution process. Without In the case of Binani Industries Limited v. Bank of Baroda & Anr,32 the National timely initiation of and pursuit of ex-ante mechanisms, ex-post mechanism is rendered nugatory. The Code relies on the behavioral principle of 'making it easy to

31 Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. New Haven, CT: Yale University Press. 33 (2019) 4 SCC 17 32 Company Appeal (AT) No. 82,123,188,216 & 234 -2018 34 Ibid.

38 39 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

The idea of 'nudging' falls between the two extremes of a laissez-faire economic Company Law Appellate Tribunal (NCLAT) held that, first and foremost, the Code policies which suggests that an individual's preferences are better known to the accords priority to the objective of resolution of the entity in distress. Further, the person himself and the concept of 'revealed preference' of an individual which is next end which the Code seems to serve pertains to maximization of value of essentially defined by what one chooses. While conventional economic policy assets of the CD and promoting entrepreneurship, availability of credit and provides 'economic' solutions (e.g. taxes, incentives, regulation) to issues arising balancing the interests. This order of objectives is sacrosanct. Further, the Hon'ble out of market failures such as information asymmetries, 'nudges', in contrast, Supreme Court (SC) in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India provide behavioural solutions to problems that apparently be seen to have arisen &Ors.33 held that the primary focus of the legislation is to ensure resolution, by from human decision made under the influence of cognitive biases. shielding it from its erstwhile management and preventing it from being into The principles of 'nudge theory', first articulated by James Wilk around 1995, were, liquidation. In an attempt to emphasise upon the policy shift in law, the SC also in some sense, rediscovered by Thaler and Sunstien31 in their renowned book observed that, with the enactment of the Code, the defaulter's paradise is lost and, 34 'Nudge: Improving Decisions About Health, Wealth, and Happiness' in 2008. They in its place, the economy's rightful position has been regained. This is, perhaps, an suggested that human behaviour can be influenced without any coercion as enunciation of the biggest evidence of outcome from 'nudge' in the form of a bar/ an 'libertarian paternalism', viz. the idea that it is legitimately possible for private and embargo being placed upon the erstwhile defaulting promoters' of the CD from public institutions to be able to influence an individual's behavior, while, at the making a backdoor entry through bidding. same time, respecting his/her freedom of choice. The principles of nudge theory Henceforth, the framework of the Code is designed in such a way that the requisite suggest creating a choice architecture with such features that influence the stakeholders inevitably strive towards the resolution of the CD in the very first decisions of people without changing their incentives or payoffs. The right 'nudge' instance. However, if the resolution is not successful, then the liquidation has been can, therefore, produce the desired outcomes. In the words of Thaler and Sunstien, provided as an alternative in the Code. This default choice is given to all the 'A nudge is any aspect of the choice architecture that alters people's behavior in a stakeholders. Thus, the Code is 'leveraging default rules', which is a behavioural predictable way without forbidding any options or significantly changing their principle given the 'anchoring bias' of individuals, by providing default choices to economic incentives.’ the economic agents, such that the default choice maximizes their own welfare and that of the society as a whole. THE INTERFACE OF BEHAVIOURAL NUDGES WITH THE The Code enables the best outcomes for all stakeholders by requiring them to first INSOLVENCY AND BANKRUTPCY CODE attempt a resolution of the entity in distress and creating a collective process where The Code's choice framework, though perhaps not envisaged ex-ante, in terms of the value of the firm is preserved by not allowing creditors to recover at the very behavioural principles can, ex-post, be seen as following these principles and first instance. The Code, in other words, works on the basic principles of the hence yielding some visible behavioural changes in the relationship of a debtor and insolvency and bankruptcy law, viz. incentivising socially optimal behavior of the a creditor. The subsequent part of the article has attempted to relate each of the stakeholders of the entity in distress in a cost efficient and optimal manner. This behavioral principles with the frameworkof the Code to understand how the Code would happen when the resolution process is time bound, fair and equitable, is effectively utilizing the principles of behavioral economics and, taking ensuring highest recovery to cost ratio. Further, it is paramount to take into advantage of cognitive biases of individuals, to 'nudge' the stakeholder(s) to consideration ex- ante efficiency which is an incentive-based device aimed at achieve the objectives of the Code. prompt filing of applications triggering insolvency resolution process. Without In the case of Binani Industries Limited v. Bank of Baroda & Anr,32 the National timely initiation of and pursuit of ex-ante mechanisms, ex-post mechanism is rendered nugatory. The Code relies on the behavioral principle of 'making it easy to

31 Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. New Haven, CT: Yale University Press. 33 (2019) 4 SCC 17 32 Company Appeal (AT) No. 82,123,188,216 & 234 -2018 34 Ibid.

38 39 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

choose', i.e. it provides easy to comprehend options with reduced administrative Another principle of 'nudging' human behavior is 'leveraging loss aversion' of impediments to choosing. A two-way solution has been provided to the individuals, which suggests designing of incentives to reward good behavior ex- stakeholders under the Code. Firstly, the stakeholders are inevitably made to go for ante. Loss aversion is an important concept encapsulated in the expression 'losses restructuring or reorganization of the CD and if this is not successful, the CD is loom larger than gains'.37 The pain of losing is often believed to be psychologically wound up and provided with an exit from the market. Secondly, the stakeholders twice as powerful as the pleasure of gaining. The Code, by essentially making the also have the option to go for voluntary liquidation under the Code, if there is incumbent management of the CD ineligible from participating in the process or consensus ad-idem amongst them, pertaining to the fact that the CD should not bidding for the CD, has helped to instill a sense of fear or threat in the incumbent continue as a going concern.35 management, which often acts as an incentive and induces it to either devise new The Code establishes a linear, collective process of resolution which is binding on policies favourable to performance or bring about the desired change in the CD, the debtor, creditor and all other stakeholders thereby making it the 'go-to' option to with a view to avoid defaults. Quite naturally, this is also substantiated by the fact resolve insolvency of a CD. It confers on creditors a chance to assess the viability that in some instances, in India, the CDs have been led to pay the default amount, of the CD. If the Code is read with the RBI circular36 of June 7, 2019, which once the initiation was triggered or the CIRP application was filed or after receipt provides a framework for early recognition, reporting and time-bound resolution of notice from the creditors. The CIRP process under the Code is a non-adversarial of stressed assets, it can be easily said that it is an easy option to choose for the and a court approved process, giving it a sense of comfort for both creditors and purpose. debtors. Thus, the law has become preventative in nature so that real damages can be avoided by simply signaling to the market participants that the consequences of For an effective resolution, assembling the assets of the CD is a principal task. In non-compliance might be heavy and that good credit behavior will be rewarded. this respect, adequate protection is accorded to the assets of the CD during the course of the procedures under the Code. During resolution, a 'moratorium'on Taking a cue from 'failure bias' of individuals, the third principle talks about proceedings against the CD is applicable, which provides a breathing space to the 'emphasising social norm' that enhances good behaviour by focusing on relevant stakeholders to mutually arrive at a decision, without any undue influencers that people can relate to. Our ancient scriptures have guidance to offer interruptions. While such a 'stay' is secured, no assets of the CD can be invaded in respect of the borrowing behaviour, saying: upon or attached by any authority. Additionally, the CD is also protected against institution of any legal proceedings, when an order for liquidation has been passed. अिनशेषमऋणश् ेषशशु ेषतथवै च | पनु : पनु : वधततमाशेषनकारयेत् || During liquidation, the liquidator is also expected to take into custody or control all the assets, property, effects and actionable claims of the CD. Additionally, even Meaning, 'If a fire, a loan, or an enemy continues to exist even to a small extent, it though the Code's overriding effect and the moratorium have often invited will grow again and again; so do not let any one of it continue to exist even to a criticism, butthey serve as effective safeguards/ shields against individual small extent.’ enforcement actions by the financial creditor (FCs), as has been rightfully observed by the SC in the matter of Swiss Ribbons Thus, the guidance is to repay your loans. The occurrence of default not only results in individual harm but also impairs the credit availability and functioning of “…the moratorium imposed by Section 14 is in the interest of the corporate debtor the economy. Therefore, sound financial preparation is always a must as it reduces itself, thereby preserving the assets of the corporate debtor during the resolution the possibility for an entity to become insolvent. However, honest business failures process.” cannot be ruled out. Thus, the Code looks upon such honest business failure as a normal and legitimate part of the functioning of the market economy. It strives to

35 The Insolvency & Bankruptcy Code, 2016, Section 59. 36 Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 issued on 37 (Daniel Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, June 7, 2019. Econometrica, Vol. 47, No. 2, pp. 263-291

40 41 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

choose', i.e. it provides easy to comprehend options with reduced administrative Another principle of 'nudging' human behavior is 'leveraging loss aversion' of impediments to choosing. A two-way solution has been provided to the individuals, which suggests designing of incentives to reward good behavior ex- stakeholders under the Code. Firstly, the stakeholders are inevitably made to go for ante. Loss aversion is an important concept encapsulated in the expression 'losses restructuring or reorganization of the CD and if this is not successful, the CD is loom larger than gains'.37 The pain of losing is often believed to be psychologically wound up and provided with an exit from the market. Secondly, the stakeholders twice as powerful as the pleasure of gaining. The Code, by essentially making the also have the option to go for voluntary liquidation under the Code, if there is incumbent management of the CD ineligible from participating in the process or consensus ad-idem amongst them, pertaining to the fact that the CD should not bidding for the CD, has helped to instill a sense of fear or threat in the incumbent continue as a going concern.35 management, which often acts as an incentive and induces it to either devise new The Code establishes a linear, collective process of resolution which is binding on policies favourable to performance or bring about the desired change in the CD, the debtor, creditor and all other stakeholders thereby making it the 'go-to' option to with a view to avoid defaults. Quite naturally, this is also substantiated by the fact resolve insolvency of a CD. It confers on creditors a chance to assess the viability that in some instances, in India, the CDs have been led to pay the default amount, of the CD. If the Code is read with the RBI circular36 of June 7, 2019, which once the initiation was triggered or the CIRP application was filed or after receipt provides a framework for early recognition, reporting and time-bound resolution of notice from the creditors. The CIRP process under the Code is a non-adversarial of stressed assets, it can be easily said that it is an easy option to choose for the and a court approved process, giving it a sense of comfort for both creditors and purpose. debtors. Thus, the law has become preventative in nature so that real damages can be avoided by simply signaling to the market participants that the consequences of For an effective resolution, assembling the assets of the CD is a principal task. In non-compliance might be heavy and that good credit behavior will be rewarded. this respect, adequate protection is accorded to the assets of the CD during the course of the procedures under the Code. During resolution, a 'moratorium'on Taking a cue from 'failure bias' of individuals, the third principle talks about proceedings against the CD is applicable, which provides a breathing space to the 'emphasising social norm' that enhances good behaviour by focusing on relevant stakeholders to mutually arrive at a decision, without any undue influencers that people can relate to. Our ancient scriptures have guidance to offer interruptions. While such a 'stay' is secured, no assets of the CD can be invaded in respect of the borrowing behaviour, saying: upon or attached by any authority. Additionally, the CD is also protected against institution of any legal proceedings, when an order for liquidation has been passed. अिनशेषमऋणश् ेषशशु ेषतथवै च | पनु : पनु : वधततमाशेषनकारयेत् || During liquidation, the liquidator is also expected to take into custody or control all the assets, property, effects and actionable claims of the CD. Additionally, even Meaning, 'If a fire, a loan, or an enemy continues to exist even to a small extent, it though the Code's overriding effect and the moratorium have often invited will grow again and again; so do not let any one of it continue to exist even to a criticism, butthey serve as effective safeguards/ shields against individual small extent.’ enforcement actions by the financial creditor (FCs), as has been rightfully observed by the SC in the matter of Swiss Ribbons Thus, the guidance is to repay your loans. The occurrence of default not only results in individual harm but also impairs the credit availability and functioning of “…the moratorium imposed by Section 14 is in the interest of the corporate debtor the economy. Therefore, sound financial preparation is always a must as it reduces itself, thereby preserving the assets of the corporate debtor during the resolution the possibility for an entity to become insolvent. However, honest business failures process.” cannot be ruled out. Thus, the Code looks upon such honest business failure as a normal and legitimate part of the functioning of the market economy. It strives to

35 The Insolvency & Bankruptcy Code, 2016, Section 59. 36 Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 issued on 37 (Daniel Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, June 7, 2019. Econometrica, Vol. 47, No. 2, pp. 263-291

40 41 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

address the stigma associated with financial failure by providing a structured and in which the Code has evolved as a problem solver to debtors and creditors in the swift mechanism to resolve it. In this regard, the provisions pertaining to fast track society, it is expected that taking recourse to the provisions of the Code for insolvency resolution pave the way for promotion of the burgeoning resolving insolvency will be the new thumb rule. entrepreneurial and investment sentiment in India. Accelerated resolution attracts investors and, in this way, the Government of India, as a part of the Start-up India CONCLUSION Initiative, is facilitating an easy option for smaller firms to exit and start afresh. It is worthwhile to note that the recourse to the Code is still voluntary and is Further to overcome the 'failure bias', the next principle suggests that the contingent on one of the stakeholders initiating the process under the provisions. Government/regulator should 'disclose outcomes' or publish the results of However, once it is initiated, all the relevant stakeholders inevitably become a part insolvency processes, which are the realised benefits of good behavior which can of it. Therefore, it is one of the parties to the insolvency process and not the State often have a demonstrative effect on others to follow. Measurable desired who imposes an outcome on all other players. This can be viewed as one of the outcomes of the Code have come to fore over the past two years with a number of most powerful 'nudge' requiring all stakeholders to exhibit their best behaviour, CIRPs yielding resolution, wherein realisation by FCs in comparison to the firstly to prevent triggering of an insolvency process and if triggered, to preserve liquidation value of the CD has been almost 188 percent. Further, there has been a the interests of all stakeholders. by first striving for reorganization of the CD and very less percentage of haircut on the claims of both the FCs and operational maintaining a desired balance between the diverse objectives. creditors (OCs). Active disclosure of these outcomes has imparted greater Behavioural principles have strengthened the efficacy of principles of governance credibility to the Code and encouraged greater recourse to it. Further, the and economics. The relation between law and economics is that of Adjudicating Authorities have played a vital role in the emergence of rich complementarity, wherein the 'justness' of law and 'efficiency' of economics come jurisprudence around the Code. They have been successful in setting up a together into a state of equilibrium. In fact, law can be said to be an enabler of behavioural insight through the interpretations that has developed with their economic activities. If the current order is less enabling, then the economy and its decisions. agents cannot perform to their full potential, leading to inefficient allocation of However, it is also essential that the disclosure of desirable outcomes is scarce resources. The objective is to encourage regulation that is designed to be accompanied by implementation of the same in the relevant stakeholders in future efficient, accessible to all and simple to implement. Law or rather regulation so as to ensure a shift in the behavioural pattern of the stakeholders. Need for making has gone one step further to imbibe the behavioural principles into 'reinforcing desirable outcomes' repeatedly is what the next principle of behavioral achieving the desired economic outcomes, leading to maximization of social economics suggests. In furtherance to this, the Government and IBBI have been welfare. The Code tests positive on all these fronts and is slowly and progressively regularly engaging with various stakeholders in the context of the new legal 'nudging' its way towards achieving its statutory objectives. framework for insolvency and bankruptcy regime in the country, making them aware of the details of the processes.The positive outcomes of the same are being informed through various communication channels, hence reinforcing its merits. As noted earlier, individuals suffer from 'confirmation bias'. To use this to nudge a behavioral change, principle of behavioural, viz., 'making messages match mental models' i.e. training people to shift to new rules of thumb, can come in handy. Heuristics or mental shortcuts are often used by people as simple rules of thumb to help them take decisions.38 Given the growth of Code's jurisprudence and the way

35 On Amir & Orly Lobel, Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, 108 37 (Daniel Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, COLUM. L. REV. 2098 (2008). Econometrica, Vol. 47, No. 2, pp. 263-291

42 43 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 An Analysis of the Insolvency and Bankrupt2 cy code via the Lens of Behavioural Economics

address the stigma associated with financial failure by providing a structured and in which the Code has evolved as a problem solver to debtors and creditors in the swift mechanism to resolve it. In this regard, the provisions pertaining to fast track society, it is expected that taking recourse to the provisions of the Code for insolvency resolution pave the way for promotion of the burgeoning resolving insolvency will be the new thumb rule. entrepreneurial and investment sentiment in India. Accelerated resolution attracts investors and, in this way, the Government of India, as a part of the Start-up India CONCLUSION Initiative, is facilitating an easy option for smaller firms to exit and start afresh. It is worthwhile to note that the recourse to the Code is still voluntary and is Further to overcome the 'failure bias', the next principle suggests that the contingent on one of the stakeholders initiating the process under the provisions. Government/regulator should 'disclose outcomes' or publish the results of However, once it is initiated, all the relevant stakeholders inevitably become a part insolvency processes, which are the realised benefits of good behavior which can of it. Therefore, it is one of the parties to the insolvency process and not the State often have a demonstrative effect on others to follow. Measurable desired who imposes an outcome on all other players. This can be viewed as one of the outcomes of the Code have come to fore over the past two years with a number of most powerful 'nudge' requiring all stakeholders to exhibit their best behaviour, CIRPs yielding resolution, wherein realisation by FCs in comparison to the firstly to prevent triggering of an insolvency process and if triggered, to preserve liquidation value of the CD has been almost 188 percent. Further, there has been a the interests of all stakeholders. by first striving for reorganization of the CD and very less percentage of haircut on the claims of both the FCs and operational maintaining a desired balance between the diverse objectives. creditors (OCs). Active disclosure of these outcomes has imparted greater Behavioural principles have strengthened the efficacy of principles of governance credibility to the Code and encouraged greater recourse to it. Further, the and economics. The relation between law and economics is that of Adjudicating Authorities have played a vital role in the emergence of rich complementarity, wherein the 'justness' of law and 'efficiency' of economics come jurisprudence around the Code. They have been successful in setting up a together into a state of equilibrium. In fact, law can be said to be an enabler of behavioural insight through the interpretations that has developed with their economic activities. If the current order is less enabling, then the economy and its decisions. agents cannot perform to their full potential, leading to inefficient allocation of However, it is also essential that the disclosure of desirable outcomes is scarce resources. The objective is to encourage regulation that is designed to be accompanied by implementation of the same in the relevant stakeholders in future efficient, accessible to all and simple to implement. Law or rather regulation so as to ensure a shift in the behavioural pattern of the stakeholders. Need for making has gone one step further to imbibe the behavioural principles into 'reinforcing desirable outcomes' repeatedly is what the next principle of behavioral achieving the desired economic outcomes, leading to maximization of social economics suggests. In furtherance to this, the Government and IBBI have been welfare. The Code tests positive on all these fronts and is slowly and progressively regularly engaging with various stakeholders in the context of the new legal 'nudging' its way towards achieving its statutory objectives. framework for insolvency and bankruptcy regime in the country, making them aware of the details of the processes.The positive outcomes of the same are being informed through various communication channels, hence reinforcing its merits. As noted earlier, individuals suffer from 'confirmation bias'. To use this to nudge a behavioral change, principle of behavioural, viz., 'making messages match mental models' i.e. training people to shift to new rules of thumb, can come in handy. Heuristics or mental shortcuts are often used by people as simple rules of thumb to help them take decisions.38 Given the growth of Code's jurisprudence and the way

35 On Amir & Orly Lobel, Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, 108 37 (Daniel Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, COLUM. L. REV. 2098 (2008). Econometrica, Vol. 47, No. 2, pp. 263-291

42 43 2 2 Creditor Rights under the Insolvency & Bankruptcy Code, 2016

Nikhil Shah, Khushboo Vaish & Anshul Dhanuka

1 Nikhil Shah is the Managing Director with Alvarez & Marsal, Khushboo Vaish is a Senior Director at Alvarez & Marsal and Anshul Dhanuka is a Manager, Restructuring, Turnaround & Performance Improvement at Alvarez & Marsal. Creditor Rights under the Insolvency & Bankruptcy Code, 2016

Nikhil Shah, Khushboo Vaish & Anshul Dhanuka

1 Nikhil Shah is the Managing Director with Alvarez & Marsal, Khushboo Vaish is a Senior Director at Alvarez & Marsal and Anshul Dhanuka is a Manager, Restructuring, Turnaround & Performance Improvement at Alvarez & Marsal. Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Abstract further threaten the solvency and the survival of business. Hence, in such a situation, it is essential that a streamlined or collective action follows, which may The author, in this article, discusses the prevalence of different classes of creditors be enforced by change of control from equity holders to creditors, and guided by under the present Insolvency & Bankruptcy Code, 2016 (“IBC”) and also the the respective bankruptcy laws and rules, which must not only aim to ensure a various provisions under the IBC, which accord protection to their rights during successful corporate rescue but also satisfy the interests of the diverse stakeholders the subsistence of either the resolution or liquidation. With the help of case-laws, involved.. the article also discusses, in detail, the rights of homebuyers and the rights of In view of the above background, this article aims to discuss the importance of creditors against the guarantors under the IBC. Further, the author has also protection of creditors' rights and the treatment of various classes of creditors highlighted certain gaps in IBC and concluded with certain recommendations, during the insolvency resolution process under the IBC. drawing from a comparative analysis of the jurisdictions of the United States of America (“US”) and United Kingdom (“UK”) in this regard. ACCORDING PROTECTION TO CREDITORS' RIGHTS Keywords – IBC; Creditors' rights under IBC; Comparative Insolvency Law; Debt capital is a significant source of corporate finance and is essential for Creditors in US and UK. economic growth. Once debt has been issued, stockholders (or managers, acting on their behalf) can increase the value of equity at the debt-holders' expense in various BACKGROUND ways, including claim dilution, under investment, and risk shifting.3 The chart In a corporation, capital can be either in the form of equity or debt. Equity below illustrates the importance of debt as a major source of capital, even in more shareholders not only have management and controlling rights but are also entitled developed economies. The Debt-Equity (DE) ratio of BSE 500 companies to a share in the profits. Contrastingly, lenders or debt providers, while not having (excluding banks) is 0.84 in Financial Year 2017. For 36 Organization of Economic say in the management decisions of the firm, are entitled to a fixed interest on their Cooperation &Development (OECD) countries, the DE ratio for non-financial loans, with a definite repayment timeline for their capital. Notwithstanding the fact corporations is mostly higher than 1 with some countries at much higher level like that both forms of capital carry varied amount of risk, a corporation must endeavor Canada (7.7), and France (6.7) in 2018. to pay back its creditors first, with only residual return going to the equity shareholders, as they have the lowest ranking claim over the corporation's assets.2 Chart 1: Debt to Equity Ratios of non-financial corporations in FY18 Further, there can also be differentiation or class creation, in terms of voting rights or distribution of proceeds, amongst the various creditors or debt providers, Canada 7.70 emanating either from contractual arrangement or legislative framework. However, when a business reaches the brink of insolvency or faces financial France 6.70 distress, it may resort to prioritizing payments, bypassing customary, contractual and legislative order. This may not only result in differential treatment for creditors Advanced 36 OE CD countries >1 placed in same or similar classes, but it may also result in creditors taking unilateral India BSE 500 companies 0.84 remedial actions, like terminating supply of goods/services to the business, imposing interest or penal charges, enforcing debt security, etc. Even though these Source: OECD website, Mint article, A&M Analysis; *BSE 500 company data is for FY17 retaliatory actions are meant to protect the interests of the creditors, these may

2 Comparative Corporate Insolvency Law, By Horst Eidenmüller, The Oxford Handbook of Corporate Law 3 Inside Debt and the Design of Corporate Debt Contracts, By Divya Anantharaman, Vivian W. Fang and and Governance, Edited by Jeffrey N. Gordon and Wolf-Georg Ringe, December, 2016, Page 21. Guojin Gong, Management Science , May 2014, Vol. 60, No. 5, pp. 1260-1280, 1260.

46 47 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Abstract further threaten the solvency and the survival of business. Hence, in such a situation, it is essential that a streamlined or collective action follows, which may The author, in this article, discusses the prevalence of different classes of creditors be enforced by change of control from equity holders to creditors, and guided by under the present Insolvency & Bankruptcy Code, 2016 (“IBC”) and also the the respective bankruptcy laws and rules, which must not only aim to ensure a various provisions under the IBC, which accord protection to their rights during successful corporate rescue but also satisfy the interests of the diverse stakeholders the subsistence of either the resolution or liquidation. With the help of case-laws, involved.. the article also discusses, in detail, the rights of homebuyers and the rights of In view of the above background, this article aims to discuss the importance of creditors against the guarantors under the IBC. Further, the author has also protection of creditors' rights and the treatment of various classes of creditors highlighted certain gaps in IBC and concluded with certain recommendations, during the insolvency resolution process under the IBC. drawing from a comparative analysis of the jurisdictions of the United States of America (“US”) and United Kingdom (“UK”) in this regard. ACCORDING PROTECTION TO CREDITORS' RIGHTS Keywords – IBC; Creditors' rights under IBC; Comparative Insolvency Law; Debt capital is a significant source of corporate finance and is essential for Creditors in US and UK. economic growth. Once debt has been issued, stockholders (or managers, acting on their behalf) can increase the value of equity at the debt-holders' expense in various BACKGROUND ways, including claim dilution, under investment, and risk shifting.3 The chart In a corporation, capital can be either in the form of equity or debt. Equity below illustrates the importance of debt as a major source of capital, even in more shareholders not only have management and controlling rights but are also entitled developed economies. The Debt-Equity (DE) ratio of BSE 500 companies to a share in the profits. Contrastingly, lenders or debt providers, while not having (excluding banks) is 0.84 in Financial Year 2017. For 36 Organization of Economic say in the management decisions of the firm, are entitled to a fixed interest on their Cooperation &Development (OECD) countries, the DE ratio for non-financial loans, with a definite repayment timeline for their capital. Notwithstanding the fact corporations is mostly higher than 1 with some countries at much higher level like that both forms of capital carry varied amount of risk, a corporation must endeavor Canada (7.7), and France (6.7) in 2018. to pay back its creditors first, with only residual return going to the equity shareholders, as they have the lowest ranking claim over the corporation's assets.2 Chart 1: Debt to Equity Ratios of non-financial corporations in FY18 Further, there can also be differentiation or class creation, in terms of voting rights or distribution of proceeds, amongst the various creditors or debt providers, Canada 7.70 emanating either from contractual arrangement or legislative framework. However, when a business reaches the brink of insolvency or faces financial France 6.70 distress, it may resort to prioritizing payments, bypassing customary, contractual and legislative order. This may not only result in differential treatment for creditors Advanced 36 OE CD countries >1 placed in same or similar classes, but it may also result in creditors taking unilateral India BSE 500 companies 0.84 remedial actions, like terminating supply of goods/services to the business, imposing interest or penal charges, enforcing debt security, etc. Even though these Source: OECD website, Mint article, A&M Analysis; *BSE 500 company data is for FY17 retaliatory actions are meant to protect the interests of the creditors, these may

2 Comparative Corporate Insolvency Law, By Horst Eidenmüller, The Oxford Handbook of Corporate Law 3 Inside Debt and the Design of Corporate Debt Contracts, By Divya Anantharaman, Vivian W. Fang and and Governance, Edited by Jeffrey N. Gordon and Wolf-Georg Ringe, December, 2016, Page 21. Guojin Gong, Management Science , May 2014, Vol. 60, No. 5, pp. 1260-1280, 1260.

46 47 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Existing in diverse forms like bank term loans, bond subscription, working capital as being debtor-friendly, while others being creditor-friendly.5 Even though there is financing, trade finance, operational debts etc., debt capital needs to be protected no stakeholder who can assume superior priority for treatment under insolvency and treated fairly, irrespective of its form, otherwise the discriminated source of processes, creditors' protection continues to stay at the helm of objectives of all financing will dry up which would likely inhibit economic growth. Several studies insolvency laws in form of varied provisions. For instance, some laws grant maintain that a higher level of creditor protection often leads to increased levels of secured creditor right to enforce security against insolvent company but prohibit private credit and bank lending.4 the enforcement of such rights during the pendency of insolvency proceedings. As far as India is concerned, prior to the enactment of the IBC, creditors, and However, due to the complexity of credit instruments with differential rights and particularly secured creditors' rights, were primarily protected through the purposes of credit, the insolvency laws tend to struggle to maintain the balance of enforcement of security. For instance, banks and financial Institutions (FI) can all such creditors' interest, vis-à-vis other objectives. recover their dues under Recovery of Debts Due to Banks & Financial Institutions In the same backdrop, it is pertinent to note the objective with which IBC has been Act, 1993 (RDBA) through the Debt Recovery Tribunal (DRT), a quasi-judicial broughtin India: body, once such dues are declared Non-Performing Assets (NPA). However, these recovery mechanisms cannot be availed by other creditors like bond holders, An Act to consolidate and amend the laws relating to reorganization and operational creditors, etc. Creditors, in general, also take recourse to civil action insolvency resolution of corporate persons, partnership firms and individuals in a suits or winding up petition as tools for recovery mechanism. However, such filing time bound manner for maximization of value of assets of such persons, to of recovery suits in courts often resulted in lengthy judicial processes, which would promote entrepreneurship, availability of credit and balance the interests of all take away the essence of debt recovery suits, and resultantly leading the business the stakeholders including alteration in the order of priority of payment of to either shut down, or yield lop sided recovery or poor recovery. The enactment of Government dues and to establish an Insolvency and Bankruptcy Board of India, 6 IBC not only streamlined the various segmented laws for debt recovery and and for matters connected therewith or incidental thereto. liquidation but also put in place a collective resolution framework for all kinds of In the abovementioned Preamble to the IBC, the terms 'availability of credit' and creditors. Under pre-IBC regime India, the creditors did not have much protection 'balance the interests of all the stakeholders' embody the need for creditors' over their rights and possessed little control over the outcome of the insolvency protection in tandem with the maximization of value of assets, and accordingly situation. relevant provisions have been kept in the IBC to serve this purpose CREDITORS' RIGHTS IN AN INSOLVENCY LAW FRAMEWORK CREDITORS UNDER THE INSOLVENCY & BANKRUPTCY CODE, 2016 The purpose of the insolvency law is to not only rescue the corporation from The term 'creditor' even though found reference in various provisions of the financial distress but also to achieve several other competing objectives like Companies Act, 2013, but was not defined. However, as per section 3(10) of IBC, maximizing recovery to creditors, ensuring employee welfare, consumer welfare, creditor has been defined as: 'any person to whom a debt is owed and includes a fair distribution of proceeds in liquidation. However, jurisdictions across the world financial creditor, an operational creditor, a secured creditor, an unsecured creditor structure their bankruptcy laws differently, owing to the different social, economic and political scenarios. For instance, some countries design their insolvency laws

5 Comparative Corporate Insolvency Law, By Horst Eidenmüller, The Oxford Handbook of Corporate Law and Governance, Edited by Jeffrey N. Gordon and Wolf-Georg Ringe, December, 2016, Page 9. 4 Deakin, S., Mollica, V., & Sarkar, P. (2016). Varieties of creditor protection: insolvency law reform and credit expansion in developed market economies. Socio-Economic Review, mww005. 6 The Insolvency & Bankruptcy Code, 2016, the Preamble.

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Existing in diverse forms like bank term loans, bond subscription, working capital as being debtor-friendly, while others being creditor-friendly.5 Even though there is financing, trade finance, operational debts etc., debt capital needs to be protected no stakeholder who can assume superior priority for treatment under insolvency and treated fairly, irrespective of its form, otherwise the discriminated source of processes, creditors' protection continues to stay at the helm of objectives of all financing will dry up which would likely inhibit economic growth. Several studies insolvency laws in form of varied provisions. For instance, some laws grant maintain that a higher level of creditor protection often leads to increased levels of secured creditor right to enforce security against insolvent company but prohibit private credit and bank lending.4 the enforcement of such rights during the pendency of insolvency proceedings. As far as India is concerned, prior to the enactment of the IBC, creditors, and However, due to the complexity of credit instruments with differential rights and particularly secured creditors' rights, were primarily protected through the purposes of credit, the insolvency laws tend to struggle to maintain the balance of enforcement of security. For instance, banks and financial Institutions (FI) can all such creditors' interest, vis-à-vis other objectives. recover their dues under Recovery of Debts Due to Banks & Financial Institutions In the same backdrop, it is pertinent to note the objective with which IBC has been Act, 1993 (RDBA) through the Debt Recovery Tribunal (DRT), a quasi-judicial broughtin India: body, once such dues are declared Non-Performing Assets (NPA). However, these recovery mechanisms cannot be availed by other creditors like bond holders, An Act to consolidate and amend the laws relating to reorganization and operational creditors, etc. Creditors, in general, also take recourse to civil action insolvency resolution of corporate persons, partnership firms and individuals in a suits or winding up petition as tools for recovery mechanism. However, such filing time bound manner for maximization of value of assets of such persons, to of recovery suits in courts often resulted in lengthy judicial processes, which would promote entrepreneurship, availability of credit and balance the interests of all take away the essence of debt recovery suits, and resultantly leading the business the stakeholders including alteration in the order of priority of payment of to either shut down, or yield lop sided recovery or poor recovery. The enactment of Government dues and to establish an Insolvency and Bankruptcy Board of India, 6 IBC not only streamlined the various segmented laws for debt recovery and and for matters connected therewith or incidental thereto. liquidation but also put in place a collective resolution framework for all kinds of In the abovementioned Preamble to the IBC, the terms 'availability of credit' and creditors. Under pre-IBC regime India, the creditors did not have much protection 'balance the interests of all the stakeholders' embody the need for creditors' over their rights and possessed little control over the outcome of the insolvency protection in tandem with the maximization of value of assets, and accordingly situation. relevant provisions have been kept in the IBC to serve this purpose CREDITORS' RIGHTS IN AN INSOLVENCY LAW FRAMEWORK CREDITORS UNDER THE INSOLVENCY & BANKRUPTCY CODE, 2016 The purpose of the insolvency law is to not only rescue the corporation from The term 'creditor' even though found reference in various provisions of the financial distress but also to achieve several other competing objectives like Companies Act, 2013, but was not defined. However, as per section 3(10) of IBC, maximizing recovery to creditors, ensuring employee welfare, consumer welfare, creditor has been defined as: 'any person to whom a debt is owed and includes a fair distribution of proceeds in liquidation. However, jurisdictions across the world financial creditor, an operational creditor, a secured creditor, an unsecured creditor structure their bankruptcy laws differently, owing to the different social, economic and political scenarios. For instance, some countries design their insolvency laws

5 Comparative Corporate Insolvency Law, By Horst Eidenmüller, The Oxford Handbook of Corporate Law and Governance, Edited by Jeffrey N. Gordon and Wolf-Georg Ringe, December, 2016, Page 9. 4 Deakin, S., Mollica, V., & Sarkar, P. (2016). Varieties of creditor protection: insolvency law reform and credit expansion in developed market economies. Socio-Economic Review, mww005. 6 The Insolvency & Bankruptcy Code, 2016, the Preamble.

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and a decree-holder'. This definition has clearly laid down the demarcation minimum amount of ₹1 lakh.9 On the occurrence of a default, the FC can between various classes of creditors, i.e. financial creditor (FC), operational straightaway file an application before the National Company Law Tribunal creditor (OC), secured creditor and unsecured creditor, which have been properly (“NCLT”), which can either reject or admit the application on the grounds, whether defined in the respective provisions of IBC. or not there is a default or the application is complete or there are disciplinary Section 3(30) of the IBC defines secured creditor as 'a creditor in favor of whom proceedings pending against the proposed Resolution Professional (Resolution 10 security interest is created”. Further, section 3(31) defines security interest as Professional refers to an insolvency professional appointed to conduct the CIRP). “right, title or interest or a claim to property, created in favour of, or provided for a Quite interestingly, the real estate allottees can initiate the CIRP on default by the secured creditor by a transaction which secures payment or performance of an real estate builder, only if at least 10% of the total number of allottees or 100 such 11 obligation and includes mortgage, charge, hypothecation, assignment and allottees jointly file the application. encumbrance or any other agreement or arrangement securing payment or However, as far as an OC is concerned, after the occurrence of default, he/she will performance of any obligation of any person: Provided that security interest shall have to serve a demand notice on the corporate debtor, demanding payment of not include a performance guarantee'. unpaid debt.12 The corporate debtor will have to reply within 10 days, stating either It may be noted that the existing laws, which were primarily available for debt that the unpaid debt has been paid, by attaching the relevant financial records or enforcement prior to IBC, like the Securitization and Reconstruction of Financial apprise the OC of the existence of a dispute or a suit or any kind of proceeding Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) had defined pending in some other court on the services/goods delivered by the OC to the 'secured creditor' and 'security interest' in a way similar to that of the present IBC. corporate debtor. If the corporate debtor does not reply to the notice with either of the aforementioned, then the OC has the right to file an application before the Moreover, the IBC introduced, for the first time, the concept of FC/ financial debt NCLT, which will examine the application on the grounds of existence of dispute, and OC / operational debt to create differential voting powers for conducting payment of unpaid debt, completeness of the application and pending disciplinary creditor-in-control Corporate Insolvency Resolution Process (CIRP) process. proceedings against the proposed Resolution Professional (“RP”), if any and then Each of the above class of creditors enjoys certain rights under IBC and its related accordingly admit or reject it.13 rules/ regulations vis-à-vis the corporate debtor (CD). In the next segment, the authors will highlight certain provisions of IBC, pertaining to treatment of Committee of creditors (CoC) and voting rights creditors' issues, and the prominent judgments elaborately discussing these issues. The CoC shall comprise of only FCs (excluding related parties) who shall have voting rights proportionate to the financial debt owed to them.14 Where there are no I BC A N D THE D I FFER EN T C LA S S ES OF C R ED I TOR S – eligible financial creditors, the CoC shall consist of eighteen largest operational CONTENTIOUS ISSUES AND JUDICIAL RULINGS Initiation rights for FC and OC under IBC Under IBC, the CIRP can be initiated by any creditor, once any corporate person 9 The Insolvency & Bankruptcy Code, 2016, Section 4. It has been amended to increase the minimum amount of default to Rs one crore by a notification S.O. 1205(E) dated 24 March 2020. 7 8 commits a default (such a corporate person is called corporate debtor ), of a 10 The Insolvency & Bankruptcy Code, 2016, Section 7. 11 The Insolvency & Bankruptcy Code, 2016, Section 7(1), Second Proviso. 12 The Insolvency & Bankruptcy Code, 2016, Section 8.

13 7 The Insolvency & Bankruptcy Code, 2016, Section 6. The Insolvency & Bankruptcy Code, 2016, Section 9(5).

14 8 The Insolvency & Bankruptcy Code, 2016, Section 3(8). The Insolvency & Bankruptcy Code, 2016, Section 21.

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and a decree-holder'. This definition has clearly laid down the demarcation minimum amount of ₹1 lakh.9 On the occurrence of a default, the FC can between various classes of creditors, i.e. financial creditor (FC), operational straightaway file an application before the National Company Law Tribunal creditor (OC), secured creditor and unsecured creditor, which have been properly (“NCLT”), which can either reject or admit the application on the grounds, whether defined in the respective provisions of IBC. or not there is a default or the application is complete or there are disciplinary Section 3(30) of the IBC defines secured creditor as 'a creditor in favor of whom proceedings pending against the proposed Resolution Professional (Resolution 10 security interest is created”. Further, section 3(31) defines security interest as Professional refers to an insolvency professional appointed to conduct the CIRP). “right, title or interest or a claim to property, created in favour of, or provided for a Quite interestingly, the real estate allottees can initiate the CIRP on default by the secured creditor by a transaction which secures payment or performance of an real estate builder, only if at least 10% of the total number of allottees or 100 such 11 obligation and includes mortgage, charge, hypothecation, assignment and allottees jointly file the application. encumbrance or any other agreement or arrangement securing payment or However, as far as an OC is concerned, after the occurrence of default, he/she will performance of any obligation of any person: Provided that security interest shall have to serve a demand notice on the corporate debtor, demanding payment of not include a performance guarantee'. unpaid debt.12 The corporate debtor will have to reply within 10 days, stating either It may be noted that the existing laws, which were primarily available for debt that the unpaid debt has been paid, by attaching the relevant financial records or enforcement prior to IBC, like the Securitization and Reconstruction of Financial apprise the OC of the existence of a dispute or a suit or any kind of proceeding Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) had defined pending in some other court on the services/goods delivered by the OC to the 'secured creditor' and 'security interest' in a way similar to that of the present IBC. corporate debtor. If the corporate debtor does not reply to the notice with either of the aforementioned, then the OC has the right to file an application before the Moreover, the IBC introduced, for the first time, the concept of FC/ financial debt NCLT, which will examine the application on the grounds of existence of dispute, and OC / operational debt to create differential voting powers for conducting payment of unpaid debt, completeness of the application and pending disciplinary creditor-in-control Corporate Insolvency Resolution Process (CIRP) process. proceedings against the proposed Resolution Professional (“RP”), if any and then Each of the above class of creditors enjoys certain rights under IBC and its related accordingly admit or reject it.13 rules/ regulations vis-à-vis the corporate debtor (CD). In the next segment, the authors will highlight certain provisions of IBC, pertaining to treatment of Committee of creditors (CoC) and voting rights creditors' issues, and the prominent judgments elaborately discussing these issues. The CoC shall comprise of only FCs (excluding related parties) who shall have voting rights proportionate to the financial debt owed to them.14 Where there are no I BC A N D THE D I FFER EN T C LA S S ES OF C R ED I TOR S – eligible financial creditors, the CoC shall consist of eighteen largest operational CONTENTIOUS ISSUES AND JUDICIAL RULINGS Initiation rights for FC and OC under IBC Under IBC, the CIRP can be initiated by any creditor, once any corporate person 9 The Insolvency & Bankruptcy Code, 2016, Section 4. It has been amended to increase the minimum amount of default to Rs one crore by a notification S.O. 1205(E) dated 24 March 2020. 7 8 commits a default (such a corporate person is called corporate debtor ), of a 10 The Insolvency & Bankruptcy Code, 2016, Section 7. 11 The Insolvency & Bankruptcy Code, 2016, Section 7(1), Second Proviso. 12 The Insolvency & Bankruptcy Code, 2016, Section 8.

13 7 The Insolvency & Bankruptcy Code, 2016, Section 6. The Insolvency & Bankruptcy Code, 2016, Section 9(5).

14 8 The Insolvency & Bankruptcy Code, 2016, Section 3(8). The Insolvency & Bankruptcy Code, 2016, Section 21.

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creditors, unless there are less than eighteen, and one representative of workmen Further, in the case of Central Bank of India v. Resolution Professional of the and employee each.15 The voting rights shall not be affected due to any charge, Sirpur Paper Mills Ltd. and Ors,20 the Hon'ble National Company Law Appellate security or mortgage. Tribunal (NCLAT) ruled that IBBI doesn't have the power to issue regulations to provide preferential payment to dissenting FCs and hence such treatment is Treatment of dissenting FC and OC in resolution plan and in liquidation inconsistent with the provisions of IBC. Subsequently, the IBBI brought The involvement of a lot of creditors with diverse and sometimes conflicting amendment to the IBBI CIRP Regulations, through section 6 of the Act No. 26 of interests, in the voting process of the resolution plan, inevitably delays the 2019, to provide for the payment of minimum of liquidation value to the dissenting finalization of the resolution plan. To avoid such delays and holdouts, the law must FCs.21 As on the present date, the law simply requires dues of OCs and of dissenting have certain provisions that disincentivize unfair holdouts or make consenting FCs under resolution plan be paid in priority to the FC dues which voted in favour creditors' majority decision binding on all creditors. This is also known as cram- of the plan,22 prescribing a minimum value payable to such creditors to the extent of 16 down in insolvency law. It is also accompanied with requisite safeguards for the liquidation value or distribution as may be calculated under section 53. However, protection of dissenting creditors to avoid misuse of power by the majority the exact amount of such proceeds to be given to any creditor is to be determined by consenting creditors. the collective wisdom of the CoC, as held by the Supreme Court in the case of Initially, the Section 21(8) of the IBC (the law prior to any amendments in 2016) Committee of Creditors, Essar Steel v. Satish Kumar Gupta,23 comprising of provided that all the decisions of the CoC, including the approval of the resolution secured and unsecured FCs. plan, will require 75% approval of the voting share of FCs. Subsequently, this Even though, prior to the amendments, the IBC did not protect the interests of threshold was revised and reduced to 66% of the voting share of FCs for all secured FCs who wish to dissent and enforce their security, however, subsequently 17 18 specified major decisions like appointment of RP, approval of resolution plan, the Government has rightly amended the law to safeguard the interest of dissenting 19 and 51% for all other decisions, through an amendment dated June06, 2018 in line FCs by mandating a minimum payout of liquidation value. with various courts' pronouncement and Reserves Bank of India's (RBI) existing framework for restructuring of loans. Treatment of OC/FC dues to related parties It is pertinent to note that the bare text of IBC initially did not provide any rights to The Proviso to section 21(2) of IBC provides that any FC, which is a related party the dissenting FCs, even though the IBBI CIRP Regulations (pre-amendment) of the CD, shall have no right of representation, participation or voting in CoC. defined dissenting FC as an FC who voted against the resolution plan or abstained Even though, similar specific provision does not exist for any OC, which can also from voting for the resolution plan, and who must be paid liquidation value before be a related party of the CD, when the CoC is solely composed of OCs under any recoveries are made by the consenting financial creditors. regulation 16 of the IBBI CIRP Regulations, 2016, it can be safely deduced that the intent of the law is to disenfranchise the related parties of the CoC membership. The authors believe that, while related parties may not have voting rights, they still

15 Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI CIRP Regulations”), Regulation 16.

16 Beale, Simon, and Paul Keddie. "Restructuring." Insolvency and Restructuring Manual. London: 20 Company Appeal (AT) (Insolvency) No. 526 of 2018 Bloomsbury Professional, 2018. 246–278, 264. 21 The Insolvency & Bankruptcy Code, 2016, Section 30(2)(b). 17 The Insolvency & Bankruptcy Code, 2016, Section 22(2). 22 IBBI CIRP Regulations, Regulation 38(1). 18 The Insolvency & Bankruptcy Code, 2016, Section 30(4). 23 Committee of Creditors, Essar Steel v. Satish Kumar Gupta, Civil Appeal No.8766-67 of 2019 (“Essar Steel 19 The Insolvency & Bankruptcy Code, 2016, Section 21(8). case”).

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creditors, unless there are less than eighteen, and one representative of workmen Further, in the case of Central Bank of India v. Resolution Professional of the and employee each.15 The voting rights shall not be affected due to any charge, Sirpur Paper Mills Ltd. and Ors,20 the Hon'ble National Company Law Appellate security or mortgage. Tribunal (NCLAT) ruled that IBBI doesn't have the power to issue regulations to provide preferential payment to dissenting FCs and hence such treatment is Treatment of dissenting FC and OC in resolution plan and in liquidation inconsistent with the provisions of IBC. Subsequently, the IBBI brought The involvement of a lot of creditors with diverse and sometimes conflicting amendment to the IBBI CIRP Regulations, through section 6 of the Act No. 26 of interests, in the voting process of the resolution plan, inevitably delays the 2019, to provide for the payment of minimum of liquidation value to the dissenting finalization of the resolution plan. To avoid such delays and holdouts, the law must FCs.21 As on the present date, the law simply requires dues of OCs and of dissenting have certain provisions that disincentivize unfair holdouts or make consenting FCs under resolution plan be paid in priority to the FC dues which voted in favour creditors' majority decision binding on all creditors. This is also known as cram- of the plan,22 prescribing a minimum value payable to such creditors to the extent of 16 down in insolvency law. It is also accompanied with requisite safeguards for the liquidation value or distribution as may be calculated under section 53. However, protection of dissenting creditors to avoid misuse of power by the majority the exact amount of such proceeds to be given to any creditor is to be determined by consenting creditors. the collective wisdom of the CoC, as held by the Supreme Court in the case of Initially, the Section 21(8) of the IBC (the law prior to any amendments in 2016) Committee of Creditors, Essar Steel v. Satish Kumar Gupta,23 comprising of provided that all the decisions of the CoC, including the approval of the resolution secured and unsecured FCs. plan, will require 75% approval of the voting share of FCs. Subsequently, this Even though, prior to the amendments, the IBC did not protect the interests of threshold was revised and reduced to 66% of the voting share of FCs for all secured FCs who wish to dissent and enforce their security, however, subsequently 17 18 specified major decisions like appointment of RP, approval of resolution plan, the Government has rightly amended the law to safeguard the interest of dissenting 19 and 51% for all other decisions, through an amendment dated June06, 2018 in line FCs by mandating a minimum payout of liquidation value. with various courts' pronouncement and Reserves Bank of India's (RBI) existing framework for restructuring of loans. Treatment of OC/FC dues to related parties It is pertinent to note that the bare text of IBC initially did not provide any rights to The Proviso to section 21(2) of IBC provides that any FC, which is a related party the dissenting FCs, even though the IBBI CIRP Regulations (pre-amendment) of the CD, shall have no right of representation, participation or voting in CoC. defined dissenting FC as an FC who voted against the resolution plan or abstained Even though, similar specific provision does not exist for any OC, which can also from voting for the resolution plan, and who must be paid liquidation value before be a related party of the CD, when the CoC is solely composed of OCs under any recoveries are made by the consenting financial creditors. regulation 16 of the IBBI CIRP Regulations, 2016, it can be safely deduced that the intent of the law is to disenfranchise the related parties of the CoC membership. The authors believe that, while related parties may not have voting rights, they still

15 Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI CIRP Regulations”), Regulation 16.

16 Beale, Simon, and Paul Keddie. "Restructuring." Insolvency and Restructuring Manual. London: 20 Company Appeal (AT) (Insolvency) No. 526 of 2018 Bloomsbury Professional, 2018. 246–278, 264. 21 The Insolvency & Bankruptcy Code, 2016, Section 30(2)(b). 17 The Insolvency & Bankruptcy Code, 2016, Section 22(2). 22 IBBI CIRP Regulations, Regulation 38(1). 18 The Insolvency & Bankruptcy Code, 2016, Section 30(4). 23 Committee of Creditors, Essar Steel v. Satish Kumar Gupta, Civil Appeal No.8766-67 of 2019 (“Essar Steel 19 The Insolvency & Bankruptcy Code, 2016, Section 21(8). case”).

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have the rights to file a claim and settle as part of the resolution/liquidation process. Financial creditors are, from the very beginning, involved with assessing the Even though the IBC does not specifically allow or guarantee any differential viability of the corporate debtor. They can, and therefore do, engage in treatment to related parties creditors vis-à-vis normal creditors, but practically it restructuring of the loan as well as reorganization of the corporate debtor's business has been observed that most resolution plans do not provide for equitable payment when there is financial stress, which are things operational creditors do not and of the dues of such creditors. The courts in India, in many cases like Binani cannot do….financial creditors are clearly different from operational creditors and Industries Ltd. &Anr.24 v. Bank of Baroda & Anrand Rajputana Properties Pvt. Ltd. therefore, there is obviously an intelligible differentia between the two which has a v. Ultratech Cement Ltd. &Ors.,25 have held that similarly situated creditors cannot direct relation to the objects sought to be achieved by the Code. be discriminated in the resolution plan or in distribution of proceeds under section Treatment of statutory dues 53 of IBC. Section 5(21) of IBC defines operational debt as 'a claim in respect of the provision Constitutional validity of FC and OC of goods or services including employment or a debt in respect of the payment of The Indian jurisdiction is the first to lay down the distinction of FC and OC in an dues arising under any law for the time being in force and payable to the Central insolvency law, unlike the older and well-developed insolvency regimes like US, Government, any State Government or any local authority', thereby clearly stating UK, Singapore etc. Even though the OCs do not find a place on the CoC, unless in that any due payable to the Government will be classified as an operational debt. To certain circumstances, as already mentioned, there are still provisions present to clarify this issue, the Hon'ble NCLAT in the case of DG of Income Tax v. Synergies safeguards their interests. However, it is not without any surprise that the Dooray Automotive Ltd.29 held that the tax dues payable to the government have a differential rights of FC and OC under IBC has been challenged by several direct nexus with the operation of the company and hence come within the ambit of stakeholders in courts, calling sections 21 and 24 as 'discriminatory and manifestly operational debt under the provisions of IBC. 26 arbitrary in that operational creditors do not have even a single vote in the CoC. Further, according to the order of distribution of proceeds in liquidation At this juncture, it is worthwhile to refer to the final report of the Bankruptcy Law proceedings in Section 53 of IBC, the Government dues are ranked junior to Reforms Committee (BLRC), which had explained the rationale of only allowing secured creditors, workmen's dues, employee dues, and unsecured financial financial creditors the right to form a CoC, as “members of the creditors committee creditors dues. The intention of legislature of deprioritizing statutory dues over have to be creditors both with the capability to assess viability, as well as to be other dues is also in consonance with the text of the Preamble to the IBC i.e. willing to modify terms of existing liabilities in negotiations.”27 'balance the interests of all the stakeholders including alteration in the order of However, the Hon'ble Apex Court settled the debate in Swiss Ribbons Pvt. Ltd. & priority of payment of Government dues'. Anr. v. Union of India28 and held, “ Classification between financial creditor and Statutory authorities tend to take sequestration actions emanating from powers operational creditor is neither discriminatory, nor arbitrary, nor violative of under respective statute disregarding the CIRP or liquidation process and even article 14 of the Constitution of India”, explaining that. after the approval of the plan. Such powers are not available to non-statutory operational creditors. To this extent, various court judgments have upheld 24 Company Appeal (AT) (Insolvency) No. 82 of 2018. protection available to companies under section 14 against recovery actions by 25 CIVIL APPEAL No. 10998 OF 2018. creditors, which includes statutory authorities or OCs as well. Although the 26 Swiss Ribbons v. Union of India, 2019 SCC OnLine SC 73. 27 The report of the Bankruptcy Law Reforms Committee (November 2015), https://dea.gov.in/sites/default/files/BLRCReportVol1_04112015.pdf 28 Writ Petition (Civil) No. 99 Of 2018 29 Company Appeal (AT) (Insolvency) No. 205 of 2017

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have the rights to file a claim and settle as part of the resolution/liquidation process. Financial creditors are, from the very beginning, involved with assessing the Even though the IBC does not specifically allow or guarantee any differential viability of the corporate debtor. They can, and therefore do, engage in treatment to related parties creditors vis-à-vis normal creditors, but practically it restructuring of the loan as well as reorganization of the corporate debtor's business has been observed that most resolution plans do not provide for equitable payment when there is financial stress, which are things operational creditors do not and of the dues of such creditors. The courts in India, in many cases like Binani cannot do….financial creditors are clearly different from operational creditors and Industries Ltd. &Anr.24 v. Bank of Baroda & Anrand Rajputana Properties Pvt. Ltd. therefore, there is obviously an intelligible differentia between the two which has a v. Ultratech Cement Ltd. &Ors.,25 have held that similarly situated creditors cannot direct relation to the objects sought to be achieved by the Code. be discriminated in the resolution plan or in distribution of proceeds under section Treatment of statutory dues 53 of IBC. Section 5(21) of IBC defines operational debt as 'a claim in respect of the provision Constitutional validity of FC and OC of goods or services including employment or a debt in respect of the payment of The Indian jurisdiction is the first to lay down the distinction of FC and OC in an dues arising under any law for the time being in force and payable to the Central insolvency law, unlike the older and well-developed insolvency regimes like US, Government, any State Government or any local authority', thereby clearly stating UK, Singapore etc. Even though the OCs do not find a place on the CoC, unless in that any due payable to the Government will be classified as an operational debt. To certain circumstances, as already mentioned, there are still provisions present to clarify this issue, the Hon'ble NCLAT in the case of DG of Income Tax v. Synergies safeguards their interests. However, it is not without any surprise that the Dooray Automotive Ltd.29 held that the tax dues payable to the government have a differential rights of FC and OC under IBC has been challenged by several direct nexus with the operation of the company and hence come within the ambit of stakeholders in courts, calling sections 21 and 24 as 'discriminatory and manifestly operational debt under the provisions of IBC. 26 arbitrary in that operational creditors do not have even a single vote in the CoC. Further, according to the order of distribution of proceeds in liquidation At this juncture, it is worthwhile to refer to the final report of the Bankruptcy Law proceedings in Section 53 of IBC, the Government dues are ranked junior to Reforms Committee (BLRC), which had explained the rationale of only allowing secured creditors, workmen's dues, employee dues, and unsecured financial financial creditors the right to form a CoC, as “members of the creditors committee creditors dues. The intention of legislature of deprioritizing statutory dues over have to be creditors both with the capability to assess viability, as well as to be other dues is also in consonance with the text of the Preamble to the IBC i.e. willing to modify terms of existing liabilities in negotiations.”27 'balance the interests of all the stakeholders including alteration in the order of However, the Hon'ble Apex Court settled the debate in Swiss Ribbons Pvt. Ltd. & priority of payment of Government dues'. Anr. v. Union of India28 and held, “ Classification between financial creditor and Statutory authorities tend to take sequestration actions emanating from powers operational creditor is neither discriminatory, nor arbitrary, nor violative of under respective statute disregarding the CIRP or liquidation process and even article 14 of the Constitution of India”, explaining that. after the approval of the plan. Such powers are not available to non-statutory operational creditors. To this extent, various court judgments have upheld 24 Company Appeal (AT) (Insolvency) No. 82 of 2018. protection available to companies under section 14 against recovery actions by 25 CIVIL APPEAL No. 10998 OF 2018. creditors, which includes statutory authorities or OCs as well. Although the 26 Swiss Ribbons v. Union of India, 2019 SCC OnLine SC 73. 27 The report of the Bankruptcy Law Reforms Committee (November 2015), https://dea.gov.in/sites/default/files/BLRCReportVol1_04112015.pdf 28 Writ Petition (Civil) No. 99 Of 2018 29 Company Appeal (AT) (Insolvency) No. 205 of 2017

54 55 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Rajasthan High Court in case of Ultra Tech Nathdwara Cement Ltd. v. Union of was challenged by real estate developers in multiple forums, but eventually in case India,30 held that demand notices by Goods &Services Tax (GST) authorities, after of Pioneer Urban Land and Infrastructure v Union of India31, SC upheld the the approval of the plan 'are ex-facie illegal, arbitrary and per-se and cannot be constitutional validity of the same. The rights of home buyers to initiate CIRP was sustained', there continued to be sequestration actions in the form of demand recently curtailed through an amendment dated December 28, 2019 necessitating a notices, penalties and other enforcement actions, which was finally put to a halt joint application 'by not less than one hundred of such allottees under the same real after the Government introduced Section 32A in the IBC, in consonance with the estate project or not less than ten per cent. of the total number of such allottees report of the Insolvency Law Committee (February, 2020) and exempted the CD under the same real estate project, whichever is less'.32 However, this threshold of from being prosecuted for any offense committed prior to the commencement of application has also been challenged at SC and is currently subject to judicial CIRP. review.

Treatment of home buyers Treatment of Secured (including differential rights) and unsecured creditor under The definitions of financial debt and operational debt have limited boundaries IBC regime where certain dues of a business may neither be classified as financial debt or It is an established principle of insolvency law that the rights and ranking of operational debt. In large number of cases, a third class of creditors, i.e. home creditors existing prior to insolvency situation must be recognized and honored buyers in case of real estate companies found themselves having no control despite during the insolvency resolution. This principle is also enshrined in the United having a sizeable ratio of overall debt of an insolvent company and being a source Nations Commission on International Trade Law (UNCITRAL) Legislative Guide of financing for the real projects. IBC didn't have home buyers as a separate class of on Insolvency Law. One of the key objectives of an effective and efficient creditors and, by definition, it was neither a financial debt nor an operational debt, insolvency law include: within the domains of Section 5(8) and Section 5(21) of IBC respectively. The i. Recognition of existing creditor rights and establishment of clear rules IBBI later introduced new Claim Form F for submission of claims by creditors for ranking of priority claims'; other than financial and operational creditors, which re-emphasized that home ii. Ensuring equitable treatment of similarly situated creditors'. buyers are neither FC nor OC. Further, the World Bank's Principles for Effective insolvency and Creditor/Debtor Further, the Insolvency Law Committee deliberated on the subject in detail and regimes also include 'Recognize existing creditor rights and respect the priority of concluded that due to intrinsic nature of the home buyers' advance to builder, it may claims with a predictable and established process' as one of essential principles. fall under the definition of financial debt. It is also desirable to have such wider Such treatment brings certainty and predictability in the credit market and help interpretation to marry the objective of consumer protection under Real Estate creditors to manage their risk based on transparency. (Regulation and Development) Act, 2016 (RERA) and creditors protection under In IBC, even though section 53 provides for a clear order of priority for distribution IBC to elevate it to the position of financial debt. of assets under liquidation, there is no specific order for distribution of proceeds in Considering this, an explanation was inserted to Section 5(8)(f) through an a CIRP and the same is left to the commercial wisdom of the CoC. amendment dated June 6, 2018 treating 'amount raised from an allottee under a However, section 30(4) of IBC provides that the manner of proposed distribution real estate project' as deemed to be an amount having the 'commercial effect of a in a resolution plan 'may take into account the order of priority amongst creditors as borrowing', owing to which home buyers became FCs with voting rights in CoC. It

31 30 Civil Writ Petition No. 9480/2019 Writ Petition (Civil) No. 43 Of 2019 32 The Insolvency & Bankruptcy Code, 2016, Section 7(1), Second Proviso.

56 57 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Rajasthan High Court in case of Ultra Tech Nathdwara Cement Ltd. v. Union of was challenged by real estate developers in multiple forums, but eventually in case India,30 held that demand notices by Goods &Services Tax (GST) authorities, after of Pioneer Urban Land and Infrastructure v Union of India31, SC upheld the the approval of the plan 'are ex-facie illegal, arbitrary and per-se and cannot be constitutional validity of the same. The rights of home buyers to initiate CIRP was sustained', there continued to be sequestration actions in the form of demand recently curtailed through an amendment dated December 28, 2019 necessitating a notices, penalties and other enforcement actions, which was finally put to a halt joint application 'by not less than one hundred of such allottees under the same real after the Government introduced Section 32A in the IBC, in consonance with the estate project or not less than ten per cent. of the total number of such allottees report of the Insolvency Law Committee (February, 2020) and exempted the CD under the same real estate project, whichever is less'.32 However, this threshold of from being prosecuted for any offense committed prior to the commencement of application has also been challenged at SC and is currently subject to judicial CIRP. review.

Treatment of home buyers Treatment of Secured (including differential rights) and unsecured creditor under The definitions of financial debt and operational debt have limited boundaries IBC regime where certain dues of a business may neither be classified as financial debt or It is an established principle of insolvency law that the rights and ranking of operational debt. In large number of cases, a third class of creditors, i.e. home creditors existing prior to insolvency situation must be recognized and honored buyers in case of real estate companies found themselves having no control despite during the insolvency resolution. This principle is also enshrined in the United having a sizeable ratio of overall debt of an insolvent company and being a source Nations Commission on International Trade Law (UNCITRAL) Legislative Guide of financing for the real projects. IBC didn't have home buyers as a separate class of on Insolvency Law. One of the key objectives of an effective and efficient creditors and, by definition, it was neither a financial debt nor an operational debt, insolvency law include: within the domains of Section 5(8) and Section 5(21) of IBC respectively. The i. Recognition of existing creditor rights and establishment of clear rules IBBI later introduced new Claim Form F for submission of claims by creditors for ranking of priority claims'; other than financial and operational creditors, which re-emphasized that home ii. Ensuring equitable treatment of similarly situated creditors'. buyers are neither FC nor OC. Further, the World Bank's Principles for Effective insolvency and Creditor/Debtor Further, the Insolvency Law Committee deliberated on the subject in detail and regimes also include 'Recognize existing creditor rights and respect the priority of concluded that due to intrinsic nature of the home buyers' advance to builder, it may claims with a predictable and established process' as one of essential principles. fall under the definition of financial debt. It is also desirable to have such wider Such treatment brings certainty and predictability in the credit market and help interpretation to marry the objective of consumer protection under Real Estate creditors to manage their risk based on transparency. (Regulation and Development) Act, 2016 (RERA) and creditors protection under In IBC, even though section 53 provides for a clear order of priority for distribution IBC to elevate it to the position of financial debt. of assets under liquidation, there is no specific order for distribution of proceeds in Considering this, an explanation was inserted to Section 5(8)(f) through an a CIRP and the same is left to the commercial wisdom of the CoC. amendment dated June 6, 2018 treating 'amount raised from an allottee under a However, section 30(4) of IBC provides that the manner of proposed distribution real estate project' as deemed to be an amount having the 'commercial effect of a in a resolution plan 'may take into account the order of priority amongst creditors as borrowing', owing to which home buyers became FCs with voting rights in CoC. It

31 30 Civil Writ Petition No. 9480/2019 Writ Petition (Civil) No. 43 Of 2019 32 The Insolvency & Bankruptcy Code, 2016, Section 7(1), Second Proviso.

56 57 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

laid down in sub-section (1) of section 53, including the priority and value of the relinquish its security interest to the liquidation estate or alternatively realize its security interest of a secured creditor'. Section 53 does accord priority to secured security. Accordingly, section 52(4) reads- creditors over unsecured creditors, but it makes no mention about treatment of 'creditors may enforce, realise, settle, compromise or deal with the secured assets creditors with differential rights over security. Therefore, there remain some in accordance with such law as applicable to the security interest being realized unanswered questions regarding the rights of secured creditor vis-a-vis other and to the secured creditor and apply the proceeds to recover the debts due to it'. secured creditors junior to them. Further, section 53(1) of IBC, which lays down the waterfall mechanism for Significance of the Inter-se rights of Secured Creditors distribution of proceeds in liquidation, opens with a non-obstante clause, stating It is not a disputed fact that senior or secured debt has a higher priority than the “overriding anything to the contrary contained in any law enacted by the subordinated debt.33 An enterprise can raise funds against same collateral from Parliament or any State Legislature for the time being in force.” Here, it is multiple creditors by way of giving preferential charge to one over another, and by important to note that the waterfall mechanism places secured creditors pari-passu obtaining consent from the superior charge holders for any sharing of collateral. It with workmen' dues, thereby making no mention of the inter-se rights of the is, therefore, common to understand that a creditor with the first charge over the secured creditors and how such differential rights shall be treated for distribution of same collateral would be paid first from such secured asset followed by second proceeds. Hence, going by the provisions of the IBC, it is uncertain as to whether charge holders and so on. the IBC clearly disregards inter-se rights of secured creditors, as envisaged in section 48 of Transfer of Property Act, 1882. In legal parlance this is best represented as the doctrine of priority of rights, i.e. qui prior est tempore potior est jure (whomever is first in time is first in right or one It is also a matter of debate, as to whether the secured creditor must relinquish its who is prior in time has a superior right in law). According to section 48 of the security in favor of collective liquidation proceedings or must realize the security Transfer of Property Act, 1882 - to pay off the debt. One school of thought emphasizes the choice of the secured creditor who voluntarily relinquishes its security interest in favor of common pool Where a person purports to create by transfer at different times rights in or over the of liquidation estate. However, if the secured creditor is of the opinion that, same immoveable property, and such rights cannot all exist or be exercised to their recovery under collective liquidation process is higher than enforcement of full extent together, each later created right shall, in the absence of a special security outside of it, it would not refrain from being a part of liquidation pool. This contract or reservation binding the earlier transferees, be subject to the rights school of thought, by prospectively asking the secured creditors to weigh their previously created.' interests between the two ends may often discourage such secured creditors to However, even after such clarity, preferential rights over property have been a come into liquidation for common interest, thereby defeating the possibility of subject of debate in various court judgments. Further, the IBC is also not clear on collective recovery action which any insolvency and liquidation law envisage. the issue of treatment of preferential charge/rights of creditors during liquidation On the other hand, the other school of thoughts suggests that the legislature would and winding up processes. not have intended to curtail a very essential and fundamental right of the secured Provisions and Jurisprudence under IBC creditor and put all secured creditors in the same class. If such were the intention, Under IBC, section 52(1) provides an option to the secured creditors to either the legislature would have mentioned it clearly. To counter this argument, it may be said that all insolvency laws limit the levels of distribution of the proceeds to a minimum, as mentioned in the waterfall mechanism under section 53 of IBC. The 33 SUBORDINATED DEBT—NATURE AND ENFORCEMENT, ByEdward Everett, The Business Lawyer , absence of specific level for preferential rights would mean it has to be disregarded. July 1965, Vol. 20, No. 4, pp. 953-987, published by: American Bar Association

58 59 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

laid down in sub-section (1) of section 53, including the priority and value of the relinquish its security interest to the liquidation estate or alternatively realize its security interest of a secured creditor'. Section 53 does accord priority to secured security. Accordingly, section 52(4) reads- creditors over unsecured creditors, but it makes no mention about treatment of 'creditors may enforce, realise, settle, compromise or deal with the secured assets creditors with differential rights over security. Therefore, there remain some in accordance with such law as applicable to the security interest being realized unanswered questions regarding the rights of secured creditor vis-a-vis other and to the secured creditor and apply the proceeds to recover the debts due to it'. secured creditors junior to them. Further, section 53(1) of IBC, which lays down the waterfall mechanism for Significance of the Inter-se rights of Secured Creditors distribution of proceeds in liquidation, opens with a non-obstante clause, stating It is not a disputed fact that senior or secured debt has a higher priority than the “overriding anything to the contrary contained in any law enacted by the subordinated debt.33 An enterprise can raise funds against same collateral from Parliament or any State Legislature for the time being in force.” Here, it is multiple creditors by way of giving preferential charge to one over another, and by important to note that the waterfall mechanism places secured creditors pari-passu obtaining consent from the superior charge holders for any sharing of collateral. It with workmen' dues, thereby making no mention of the inter-se rights of the is, therefore, common to understand that a creditor with the first charge over the secured creditors and how such differential rights shall be treated for distribution of same collateral would be paid first from such secured asset followed by second proceeds. Hence, going by the provisions of the IBC, it is uncertain as to whether charge holders and so on. the IBC clearly disregards inter-se rights of secured creditors, as envisaged in section 48 of Transfer of Property Act, 1882. In legal parlance this is best represented as the doctrine of priority of rights, i.e. qui prior est tempore potior est jure (whomever is first in time is first in right or one It is also a matter of debate, as to whether the secured creditor must relinquish its who is prior in time has a superior right in law). According to section 48 of the security in favor of collective liquidation proceedings or must realize the security Transfer of Property Act, 1882 - to pay off the debt. One school of thought emphasizes the choice of the secured creditor who voluntarily relinquishes its security interest in favor of common pool Where a person purports to create by transfer at different times rights in or over the of liquidation estate. However, if the secured creditor is of the opinion that, same immoveable property, and such rights cannot all exist or be exercised to their recovery under collective liquidation process is higher than enforcement of full extent together, each later created right shall, in the absence of a special security outside of it, it would not refrain from being a part of liquidation pool. This contract or reservation binding the earlier transferees, be subject to the rights school of thought, by prospectively asking the secured creditors to weigh their previously created.' interests between the two ends may often discourage such secured creditors to However, even after such clarity, preferential rights over property have been a come into liquidation for common interest, thereby defeating the possibility of subject of debate in various court judgments. Further, the IBC is also not clear on collective recovery action which any insolvency and liquidation law envisage. the issue of treatment of preferential charge/rights of creditors during liquidation On the other hand, the other school of thoughts suggests that the legislature would and winding up processes. not have intended to curtail a very essential and fundamental right of the secured Provisions and Jurisprudence under IBC creditor and put all secured creditors in the same class. If such were the intention, Under IBC, section 52(1) provides an option to the secured creditors to either the legislature would have mentioned it clearly. To counter this argument, it may be said that all insolvency laws limit the levels of distribution of the proceeds to a minimum, as mentioned in the waterfall mechanism under section 53 of IBC. The 33 SUBORDINATED DEBT—NATURE AND ENFORCEMENT, ByEdward Everett, The Business Lawyer , absence of specific level for preferential rights would mean it has to be disregarded. July 1965, Vol. 20, No. 4, pp. 953-987, published by: American Bar Association

58 59 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Moreover, section 53(2) apparently disregards all contractual arrangements expectations of creditors and encourage greater predictability in commercial including differential rights with these texts: 'any contractual arrangements relationship'. between recipients under sub-section (1) with equal ranking, if disrupting the order Further paragraph 21.4 states - of priority under that sub-section shall be disregarded by the liquidator'. To this 'The number of priority classes should be kept to minimum so that rights and extent, some insolvency laws around the world also tend to restrict rights of expectations of classes created prior to insolvency are not diluted.' secured creditors to safeguard common interest of all creditors, or the rescue of the 34 'This gives a cue why the legislature may have deemed it not necessary to business enterprise. specifically mention treatment of differential rights in the waterfall mechanism. However, such interpretations, pertaining to restriction of the individual rights of Such a treatment or design is also consistent with the principles enshrined in the secured creditors in the collective interests of all creditors, may be detrimental to UNCITRAL's Legislative guide on Insolvency Law, which are recommendatory in the entire essence of the concept of security. If this argument is relied on, then all nature. The Part II of the guide contains principles for treatment of 'Assets included forms of differential rights including rights of shareholders, and unsecured in the insolvency estate'. Para II.A.2.(b) discusses the treatment of encumbered creditors may be disregarded. A proposition such as this which abridges the rightful assets. Some laws mandate the inclusion of encumbered assets to liquidation estate preference on the collateral shall create uncertainty for credit market. as is desirable for greater recovery where such assets are critical for running the Creation of charge is extremely important to protect the rights of the secured business. Therefore, wherever law mandates inclusion of encumbered assets in creditors. As per section 77(3) of the Companies Act, 2013, it is mandatory to liquidation estate, it must provide certain protection to the secured creditors. register all charges: To quote from the same paragraph, “An insolvency law should make it clear that 'Notwithstanding anything contained in any other law for the time being in force, such an inclusion will not deprive secured creditors of their rights in the no charge created by a company shall be taken into account by the liquidator or any encumbered assets, even if it does operate to limit the exercise of those rights (e.g. other creditor unless it is duly registered under sub-section (1) and a certificate of postponement by operation of the stay) and should specifically ensure the registration of such charge is given by the Registrar under sub-section (2)'. protection of the rights of secured creditors in encumbered assets.” This underpins the importance of charge (of all ranks) and its registration thereof, Having said that, some insolvency laws do provide that encumbered assets are for being considered by the liquidator during liquidation proceedings under the unaffected by insolvency proceedings and secured creditors may proceed to Companies Act, 2013. It may be incongruent to conclude that provisions of IBC enforce their legal and contractual rights.The IBC marries both principles and would treat such charge any differently during the liquidation process. allows the secured creditor to exercise its discretion to either enforce security Further, it may be worth noting the observations in the Report of the Expert outside liquidation or pool its assets in liquidation estate for collective recovery. 35 Committee on Company Law. Para 21.2 of the said report under the heading In the case of SIDCO Leathers Limited & Others,36 (“Sidco Case”) the Hon'ble SC Claims Resolution: Treatment of Stake Holders Rights and priorities on dealt a similar issue under section 529A of the Companies Act, 1956 and went liquidation states that 'Rights and priorities of creditors established prior to ahead to state that, “Merely because Section 529 does not specifically provide for insolvency under commercial laws should be upheld to preserve the legitimate the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of Section 48 of the Transfer of Property Act in relation to 34 For instance, US, please refer to John C. Anderson, Secured Creditors: Their Rights and Remedies Under a company, which has undergone liquidation, shall stand obliterated”. Chapter XI of the Bankruptcy Act, 36 La. L. Rev. (1975) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol36/iss1/5

31 35 http://www.mca.gov.in/MinistryV2/restructuring+and+liquidation.html Appeal (civil) 2332 of 2006

60 61 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Moreover, section 53(2) apparently disregards all contractual arrangements expectations of creditors and encourage greater predictability in commercial including differential rights with these texts: 'any contractual arrangements relationship'. between recipients under sub-section (1) with equal ranking, if disrupting the order Further paragraph 21.4 states - of priority under that sub-section shall be disregarded by the liquidator'. To this 'The number of priority classes should be kept to minimum so that rights and extent, some insolvency laws around the world also tend to restrict rights of expectations of classes created prior to insolvency are not diluted.' secured creditors to safeguard common interest of all creditors, or the rescue of the 34 'This gives a cue why the legislature may have deemed it not necessary to business enterprise. specifically mention treatment of differential rights in the waterfall mechanism. However, such interpretations, pertaining to restriction of the individual rights of Such a treatment or design is also consistent with the principles enshrined in the secured creditors in the collective interests of all creditors, may be detrimental to UNCITRAL's Legislative guide on Insolvency Law, which are recommendatory in the entire essence of the concept of security. If this argument is relied on, then all nature. The Part II of the guide contains principles for treatment of 'Assets included forms of differential rights including rights of shareholders, and unsecured in the insolvency estate'. Para II.A.2.(b) discusses the treatment of encumbered creditors may be disregarded. A proposition such as this which abridges the rightful assets. Some laws mandate the inclusion of encumbered assets to liquidation estate preference on the collateral shall create uncertainty for credit market. as is desirable for greater recovery where such assets are critical for running the Creation of charge is extremely important to protect the rights of the secured business. Therefore, wherever law mandates inclusion of encumbered assets in creditors. As per section 77(3) of the Companies Act, 2013, it is mandatory to liquidation estate, it must provide certain protection to the secured creditors. register all charges: To quote from the same paragraph, “An insolvency law should make it clear that 'Notwithstanding anything contained in any other law for the time being in force, such an inclusion will not deprive secured creditors of their rights in the no charge created by a company shall be taken into account by the liquidator or any encumbered assets, even if it does operate to limit the exercise of those rights (e.g. other creditor unless it is duly registered under sub-section (1) and a certificate of postponement by operation of the stay) and should specifically ensure the registration of such charge is given by the Registrar under sub-section (2)'. protection of the rights of secured creditors in encumbered assets.” This underpins the importance of charge (of all ranks) and its registration thereof, Having said that, some insolvency laws do provide that encumbered assets are for being considered by the liquidator during liquidation proceedings under the unaffected by insolvency proceedings and secured creditors may proceed to Companies Act, 2013. It may be incongruent to conclude that provisions of IBC enforce their legal and contractual rights.The IBC marries both principles and would treat such charge any differently during the liquidation process. allows the secured creditor to exercise its discretion to either enforce security Further, it may be worth noting the observations in the Report of the Expert outside liquidation or pool its assets in liquidation estate for collective recovery. 35 Committee on Company Law. Para 21.2 of the said report under the heading In the case of SIDCO Leathers Limited & Others,36 (“Sidco Case”) the Hon'ble SC Claims Resolution: Treatment of Stake Holders Rights and priorities on dealt a similar issue under section 529A of the Companies Act, 1956 and went liquidation states that 'Rights and priorities of creditors established prior to ahead to state that, “Merely because Section 529 does not specifically provide for insolvency under commercial laws should be upheld to preserve the legitimate the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of Section 48 of the Transfer of Property Act in relation to 34 For instance, US, please refer to John C. Anderson, Secured Creditors: Their Rights and Remedies Under a company, which has undergone liquidation, shall stand obliterated”. Chapter XI of the Bankruptcy Act, 36 La. L. Rev. (1975) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol36/iss1/5

31 35 http://www.mca.gov.in/MinistryV2/restructuring+and+liquidation.html Appeal (civil) 2332 of 2006

60 61 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Not with standing the view of the courts in the erstwhile Companies law, the belongs. All the above-mentioned rulings have touched upon the issue of inter-se jurisprudence under the present IBC is not in consonance with protection of inter- rights of secured creditors for resolution purpose but for liquidation scenario, it is se rights of secured creditors in the resolution plan. The Hon'ble National still to be seen how the courts will opine Company Law Appellate Tribunal (“NCLAT”) in Central Bank of India v. RP of On one hand, if the common law principles point towards honoring differential Sirpur Paper Mills Ltd, held that the order of priority of creditors, as specified in rights of secured creditors, on the other hand, the stand taken by the Indian courts to the waterfall mechanism under section 53 of IBC, would not apply to distribution import the principle of equitable treatment for all creditors within the same class under the resolution plan, in absence of an explicit reference in the law, which cannot be totally ruled out. Some stakeholders would continue to feel that the real presently has been made optional under section 30(2)(b) of IBC, as discussed intention of the law is to disregard preferential rights in view of providing priority above. The IBC, therefore, lends credence to the viewpoint of according primacy to the collective liquidation recovery. However, collective proceedings, as to the resolution applicant and the CoC in determining the order of priority of opposed to individual creditor actions, result in an overall higher recovery for all distribution of proceeds in a resolution plan. creditors, particularly in the liquidation proceeding of the CD, and hence there In the matter of Employees of Jyoti Structures Limited v. DBS Bank Ltd,37 the court remains incentive for legislature to remain inclined towards the secured creditors refused to recognize the DBS' first charge to be superior to junior charge holders foregoing their preferential rights in favor of all secured creditors. It may however under the CIRP. While the court did recognize Sidco case and UNCITRAL be counter-productive if many creditors feel their rights are being deprived and principles, but it ruled that “Financial Creditor claims are decided as per provisions would rather choose for enforcement outside liquidation process. This issue is still of the IBC. All the 'Financial Creditors' are treated to be similar, if similarly open for scrutiny and clarification is awaited, but the actions of creditors in many situated”. An appeal to the Hon'ble SC was rejected on similar grounds. ongoing IBC cases might provide some much needed guidance.

Further, in the case of DBS Bank Ltd. Singapore v. Mr. Shailendra Ajmera RP of The Curious Case of Guarantees under IBC Ruchi Soya Industries Limited,38 the DBS Bank has approached the SC, appealing In the context of guarantee's contract, there are majorly four issues which are still the NCLAT order, on the grounds that the resolution plan has been approved contentious in IBC regime, some of which has been dealt and resolved by without considering the security value based on sole first charge held by it over courts/regulators, while some remain unresolved. some of the fixed assets. If DBS were to enforce its security, it would fetch 90% recovery but under the resolution plan it is getting lower recovery, and that a. Liability of surety/guarantor towards obligee /creditor with respect to imprudent lenders have been rewarded at the cost of DBS Bank. Even though the the Obligor/principal borrower which is under CIRP Hon'ble SC is yet to adjudge on the issue, it has still approved the resolution plan b. The interplay of IBC moratorium with contracts of guarantee and ordered the amount claimed by DBS Bank to be kept in an escrow account. In the cases of State Bank of India v. Ramakrishnan and State Bank of India v. In an another recent and significant case of Essar Steel India Limited v. Satish Rajendra Kumar,40 the Hon'ble NCLAT has held that the guarantor would have Kumar Gupta & Ors,39 the SC has reiterated the principle of equitable treatment protection of moratorium under section 14 of IBC, thereby resulting in freezing of within the same class of creditors, irrespective of a sub-class to which such creditor the guarantor's liability till principal borrower is resolved under CIRP and rendering the guarantee of no use. However, to the contrary, the Bombay High Court in a subsequent ruling in Sicom Investments and Finance Limited v. Rajesh 37 Company Appeal (AT) (Insolvency) No. 464 of 2018 38 Company Appeal (AT) (Insolvency) No. 788 of 2019

39 Civil Appeal No. 8766-67 Of 2019 40 CIVIL APPEAL NO. 3595 OF 2018

62 63 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Not with standing the view of the courts in the erstwhile Companies law, the belongs. All the above-mentioned rulings have touched upon the issue of inter-se jurisprudence under the present IBC is not in consonance with protection of inter- rights of secured creditors for resolution purpose but for liquidation scenario, it is se rights of secured creditors in the resolution plan. The Hon'ble National still to be seen how the courts will opine Company Law Appellate Tribunal (“NCLAT”) in Central Bank of India v. RP of On one hand, if the common law principles point towards honoring differential Sirpur Paper Mills Ltd, held that the order of priority of creditors, as specified in rights of secured creditors, on the other hand, the stand taken by the Indian courts to the waterfall mechanism under section 53 of IBC, would not apply to distribution import the principle of equitable treatment for all creditors within the same class under the resolution plan, in absence of an explicit reference in the law, which cannot be totally ruled out. Some stakeholders would continue to feel that the real presently has been made optional under section 30(2)(b) of IBC, as discussed intention of the law is to disregard preferential rights in view of providing priority above. The IBC, therefore, lends credence to the viewpoint of according primacy to the collective liquidation recovery. However, collective proceedings, as to the resolution applicant and the CoC in determining the order of priority of opposed to individual creditor actions, result in an overall higher recovery for all distribution of proceeds in a resolution plan. creditors, particularly in the liquidation proceeding of the CD, and hence there In the matter of Employees of Jyoti Structures Limited v. DBS Bank Ltd,37 the court remains incentive for legislature to remain inclined towards the secured creditors refused to recognize the DBS' first charge to be superior to junior charge holders foregoing their preferential rights in favor of all secured creditors. It may however under the CIRP. While the court did recognize Sidco case and UNCITRAL be counter-productive if many creditors feel their rights are being deprived and principles, but it ruled that “Financial Creditor claims are decided as per provisions would rather choose for enforcement outside liquidation process. This issue is still of the IBC. All the 'Financial Creditors' are treated to be similar, if similarly open for scrutiny and clarification is awaited, but the actions of creditors in many situated”. An appeal to the Hon'ble SC was rejected on similar grounds. ongoing IBC cases might provide some much needed guidance.

Further, in the case of DBS Bank Ltd. Singapore v. Mr. Shailendra Ajmera RP of The Curious Case of Guarantees under IBC Ruchi Soya Industries Limited,38 the DBS Bank has approached the SC, appealing In the context of guarantee's contract, there are majorly four issues which are still the NCLAT order, on the grounds that the resolution plan has been approved contentious in IBC regime, some of which has been dealt and resolved by without considering the security value based on sole first charge held by it over courts/regulators, while some remain unresolved. some of the fixed assets. If DBS were to enforce its security, it would fetch 90% recovery but under the resolution plan it is getting lower recovery, and that a. Liability of surety/guarantor towards obligee /creditor with respect to imprudent lenders have been rewarded at the cost of DBS Bank. Even though the the Obligor/principal borrower which is under CIRP Hon'ble SC is yet to adjudge on the issue, it has still approved the resolution plan b. The interplay of IBC moratorium with contracts of guarantee and ordered the amount claimed by DBS Bank to be kept in an escrow account. In the cases of State Bank of India v. Ramakrishnan and State Bank of India v. In an another recent and significant case of Essar Steel India Limited v. Satish Rajendra Kumar,40 the Hon'ble NCLAT has held that the guarantor would have Kumar Gupta & Ors,39 the SC has reiterated the principle of equitable treatment protection of moratorium under section 14 of IBC, thereby resulting in freezing of within the same class of creditors, irrespective of a sub-class to which such creditor the guarantor's liability till principal borrower is resolved under CIRP and rendering the guarantee of no use. However, to the contrary, the Bombay High Court in a subsequent ruling in Sicom Investments and Finance Limited v. Rajesh 37 Company Appeal (AT) (Insolvency) No. 464 of 2018 38 Company Appeal (AT) (Insolvency) No. 788 of 2019

39 Civil Appeal No. 8766-67 Of 2019 40 CIVIL APPEAL NO. 3595 OF 2018

62 63 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Creditor Rights2 under the Insolvency & Bankruptcy Code, 2016

Kumar Drolia41 held that the guarantor will not be able to avail the protection of successful resolution applicant (SRA) as untenable, since section 31 states moratorium, just on the initiation of CIRP against the CD, and its protection will be resolution plan as 'binding on all stakeholders, including guarantors' and 'SRA available to a guarantor only if insolvency resolution is initiated against such cannot suddenly be faced with “undecided” claims after the resolution plan guarantor. This means a creditor can simultaneously initiate IBC proceedings submitted by him has been accepted'. Even though in this case, the SC refused to against the principal borrower and invoke other non-IBC recovery action against render a decision on the rights of the creditors to act against the personal guarantors guarantor, and vice-versa. to recover the remaining portion of their debt, in a separate case of State Bank of 44 Subsequently, through the amendment dated 6th June, 2018, a clarificatory section India v. V. Ramakrishnan, SC set aside NCLAT's judgment that extinguished the 14(3)(b) was inserted to specifically exclude a guarantor from the protection of rights of creditors against personal guarantor. moratorium of CIRP, impliedly granting sanction for parallel CIRP proceedings The principles of co-extensive nature of surety's and principal borrower's liability against the guarantor. In furtherance of the same, section 60(2) and section 60(3) and subrogation of rights of creditors/obligors go hand in hand. If the guarantor is have been amended to allow petition or transfer of 'insolvency resolution or not allowed to proceed against the CD or the SRA for recovering the amount he/she liquidation or bankruptcy of a corporate guarantor or personal guarantor' before has paid under guarantee, then accordingly he/she must also be discharged of any the relevant NCLT of the CD. However, the NCLAT in the case of Dr. Vishnu residual unrecovered liability of the creditors as part of the same process. It will be Kumar Agarwal v. M/s Piramal Enterprises Limited42 has held that the creditor interesting to see how the courts in India finally view this contentious point to attain cannot file insolvency application against both CD and the guarantor for the same some clarity for clear guidance. claim. Even though this judgment has been challenged in SC and the ruling is yet to come, but till then the NCLAT judgment has redefined and further complicated the COMPARISON OF CREDITOR RIGHTS IN INDIA WITH US AND UK principle of co-extensive liability of surety and obligor, in the context of CIRP The authors, in this article, have considered various contentious issues under IBC, under IBC. which may attain clarity in future, if certain amendments are made. However, to c. Subrogation of Creditor's right onto the surety and extinguishment of this extent, it is also pertinent to bring about a comparative insolvency analysis on guarantee these pertinent issues vis-à-vis the jurisdictions of US and UK, and take guidance,

43 wherever appropriate. The Hon'ble NCLAT in Lalit Mishra &Ors. v. Sharon Bio Medicine Ltd. denied the promoters the automatic subrogation of rights of the creditors against the 1 principal borrower to 'prevent promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes. Accordingly, promoters ISSUE : Treatment of OC at par with FC cannot expect any provisions in the resolution plan towards their liability to the TREATMENT IN US : The US Bankruptcy Code, 1978 does not recognize the concepts creditors by virtue of guarantee contract. of OCand FC. All creditors whose dues are impaired enjoy voting rights, with secured Further, the SC in the case of Essar Steel India Limited v. Satish Kumar Gupta & creditors having superior priority over unsecured creditors over distribution of proceeds. Ors. also held that the surety's claim on account of subrogation against the TREATMENT IN UK : The situation is similar to that of the US. RECOMMENDATION : The SC in the Swiss Ribbon case held the distinction between

41 C.P. No. IB-29/(ND)/2018 OC and FC vis-à-vis their relevant rights, as not discriminatory or violative of the Indian 42 Company Appeal (AT) (Insolvency) No. 346 of 2018

43 Company Appeal (AT) (Insolvency) No. 164 of 2018 44 Company Appeal (AT) (Insolvency) No. 213 of 2017

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Kumar Drolia41 held that the guarantor will not be able to avail the protection of successful resolution applicant (SRA) as untenable, since section 31 states moratorium, just on the initiation of CIRP against the CD, and its protection will be resolution plan as 'binding on all stakeholders, including guarantors' and 'SRA available to a guarantor only if insolvency resolution is initiated against such cannot suddenly be faced with “undecided” claims after the resolution plan guarantor. This means a creditor can simultaneously initiate IBC proceedings submitted by him has been accepted'. Even though in this case, the SC refused to against the principal borrower and invoke other non-IBC recovery action against render a decision on the rights of the creditors to act against the personal guarantors guarantor, and vice-versa. to recover the remaining portion of their debt, in a separate case of State Bank of 44 Subsequently, through the amendment dated 6th June, 2018, a clarificatory section India v. V. Ramakrishnan, SC set aside NCLAT's judgment that extinguished the 14(3)(b) was inserted to specifically exclude a guarantor from the protection of rights of creditors against personal guarantor. moratorium of CIRP, impliedly granting sanction for parallel CIRP proceedings The principles of co-extensive nature of surety's and principal borrower's liability against the guarantor. In furtherance of the same, section 60(2) and section 60(3) and subrogation of rights of creditors/obligors go hand in hand. If the guarantor is have been amended to allow petition or transfer of 'insolvency resolution or not allowed to proceed against the CD or the SRA for recovering the amount he/she liquidation or bankruptcy of a corporate guarantor or personal guarantor' before has paid under guarantee, then accordingly he/she must also be discharged of any the relevant NCLT of the CD. However, the NCLAT in the case of Dr. Vishnu residual unrecovered liability of the creditors as part of the same process. It will be Kumar Agarwal v. M/s Piramal Enterprises Limited42 has held that the creditor interesting to see how the courts in India finally view this contentious point to attain cannot file insolvency application against both CD and the guarantor for the same some clarity for clear guidance. claim. Even though this judgment has been challenged in SC and the ruling is yet to come, but till then the NCLAT judgment has redefined and further complicated the COMPARISON OF CREDITOR RIGHTS IN INDIA WITH US AND UK principle of co-extensive liability of surety and obligor, in the context of CIRP The authors, in this article, have considered various contentious issues under IBC, under IBC. which may attain clarity in future, if certain amendments are made. However, to c. Subrogation of Creditor's right onto the surety and extinguishment of this extent, it is also pertinent to bring about a comparative insolvency analysis on guarantee these pertinent issues vis-à-vis the jurisdictions of US and UK, and take guidance,

43 wherever appropriate. The Hon'ble NCLAT in Lalit Mishra &Ors. v. Sharon Bio Medicine Ltd. denied the promoters the automatic subrogation of rights of the creditors against the 1 principal borrower to 'prevent promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes. Accordingly, promoters ISSUE : Treatment of OC at par with FC cannot expect any provisions in the resolution plan towards their liability to the TREATMENT IN US : The US Bankruptcy Code, 1978 does not recognize the concepts creditors by virtue of guarantee contract. of OCand FC. All creditors whose dues are impaired enjoy voting rights, with secured Further, the SC in the case of Essar Steel India Limited v. Satish Kumar Gupta & creditors having superior priority over unsecured creditors over distribution of proceeds. Ors. also held that the surety's claim on account of subrogation against the TREATMENT IN UK : The situation is similar to that of the US. RECOMMENDATION : The SC in the Swiss Ribbon case held the distinction between

41 C.P. No. IB-29/(ND)/2018 OC and FC vis-à-vis their relevant rights, as not discriminatory or violative of the Indian 42 Company Appeal (AT) (Insolvency) No. 346 of 2018

43 Company Appeal (AT) (Insolvency) No. 164 of 2018 44 Company Appeal (AT) (Insolvency) No. 213 of 2017

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Constitution. However, the authors believe that, in cases with relatively high number of 4 OCs, such distinction between the OC and FC may lead to a sub-optimal resolution process by FC led CoC. ISSUE : Treatment of OCs /FCs dues to related parties Further, the applicability of the waterfall mechanism to the resolution proceeds is still not TREATMENT IN US : Under the US Insolvency Law, there is no distinction accorded to mandatory, and just optional under section 30(2) of the IBC. Hence, the authors believe that the creditors, which are related/connected to the CD and they are entitled to vote like the certain guidance need to be there to provide some clarity on the order of priority on other creditors. distribution of proceeds amongst the creditors in a resolution plan. TREATMENT IN UK : Under the UK Insolvency Act, 1986, there is per se no distinction of creditors, which are related/connected to the CD and they are entitled to vote like the 2 other creditors. However, in Company Voluntary Arrangement (CVA), the plan shall be ISSUE : Inter-se rights of creditors with differential security ranking approved only when at least 50% of the connected creditors give approval. TREATMENT IN US : The US Bankruptcy Code, 1978 acknowledges differential RECOMMENDATION : The creditors, which are related to the CD, are not allowed to ranking of security, and superior ranked debts are paid in priority to subordinate secured vote in CoC. However, the authors believe that there needs to be clarity in law about the debt. distribution of resolution/ liquidation proceeds among the related party creditors vis-à-vis other creditors. TREATMENT IN UK : Similar to that of US RECOMMENDATION : The IBC is silent on this issue, both under resolution and 5 liquidation scenarios. It has resulted in multiple interpretation by courts, latest being the SC's order in case of Jyoti Structures, whereby it rejected DBS Bank's plea to honour first ISSUE : Lack of clarity over treatment of creditor's /obligee's dues in surety's books once ranking security over subordinate debt while impending appeal DBS bank for distribution guarantee is invoked based on its first charge on assets in case of Ruchi Soya.Therefore, the authors believe that an amendment to the IBC, pertaining to the inter-se rights of secured creditors, would bring TREATMENT IN US : Under the US Insolvency Law, the creditors shall take both further clarity. obligor and the surety into bankruptcy proceedings for unpaid dues. The liability of suretyis not discharged because of resolution/ liquidation of obligor alone. 3 TREATMENT IN UK : Under the UK Insolvency Act, 1986, the creditor/obligee has right to recover unpaid dues from surety for the unpaid portion after the resolution/ ISSUE : Treatment of home buyer as a financial creditor liquidation of surety. Action against surety shall result in subrogation of creditors' rights, TREATMENT IN US : Under the US Insolvency Law, there is no separate class of however surety cannot file claims against the obligor till the guarantee is invoked. creditors as home buyers. RECOMMENDATION : As already mentioned in the above segments of the article, this TREATMENT IN UK : Under the UK Insolvency Act, 1986, there is no separate class of issue is highly contentious in India. However, India may choose to opt from either of the creditors as home buyers. two approaches - RECOMMENDATION : With the recent amendment in IBC to provide a certain 1. US approach, where- parallel insolvency proceedings can be initiated by the threshold for homebuyers to be satisfied before they initiate CIRP, the rights of an creditors against the obligor and surety. individual homebuyer as a FC have been severely restricted. Further, a large number of 2. UK approach, where- the creditor has rights against surety till all dues are homebuyers as creditors entail operational difficulty during voting and consensus building. To this extent, the authors believe that an IBC amendment to lower the voting threshold for cleared but surety cannot have recourse, if the obligor has emerged from resolution in cases where COC consists of a large proportion of home buyers would resolve resolution or liquidation. the situation.

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Constitution. However, the authors believe that, in cases with relatively high number of 4 OCs, such distinction between the OC and FC may lead to a sub-optimal resolution process by FC led CoC. ISSUE : Treatment of OCs /FCs dues to related parties Further, the applicability of the waterfall mechanism to the resolution proceeds is still not TREATMENT IN US : Under the US Insolvency Law, there is no distinction accorded to mandatory, and just optional under section 30(2) of the IBC. Hence, the authors believe that the creditors, which are related/connected to the CD and they are entitled to vote like the certain guidance need to be there to provide some clarity on the order of priority on other creditors. distribution of proceeds amongst the creditors in a resolution plan. TREATMENT IN UK : Under the UK Insolvency Act, 1986, there is per se no distinction of creditors, which are related/connected to the CD and they are entitled to vote like the 2 other creditors. However, in Company Voluntary Arrangement (CVA), the plan shall be ISSUE : Inter-se rights of creditors with differential security ranking approved only when at least 50% of the connected creditors give approval. TREATMENT IN US : The US Bankruptcy Code, 1978 acknowledges differential RECOMMENDATION : The creditors, which are related to the CD, are not allowed to ranking of security, and superior ranked debts are paid in priority to subordinate secured vote in CoC. However, the authors believe that there needs to be clarity in law about the debt. distribution of resolution/ liquidation proceeds among the related party creditors vis-à-vis other creditors. TREATMENT IN UK : Similar to that of US RECOMMENDATION : The IBC is silent on this issue, both under resolution and 5 liquidation scenarios. It has resulted in multiple interpretation by courts, latest being the SC's order in case of Jyoti Structures, whereby it rejected DBS Bank's plea to honour first ISSUE : Lack of clarity over treatment of creditor's /obligee's dues in surety's books once ranking security over subordinate debt while impending appeal DBS bank for distribution guarantee is invoked based on its first charge on assets in case of Ruchi Soya.Therefore, the authors believe that an amendment to the IBC, pertaining to the inter-se rights of secured creditors, would bring TREATMENT IN US : Under the US Insolvency Law, the creditors shall take both further clarity. obligor and the surety into bankruptcy proceedings for unpaid dues. The liability of suretyis not discharged because of resolution/ liquidation of obligor alone. 3 TREATMENT IN UK : Under the UK Insolvency Act, 1986, the creditor/obligee has right to recover unpaid dues from surety for the unpaid portion after the resolution/ ISSUE : Treatment of home buyer as a financial creditor liquidation of surety. Action against surety shall result in subrogation of creditors' rights, TREATMENT IN US : Under the US Insolvency Law, there is no separate class of however surety cannot file claims against the obligor till the guarantee is invoked. creditors as home buyers. RECOMMENDATION : As already mentioned in the above segments of the article, this TREATMENT IN UK : Under the UK Insolvency Act, 1986, there is no separate class of issue is highly contentious in India. However, India may choose to opt from either of the creditors as home buyers. two approaches - RECOMMENDATION : With the recent amendment in IBC to provide a certain 1. US approach, where- parallel insolvency proceedings can be initiated by the threshold for homebuyers to be satisfied before they initiate CIRP, the rights of an creditors against the obligor and surety. individual homebuyer as a FC have been severely restricted. Further, a large number of 2. UK approach, where- the creditor has rights against surety till all dues are homebuyers as creditors entail operational difficulty during voting and consensus building. To this extent, the authors believe that an IBC amendment to lower the voting threshold for cleared but surety cannot have recourse, if the obligor has emerged from resolution in cases where COC consists of a large proportion of home buyers would resolve resolution or liquidation. the situation.

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CONCLUSION Jurisprudence under IBC regime is evolving fast due to active participation from all the stakeholders, namely, government, regulator, judiciary and practitioners. Without losing momentum gained in the last four years, there should be continued efforts, and perhaps with renewed vigor, to tackle potentially bigger stressed assets crisis as a result of Covid-19 impact. There is a need for entrepreneurship and credit availability in Indian economy than ever before, which also forms part of the core objective of the Code. Hence, all necessary steps and course correction should be taken to strengthen IBC regime, amending it to clearly demonstrate the intention of some of the unresolved issues as discussed above.

Debt Default, Recovery and Resolution in a Pandemic : what to Expect in the new Normal

Bhargavi Zaveri

1 Bhargavi Zaveri is a Senior Researcher at the Finance Research Group at the Indira Gandhi Institute of Development Research. This article was originally published as Chapter 25 in the Insolvency and Bankruptcy regime in India: A Narrative, October 2020. This version has been updated to take into account developments that have transpired since the article was first written.

68 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1

CONCLUSION Jurisprudence under IBC regime is evolving fast due to active participation from all the stakeholders, namely, government, regulator, judiciary and practitioners. Without losing momentum gained in the last four years, there should be continued efforts, and perhaps with renewed vigor, to tackle potentially bigger stressed assets crisis as a result of Covid-19 impact. There is a need for entrepreneurship and credit availability in Indian economy than ever before, which also forms part of the core objective of the Code. Hence, all necessary steps and course correction should be taken to strengthen IBC regime, amending it to clearly demonstrate the intention of some of the unresolved issues as discussed above.

Debt Default, Recovery and Resolution in a Pandemic : what to Expect in the new Normal

Bhargavi Zaveri

1 Bhargavi Zaveri is a Senior Researcher at the Finance Research Group at the Indira Gandhi Institute of Development Research. This article was originally published as Chapter 25 in the Insolvency and Bankruptcy regime in India: A Narrative, October 2020. This version has been updated to take into account developments that have transpired since the article was first written.

68 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Abstract imposed by the Reserve Bank of India (RBI), as the banking regulator, on the recovery of debt by lenders regulated by it. Second, the temporary suspension of The detrimental impact of the coronavirus pandemic has swiftly expanded to all the Insolvency and Bankruptcy Code, 2016 (IBC) in its entirety, and third, sectors of the economy. Meanwhile, to curb repercussions of this detrimental forbearance offered through court judgements. impact, the governments around the world have taken certain measures to grant reliefs to the relevant stakeholders, particularly in the domain of credit lending and How will these forbearance measures affect the state of debt recovery in India? recovery. The author, through this article, critically analyses three sets of Will they impact all kinds of borrowers and credit segments equally? What will developments in India in connection with standstills and forbearance during the their impact be on credit discipline and overall contract enforcement in India? This pandemic. First, the moratorium imposed by the Reserve Bank of India, as the article attempts to unravel the seen and unseen effects of these developments for banking regulator, on the recovery of debt by lenders regulated by it. Second, the the credit market in India. temporary suspension of the Insolvency and Bankruptcy Code, 2016 in its entirety, and third, forbearance offered through court judgements. Subsequently, the author RBI MORATORIUM ON DEBT RECOVERY: SOME HITS AND MISSES also analyzes the possible implications of such developments on the credit market On March 27, 2020, the RBI announced a 'COVID Regulatory package' in India. comprising several measures to help the financial sector and borrowers deal with Keywords – Loan Moratorium; Insolvency & Bankruptcy Code, 2016; Temporary the impact of the global pandemic.3 A key measure was allowing all lending suspension; Loan recovery during pandemic. institutions (banks, NBFCs, etc.) to grant a 'moratorium' on installments and interest on term loans falling due until end of May, 2020.4 TheRBI, in exercise of INTRODUCTION its powers as a banking regulator, declared that the deferment of such installments and interest will not be classified as 'defaults', and will not be subjected to a The year 2020 has presented a unique challenge to legal regimes governing debt classification downgrade in the lenders' books. recovery and resolution around the world. Conventional wisdom on robust contract enforcement, legal certainty, strong creditor protection and speedy The measure, taken within two days of the announcement of a nationwide resolution can no longer be applied with the same conviction. Policymakers lockdown, was well-timed and underpinned by a largely sound design. It offered around the world have taken steps to allow households and businesses some immediate payment relief to a large segment of the borrowers of banks and RBI- 'breathing space' from the recovery of dues. Standstills have become the norm and regulated lending institutions.It covered term loans, credit cards and borrowings debt recovery the exception. through cash credits and overdraft facilities, which account for over 96 per cent of the outstanding loan portfolio of banks ( Table-1).Most importantly, refraining Policymakers and central banks have primarily used five tools to effectuate this from a regulatory diktat, RBI left it to the lenders to design the moratorium as per approach: fiscal stimulus to households and businesses, monetary policy their own policies as long as they transparently disseminated the offer and measures, statutory moratoria on debt repayment and suspension of parts of consistently applied it,to their borrowers. The presumption was that in a bankruptcy laws. States have also used soft nudges to pre-empt a deluge of 2 competitive lending sector, each lender is incentivized to offer the best deal to its litigation and bankruptcies. borrowers. This article critically analyses three sets of developments in India in connection with standstills and forbearance during the pandemic. First, the moratorium

3 2 Notification dated March 27, 2020 bearing number RBI/2019-20/186DOR.No.BP.BC.47/21.04.048/2019- For example, the UK government issued an advisory nudging people to refrain from exercising their 20issued by the RBI. contractual rights, in particular with respect to asking for or making payment. Similarly, the state of New York imposed a moratorium on COVID-related commercial or residential evictions from tenanted properties. 4 This was subsequently extended to August 31, 2020.

70 71 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Abstract imposed by the Reserve Bank of India (RBI), as the banking regulator, on the recovery of debt by lenders regulated by it. Second, the temporary suspension of The detrimental impact of the coronavirus pandemic has swiftly expanded to all the Insolvency and Bankruptcy Code, 2016 (IBC) in its entirety, and third, sectors of the economy. Meanwhile, to curb repercussions of this detrimental forbearance offered through court judgements. impact, the governments around the world have taken certain measures to grant reliefs to the relevant stakeholders, particularly in the domain of credit lending and How will these forbearance measures affect the state of debt recovery in India? recovery. The author, through this article, critically analyses three sets of Will they impact all kinds of borrowers and credit segments equally? What will developments in India in connection with standstills and forbearance during the their impact be on credit discipline and overall contract enforcement in India? This pandemic. First, the moratorium imposed by the Reserve Bank of India, as the article attempts to unravel the seen and unseen effects of these developments for banking regulator, on the recovery of debt by lenders regulated by it. Second, the the credit market in India. temporary suspension of the Insolvency and Bankruptcy Code, 2016 in its entirety, and third, forbearance offered through court judgements. Subsequently, the author RBI MORATORIUM ON DEBT RECOVERY: SOME HITS AND MISSES also analyzes the possible implications of such developments on the credit market On March 27, 2020, the RBI announced a 'COVID Regulatory package' in India. comprising several measures to help the financial sector and borrowers deal with Keywords – Loan Moratorium; Insolvency & Bankruptcy Code, 2016; Temporary the impact of the global pandemic.3 A key measure was allowing all lending suspension; Loan recovery during pandemic. institutions (banks, NBFCs, etc.) to grant a 'moratorium' on installments and interest on term loans falling due until end of May, 2020.4 TheRBI, in exercise of INTRODUCTION its powers as a banking regulator, declared that the deferment of such installments and interest will not be classified as 'defaults', and will not be subjected to a The year 2020 has presented a unique challenge to legal regimes governing debt classification downgrade in the lenders' books. recovery and resolution around the world. Conventional wisdom on robust contract enforcement, legal certainty, strong creditor protection and speedy The measure, taken within two days of the announcement of a nationwide resolution can no longer be applied with the same conviction. Policymakers lockdown, was well-timed and underpinned by a largely sound design. It offered around the world have taken steps to allow households and businesses some immediate payment relief to a large segment of the borrowers of banks and RBI- 'breathing space' from the recovery of dues. Standstills have become the norm and regulated lending institutions.It covered term loans, credit cards and borrowings debt recovery the exception. through cash credits and overdraft facilities, which account for over 96 per cent of the outstanding loan portfolio of banks ( Table-1).Most importantly, refraining Policymakers and central banks have primarily used five tools to effectuate this from a regulatory diktat, RBI left it to the lenders to design the moratorium as per approach: fiscal stimulus to households and businesses, monetary policy their own policies as long as they transparently disseminated the offer and measures, statutory moratoria on debt repayment and suspension of parts of consistently applied it,to their borrowers. The presumption was that in a bankruptcy laws. States have also used soft nudges to pre-empt a deluge of 2 competitive lending sector, each lender is incentivized to offer the best deal to its litigation and bankruptcies. borrowers. This article critically analyses three sets of developments in India in connection with standstills and forbearance during the pandemic. First, the moratorium

3 2 Notification dated March 27, 2020 bearing number RBI/2019-20/186DOR.No.BP.BC.47/21.04.048/2019- For example, the UK government issued an advisory nudging people to refrain from exercising their 20issued by the RBI. contractual rights, in particular with respect to asking for or making payment. Similarly, the state of New York imposed a moratorium on COVID-related commercial or residential evictions from tenanted properties. 4 This was subsequently extended to August 31, 2020.

70 71 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Table : Loan portfolio of banks resist even in the most tempting of times. Apart from the SC challenge, two other issues may limit the impact of the RBI Type of loan/ advance Rs.(in lakh crores) measure. Term loans 57.43 First, the non-applicability of the moratorium on the interestand principal repayments on bonds issued by lenders, such as NBFCs and housing finance Cash Credit/ Overdraft 36.07 companies. Most of these lenders raise capital through bond issuances, which were Bills payable/ discounted 3.6 subscribed by banks and other financial institutions such as mutual funds and Total 97.1 pension funds. While the moratorium applied to the loans advanced by NBFCs and HFCs to their borrowers and resultantly starved them of cash flows, it did not Source: RBI (as on March 31, 2019) simultaneously defer the NBFCs' and HFCs' obligations to service the interest and principal repayments falling due during the RBI Moratorium Period. At a time The measure was challenged in the Supreme Court (SC) on the ground that it was when the NBFC sector was already struggling with financial distress, the RBI ineffective as it was designed to merely 'defer' payment obligations that became measure tightened the noose further. due during the six-month period beginning March 1, 2020 and ending August 31, Second, the moratorium spanned at least six months comprising more than one 2020 (RBI Moratorium Period).The interest on these loans continued to accrue earnings and disclosure season. In the absence of any obligation to disclose the and compounded, and would be payable by the borrowers after the moratorium extent to which the moratorium has been availed of, the disclosures of the lending period. While the SC adjourned the case to early August after holding a couple of entities have largely varied in quality and detail. Resultantly, the volume, kind and hearings, it questioned the regulator's wisdom in allowing the interest to be value of borrowers who have actually availed of the moratorium, continues to compounded. After much back and forth, the court was placated only after the remain unclear. While it is estimated that 50% of the borrowers availed of the Central Government announced a scheme for the waiver of compound interest, moratorium, granular data on these aspects is valuable not only to depositors and accrued during the RBI Moratorium Period, on loans of up to Rs 2 crores 5 shareholders of these lending entities, butcould have served as high frequency borrowed by individuals and MSMEs. The court also declared that banks should indicators of the manner in which the economy was coping with the lockdown, the refrain from declaring any loan outstanding as on August 31 as a NPA, until number and kinds of defaults and bankruptcies that could be expected at the end of further others. the moratorium. The basis for the court's intervention remains unclear. The question before the court is essentially a policy related question, namely, whether the banking TEMPORARY SUSPENSION OF THE IBC: RECOVERY vs. regulator is empowered to relax its norms on asset classification if borrowers RESOLUTION failed to repay their loans during the RBI Moratorium Period. Note that the RBI circular merely 'permits' lenders to grant the moratorium and assures them that the On June 5, 2020, the Central Government promulgated an ordinance suspending loan will not be downgraded in the lender's books if the borrower defaults during the Insolvency and Bankruptcy Code (IBC), in its entirety, for six months, which 6 the RBI Moratorium Period. Questioning the wisdom of the banking regulator, on could be extended upto a year. Effectively, if a default is committed between grounds other than the constitutionality of the measures, is tantamount to March 25, 2020 and September 24, 2020 (IBC Suspension Period), such default 7 questioning the regulator's policy. This is a slippery slope which the court must could not be used to trigger the IBC at any point in time in the future.

5 Centre in Supreme Court agrees to waive compound interest on loans up to Rs 2 crore for six-months, 3rd 6 Since the provisions of the IBC governing individual insolvency have not been notified, this effectively October, 2020, available at https://www.financialexpress.com/economy/centre-in-supreme-court-agrees-to- means suspension of the IBC with respect to corporate debtors only.

waive-compound-interest-on-loans-up-to-rs-2-crore-for-six-months/2097192/, accessed on 8th December, 7 2020. This date has been extended to December 25, 2020.

72 73 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Table : Loan portfolio of banks resist even in the most tempting of times. Apart from the SC challenge, two other issues may limit the impact of the RBI Type of loan/ advance Rs.(in lakh crores) measure. Term loans 57.43 First, the non-applicability of the moratorium on the interestand principal repayments on bonds issued by lenders, such as NBFCs and housing finance Cash Credit/ Overdraft 36.07 companies. Most of these lenders raise capital through bond issuances, which were Bills payable/ discounted 3.6 subscribed by banks and other financial institutions such as mutual funds and Total 97.1 pension funds. While the moratorium applied to the loans advanced by NBFCs and HFCs to their borrowers and resultantly starved them of cash flows, it did not Source: RBI (as on March 31, 2019) simultaneously defer the NBFCs' and HFCs' obligations to service the interest and principal repayments falling due during the RBI Moratorium Period. At a time The measure was challenged in the Supreme Court (SC) on the ground that it was when the NBFC sector was already struggling with financial distress, the RBI ineffective as it was designed to merely 'defer' payment obligations that became measure tightened the noose further. due during the six-month period beginning March 1, 2020 and ending August 31, Second, the moratorium spanned at least six months comprising more than one 2020 (RBI Moratorium Period).The interest on these loans continued to accrue earnings and disclosure season. In the absence of any obligation to disclose the and compounded, and would be payable by the borrowers after the moratorium extent to which the moratorium has been availed of, the disclosures of the lending period. While the SC adjourned the case to early August after holding a couple of entities have largely varied in quality and detail. Resultantly, the volume, kind and hearings, it questioned the regulator's wisdom in allowing the interest to be value of borrowers who have actually availed of the moratorium, continues to compounded. After much back and forth, the court was placated only after the remain unclear. While it is estimated that 50% of the borrowers availed of the Central Government announced a scheme for the waiver of compound interest, moratorium, granular data on these aspects is valuable not only to depositors and accrued during the RBI Moratorium Period, on loans of up to Rs 2 crores 5 shareholders of these lending entities, butcould have served as high frequency borrowed by individuals and MSMEs. The court also declared that banks should indicators of the manner in which the economy was coping with the lockdown, the refrain from declaring any loan outstanding as on August 31 as a NPA, until number and kinds of defaults and bankruptcies that could be expected at the end of further others. the moratorium. The basis for the court's intervention remains unclear. The question before the court is essentially a policy related question, namely, whether the banking TEMPORARY SUSPENSION OF THE IBC: RECOVERY vs. regulator is empowered to relax its norms on asset classification if borrowers RESOLUTION failed to repay their loans during the RBI Moratorium Period. Note that the RBI circular merely 'permits' lenders to grant the moratorium and assures them that the On June 5, 2020, the Central Government promulgated an ordinance suspending loan will not be downgraded in the lender's books if the borrower defaults during the Insolvency and Bankruptcy Code (IBC), in its entirety, for six months, which 6 the RBI Moratorium Period. Questioning the wisdom of the banking regulator, on could be extended upto a year. Effectively, if a default is committed between grounds other than the constitutionality of the measures, is tantamount to March 25, 2020 and September 24, 2020 (IBC Suspension Period), such default 7 questioning the regulator's policy. This is a slippery slope which the court must could not be used to trigger the IBC at any point in time in the future.

5 Centre in Supreme Court agrees to waive compound interest on loans up to Rs 2 crore for six-months, 3rd 6 Since the provisions of the IBC governing individual insolvency have not been notified, this effectively October, 2020, available at https://www.financialexpress.com/economy/centre-in-supreme-court-agrees-to- means suspension of the IBC with respect to corporate debtors only. waive-compound-interest-on-loans-up-to-rs-2-crore-for-six-months/2097192/, accessed on 8th December, 7 2020. This date has been extended to December 25, 2020.

72 73 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Several countries, such as the UK, Germany and France have suspended parts of Enforcement of Security Interest Act, 2002 (SARFAESI), pursuing the claim their bankruptcy laws dealing with the obligation of the debtor to file for before a debt recovery tribunal orin a civil suit or arbitration. SARFAESI allows bankruptcy or creditor filings. Some others, such as Australia, have made other only secured some types of creditors, namely banks, financial institutions and adjustments, such as increasing the duration of the statutory notice preceding the NBFCs to enforce the underlying security to recover their debt. Similarly, only invocation of the bankruptcy law. However, India is one of the few countries to banks and financial institutions may pursue their claims before specialized have suspended its entire bankruptcy law. This has two critical implications for tribunals, called Debt Recovery Tribunals. debt recovery and resolution in India. For the purpose of re-organisation, creditors have the choice of pursuing a petition First, it leaves two options open for the reorganization of the corporate debtor, under the IBC, a scheme of arrangement or compromise under the Companies Act, namely, the regulations for the resolution of stressed assets specified by the RBI in 2013 and the RBI Resolution Frameworks as discussed above. June 2019 and August 2020 (hereafter, RBI Resolution Frameworks), and the Table 2 envisages a scenario where a corporate debtor defaults on a term loan due provisions of the Companies Act, 2013, dealing with schemes of arrangement and to a bank or NBFC. It is clear that if the default is committed anytime during the 8 compromises. These are not optimal. The RBI Resolution Frameworks bind only IBC Suspension Period, the only relief available to the creditor is reorganization RBI-regulated entities and no other creditors such as foreign lenders, mutual funds, under a scheme of compromise or arrangement as it does not require a default to bond holders, vendors, employees, etc. The latter is largely untested in India in the have been committed.11 This is because during this time, the RBI Moratorium 9 context of financial distress. Period runs concurrently with the IBC Suspension Period. Therefore, for example, This leaves debtor firms – the very firms that the suspension of the IBC intended to even if the default is committed prior to the date of the ordinance suspending the protect - in a rather low-equilibrium. To take an example, if the IBC were not IBC, that default cannot be used to invoke the IBC due to the ongoing RBI suspended, a rational debtor could consider opting for the RBI moratorium at the Moratorium Period. cost of allowing the compound interest to accrue. If the debtor were unable to repay it at the end of the RBI Moratorium Period, the debtor could have sought re- Table 2: Scenario: Borrower defaults on term loan from bank or NBFC organisation of the debt under the IBC. However, with the IBC now suspended, it is unclear if this choice would be open to debtors. Recovery mechanisms Resolution/ reorganization Second, large parts of the RBI moratorium period and the IBC suspension period mechanisms overlap with each other, effectively suspending both debt recovery and debt Date of default SARFAESI12 Suits/ IBC Scheme of RBI (2020) arbitration arrangement Resolution resolution for some time in India. Consequently, the mechanism available to a or Framework creditor entirely depends on when the default was committed and by whom. compromise As shown in Tables 2 and 3,10 under the existing legal framework for debt recovery March 1 - 24

in India, there are two options available to creditors for the recovery of their debt, March 25–August 31 namely, the Securitisation and Reconstruction of Financial Assets and September 1- December 25

8 SThe Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, notified by the RBI onJune 7, 2019 and the Resolution Framework for COVID-19-related Stress notified by the RBI August 6, 2020. 9 UmakanthVarottil (2017), “The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects”, NUS Working Paper, 2017/005, March, http://law.nus.edu.sg/wps. 10 For the sake of simplicity, Tables 2 and 3 classify the recovery mechanism before a DRT as a suit as the process for recovery under this mechanism is largely similar to that of a civil suit. 12 If the bank or NBFC is a secured creditor.

74 75 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Several countries, such as the UK, Germany and France have suspended parts of Enforcement of Security Interest Act, 2002 (SARFAESI), pursuing the claim their bankruptcy laws dealing with the obligation of the debtor to file for before a debt recovery tribunal orin a civil suit or arbitration. SARFAESI allows bankruptcy or creditor filings. Some others, such as Australia, have made other only secured some types of creditors, namely banks, financial institutions and adjustments, such as increasing the duration of the statutory notice preceding the NBFCs to enforce the underlying security to recover their debt. Similarly, only invocation of the bankruptcy law. However, India is one of the few countries to banks and financial institutions may pursue their claims before specialized have suspended its entire bankruptcy law. This has two critical implications for tribunals, called Debt Recovery Tribunals. debt recovery and resolution in India. For the purpose of re-organisation, creditors have the choice of pursuing a petition First, it leaves two options open for the reorganization of the corporate debtor, under the IBC, a scheme of arrangement or compromise under the Companies Act, namely, the regulations for the resolution of stressed assets specified by the RBI in 2013 and the RBI Resolution Frameworks as discussed above. June 2019 and August 2020 (hereafter, RBI Resolution Frameworks), and the Table 2 envisages a scenario where a corporate debtor defaults on a term loan due provisions of the Companies Act, 2013, dealing with schemes of arrangement and to a bank or NBFC. It is clear that if the default is committed anytime during the 8 compromises. These are not optimal. The RBI Resolution Frameworks bind only IBC Suspension Period, the only relief available to the creditor is reorganization RBI-regulated entities and no other creditors such as foreign lenders, mutual funds, under a scheme of compromise or arrangement as it does not require a default to bond holders, vendors, employees, etc. The latter is largely untested in India in the have been committed.11 This is because during this time, the RBI Moratorium 9 context of financial distress. Period runs concurrently with the IBC Suspension Period. Therefore, for example, This leaves debtor firms – the very firms that the suspension of the IBC intended to even if the default is committed prior to the date of the ordinance suspending the protect - in a rather low-equilibrium. To take an example, if the IBC were not IBC, that default cannot be used to invoke the IBC due to the ongoing RBI suspended, a rational debtor could consider opting for the RBI moratorium at the Moratorium Period. cost of allowing the compound interest to accrue. If the debtor were unable to repay it at the end of the RBI Moratorium Period, the debtor could have sought re- Table 2: Scenario: Borrower defaults on term loan from bank or NBFC organisation of the debt under the IBC. However, with the IBC now suspended, it is unclear if this choice would be open to debtors. Recovery mechanisms Resolution/ reorganization Second, large parts of the RBI moratorium period and the IBC suspension period mechanisms overlap with each other, effectively suspending both debt recovery and debt Date of default SARFAESI12 Suits/ IBC Scheme of RBI (2020) arbitration arrangement Resolution resolution for some time in India. Consequently, the mechanism available to a or Framework creditor entirely depends on when the default was committed and by whom. compromise As shown in Tables 2 and 3,10 under the existing legal framework for debt recovery March 1 - 24 in India, there are two options available to creditors for the recovery of their debt, March 25–August 31 namely, the Securitisation and Reconstruction of Financial Assets and September 1- December 25

8 SThe Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, notified by the RBI onJune 7, 2019 and the Resolution Framework for COVID-19-related Stress notified by the RBI August 6, 2020. 9 UmakanthVarottil (2017), “The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects”, NUS Working Paper, 2017/005, March, http://law.nus.edu.sg/wps. 10 For the sake of simplicity, Tables 2 and 3 classify the recovery mechanism before a DRT as a suit as the process for recovery under this mechanism is largely similar to that of a civil suit. 12 If the bank or NBFC is a secured creditor.

74 75 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Table 3 envisages a scenario where a bond issuer defaults to a bond holder, such For example, in one of the early cases in the lockdown before the Bombay High as a mutual fund or a pension fund. Court, the court passed an order injuncting IDBI Trusteeship Company from selling the shares of Future Retail Ltd., which were pledged as a security for the Table 3 : Scenario: bond issuer defaults to a bond holder debentures issued by a Future group company.14 The reason underlying this relief was a sharp decline of over 60 per cent in the value of the equity stock of Future Recovery mechanisms Resolution/ reorganization Retail since the beginning of March, due to the nationwide shutdown. Thereafter, mechanisms the Bombay and Delhi High Courts have passed similar orders restraining creditors 15 Date of default SARFAESI13 Suits/ IBC Scheme of RBI from invoking pledges, and restraining lenders from classifying loans that had (2020) arbitration arrangement Resolution 16 or Framework defaulted prior to the lockdown, as non-performing assets. In a more recent case, compromise however, the Delhi High Court allowed IDBI Trusteeship to sell the pledged shares

March 1 - 24 of Zee Entertainment Enterprises Ltd. ignoring the impact of the pandemic on the business or the price of the shares. March 25–August 31 These orders are deeply problematic because they are likely to have a long-lasting September 1- impact on the sanctity of debt contracts. Similarly, judicial intervention on the December 25 manner in which a bank must classify the asset in its books, erodes prudential norms and can potentially adversely affect the financial health of the bank, which in A combined reading of Tables 2 and 3 shows that for defaults committed anytime turn, jeopardizes depositors and savers. Finally, these orders create deep rule of law between March 1, 2020 to December 25, 2020 (which could be extended to March issues as none of the orders mentioned above seek to rely on the law or terms of the 24, 2021), recovery and re-organisation mechanisms for creditors in India will debt contract, but are driven by the court's notion of what is just and equitable differ substantially for different kinds of borrowers and creditors, depending on the depending on the exigencies of the situation and the gravity of the pandemic. timing of the default and the kind of creditor. These orders will have two tangible effects. First, it will increase the implicit cost One of the objectives of the IBC and several subsequent reforms implemented by of credit in the country. Given the liberal attitude of courts in granting forbearance the Government and the RBI was to equalise all credit relationships in so far as (even for defaults committed before even the first COVID-19 positive case was concerns the recovery and re-organisation options available to them. These policy detected in India), lenders will seek to build in other forms of security, such as developments have substantially, even if temporarily, disrupted this agenda. personal guarantees and escrow mechanisms to secure repayment. Second, from the debtors' perspective, boiler plate clauses in debt contracts, including in COURTS: FORBEARANCE vs. CONTRACT SANCTITY AND particular, clauses relating to material adverse changes and effects, will be PRUDENTIAL NORMS negotiated more vigorously. The objective will be to widen the scope of these Even before the policy announcements described above, several debtors and contractual terms to allow scope for forbearance. creditors had begun approaching courts seeking relief from debt or a waiver from the enforcement of covenants by creditors, especially covenants that allowed the lender to invoke a pledge of shares underlying the credit. The field is now occupied 14 Rural Fair price Wholesale Limited & Anr. v. IDBI Trusteeship Services Limited & Ors.. (March 30, 2020). by court orders granting debt forbearance waiving regulatory prudential norms on 15 For example, in Idea Toll & Infrastructure Pvt. Ltd. and Another v. ICICI Home Finance Company Ltd. and a case-by-case basis and inconsistent judgements. Anr., the Bombay High Court restrictedICICI Home Finance, from invoking the pledge of collateral and selling the shares of MEP Infrastructure Developers, in respect of defaults committed by MEP prior to the lockdown.

16 13 If the bond holders are secured and the bonds are held by a bank or a NBFC that is eligible for relief under Transcon Sky city Pvt. Ltd &Ors v. ICICI Bank Ltd. And Ors. (April 11, 2020); Anant Raj Ltd. v. Yes Bank SARFAESI. Ltd. (April 6, 2020).

76 77 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Debt Default, Recovery and Resolution in a Pandemic2 : WHAT TO EXPECT IN THE NEW NORMAL

Table 3 envisages a scenario where a bond issuer defaults to a bond holder, such For example, in one of the early cases in the lockdown before the Bombay High as a mutual fund or a pension fund. Court, the court passed an order injuncting IDBI Trusteeship Company from selling the shares of Future Retail Ltd., which were pledged as a security for the Table 3 : Scenario: bond issuer defaults to a bond holder debentures issued by a Future group company.14 The reason underlying this relief was a sharp decline of over 60 per cent in the value of the equity stock of Future Recovery mechanisms Resolution/ reorganization Retail since the beginning of March, due to the nationwide shutdown. Thereafter, mechanisms the Bombay and Delhi High Courts have passed similar orders restraining creditors 15 Date of default SARFAESI13 Suits/ IBC Scheme of RBI from invoking pledges, and restraining lenders from classifying loans that had (2020) arbitration arrangement Resolution 16 or Framework defaulted prior to the lockdown, as non-performing assets. In a more recent case, compromise however, the Delhi High Court allowed IDBI Trusteeship to sell the pledged shares

March 1 - 24 of Zee Entertainment Enterprises Ltd. ignoring the impact of the pandemic on the business or the price of the shares. March 25–August 31 These orders are deeply problematic because they are likely to have a long-lasting September 1- impact on the sanctity of debt contracts. Similarly, judicial intervention on the December 25 manner in which a bank must classify the asset in its books, erodes prudential norms and can potentially adversely affect the financial health of the bank, which in A combined reading of Tables 2 and 3 shows that for defaults committed anytime turn, jeopardizes depositors and savers. Finally, these orders create deep rule of law between March 1, 2020 to December 25, 2020 (which could be extended to March issues as none of the orders mentioned above seek to rely on the law or terms of the 24, 2021), recovery and re-organisation mechanisms for creditors in India will debt contract, but are driven by the court's notion of what is just and equitable differ substantially for different kinds of borrowers and creditors, depending on the depending on the exigencies of the situation and the gravity of the pandemic. timing of the default and the kind of creditor. These orders will have two tangible effects. First, it will increase the implicit cost One of the objectives of the IBC and several subsequent reforms implemented by of credit in the country. Given the liberal attitude of courts in granting forbearance the Government and the RBI was to equalise all credit relationships in so far as (even for defaults committed before even the first COVID-19 positive case was concerns the recovery and re-organisation options available to them. These policy detected in India), lenders will seek to build in other forms of security, such as developments have substantially, even if temporarily, disrupted this agenda. personal guarantees and escrow mechanisms to secure repayment. Second, from the debtors' perspective, boiler plate clauses in debt contracts, including in COURTS: FORBEARANCE vs. CONTRACT SANCTITY AND particular, clauses relating to material adverse changes and effects, will be PRUDENTIAL NORMS negotiated more vigorously. The objective will be to widen the scope of these Even before the policy announcements described above, several debtors and contractual terms to allow scope for forbearance. creditors had begun approaching courts seeking relief from debt or a waiver from the enforcement of covenants by creditors, especially covenants that allowed the lender to invoke a pledge of shares underlying the credit. The field is now occupied 14 Rural Fair price Wholesale Limited & Anr. v. IDBI Trusteeship Services Limited & Ors.. (March 30, 2020). by court orders granting debt forbearance waiving regulatory prudential norms on 15 For example, in Idea Toll & Infrastructure Pvt. Ltd. and Another v. ICICI Home Finance Company Ltd. and a case-by-case basis and inconsistent judgements. Anr., the Bombay High Court restrictedICICI Home Finance, from invoking the pledge of collateral and selling the shares of MEP Infrastructure Developers, in respect of defaults committed by MEP prior to the lockdown.

16 13 If the bond holders are secured and the bonds are held by a bank or a NBFC that is eligible for relief under Transcon Sky city Pvt. Ltd &Ors v. ICICI Bank Ltd. And Ors. (April 11, 2020); Anant Raj Ltd. v. Yes Bank SARFAESI. Ltd. (April 6, 2020).

76 77 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1

CONCLUSION A 40,000 feet view of the legislative, regulatory and jurisprudential developments in the credit space in 2020, indicates that while they might work in the short run to shield debtors from the immediate shock of the pandemic, the long-term impact will be hard to quantify. Policymakers and regulators must do everything in their power to elicit better and timely disclosures from lenders on the impact of the RBI moratorium and the suspension of the law. Given that all debt recovery and resolution mechanisms are nearly entirely suspended, a sensitization initiative for both lenders and borrowers on the manner in which they could deal with financial distress as economic activity resumes, would also be in order. While lenders would have to be sensitized against the disproportionate use of the bankruptcy threat, borrowers, especially small and micro enterprises, sole proprietors, etc. would need to be familiarized with the concept of bankruptcy and the need to de-stigmatize the idea of bankruptcy. They would also need support on dealing with financial distress, the legal remedies available to them and the need for transparency and fairness in their dealings. Could this have been done differently? The answer seems to be mixed. While policymakers got many things, such as the timing of the RBI moratorium and the suspension of the IBC largely right, there was scope for more nuanced interventions. For example, there is near consensus on the view that the IBC should PMLA Actions not have been suspended in its entirety and debtors should have been given the option to use the legal framework to voluntarily reorganize themselves. Similarly, against Company this time can be gainfully used to build the ecosystem necessary to support individual insolvency so that as economic activity resumes, individuals, micro and Property during the small sized unincorporated entities can use the law for the purpose, which all bankruptcy regimes are meant to serve – give a new lease of life to debtors. After all, the essence of capitalism is to reward success and accept failure with CIRP equanimity. Misha & Shreya Prakash

1 Misha is a Partner at Shardul Amarchand Mangaldas & Co. and Shreya Prakash is an Associate at Shardul Amarchand Mangaldas & Co. Views are personal and should not be construed to constitute legal advice on any specific circumstance. The authors would like to thank Ms. Prabh Simran Kaur (Associate, Shardul Amarchand Mangaldas & Co.) and Mr. Tushar Kumar (Research Associate, Indian Institute of Corporate Affairs) for research input.

78 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1

CONCLUSION A 40,000 feet view of the legislative, regulatory and jurisprudential developments in the credit space in 2020, indicates that while they might work in the short run to shield debtors from the immediate shock of the pandemic, the long-term impact will be hard to quantify. Policymakers and regulators must do everything in their power to elicit better and timely disclosures from lenders on the impact of the RBI moratorium and the suspension of the law. Given that all debt recovery and resolution mechanisms are nearly entirely suspended, a sensitization initiative for both lenders and borrowers on the manner in which they could deal with financial distress as economic activity resumes, would also be in order. While lenders would have to be sensitized against the disproportionate use of the bankruptcy threat, borrowers, especially small and micro enterprises, sole proprietors, etc. would need to be familiarized with the concept of bankruptcy and the need to de-stigmatize the idea of bankruptcy. They would also need support on dealing with financial distress, the legal remedies available to them and the need for transparency and fairness in their dealings. Could this have been done differently? The answer seems to be mixed. While policymakers got many things, such as the timing of the RBI moratorium and the suspension of the IBC largely right, there was scope for more nuanced interventions. For example, there is near consensus on the view that the IBC should PMLA Actions not have been suspended in its entirety and debtors should have been given the option to use the legal framework to voluntarily reorganize themselves. Similarly, against Company this time can be gainfully used to build the ecosystem necessary to support individual insolvency so that as economic activity resumes, individuals, micro and Property during the small sized unincorporated entities can use the law for the purpose, which all bankruptcy regimes are meant to serve – give a new lease of life to debtors. After all, the essence of capitalism is to reward success and accept failure with CIRP equanimity. Misha & Shreya Prakash

1 Misha is a Partner at Shardul Amarchand Mangaldas & Co. and Shreya Prakash is an Associate at Shardul Amarchand Mangaldas & Co. Views are personal and should not be construed to constitute legal advice on any specific circumstance. The authors would like to thank Ms. Prabh Simran Kaur (Associate, Shardul Amarchand Mangaldas & Co.) and Mr. Tushar Kumar (Research Associate, Indian Institute of Corporate Affairs) for research input.

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Abstract litigation, there is still a lack of clarity about actions against the property of the debtor during the CIRP before a resolution plan is approved or during the The enactment of the Insolvency and Bankruptcy Code, 2016 in India has also Liquidation process before the sale of assets occurs. brought into play its relation with several other existing laws in India. One such prominent interplay is between the Insolvency and Bankruptcy Code, 2016 and the While this lack of clarity raises the possibility of litigation relating to any Prevention of Money Laundering Act, 2002. In pursuance of the same, the authors, investigation, (including investigations under the Companies Act, 2013 and under in this article, examine whether attachment proceedings under section 5 of the general penal law), the possibility of litigation is higher where the governmental Prevention of Money Laundering Act, 2002 should be allowed during the pendency authority also has powers to take enforcement actions against the property of the of the Corporate Insolvency Resolution Process, when a moratorium under section debtor, such as under the Prevention of Money Laundering Act, 2002 (“PMLA”) 14 of the Insolvency and Bankruptcy Code, 2016. Further, they explain and analyse parallel to the investigation. This is particularly concerning during the CIRP or emerging case law and trends in jurisprudential development on this issue. While where the corporate debtor or its business is sought to be sold as a going concern in jurisprudence is still evolving, they argue that allowing attachment proceedings to Liquidation, as the assets of the debtor are sought to be kept together in both cases be instituted or continued against the property of the debtor even before the for most value maximising outcomes. approval of a resolution plan i.e. during the moratorium period, will be contrary to Given this context, in this article, we examine whether attachment proceedings legislative intent when reading both the Insolvency and Bankruptcy Code, 2016 under section 5 of the PMLA should be allowed during the pendency of the CIRP, and the Prevention of Money Laundering Act, 2002 together. when a moratorium under section 14 of the Code is in place.3 In this regard, we Keywords – Insolvency & Bankruptcy Code, 2016; IBC; IBC & PMLA; explain and analyse emerging case law and trends in jurisprudential development Attachment Proceedings during CIRP on this issue. While jurisprudence is still evolving, we argue that allowing attachment proceedings to be instituted or continued against the property of the BACKGROUND debtor even before the approval of a resolution plan i.e. during the moratorium period, will be contrary to legislative intent when reading both the Code and the The inter-play of criminal and insolvency law is becoming a source of increasing PMLA together. litigation in the corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). Scope for litigation arises both JURISPRUDENTIAL DEVELOPMENT when criminal investigations and enforcement actions are taken against the property of the debtor before the approval of the resolution plan by the Once a CIRP commences, section 14 of the Code introduces a moratorium on the Adjudicating Authority as well as when enforcement takes place after the approval insolvency commencement date that continues during the CIRP period. This of the resolution plan. moratorium inter alia provides that “the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of However, since the introduction of section 32A of the Code, in December, 2019, it any judgement, decree or order in any court of law, tribunal, arbitration panel or is now clear that “no action shall be taken against the property of the corporate other authority.”4 (emphasis supplied) However, despite this bar, there have been debtor in relation to an offence committed prior to the commencement of the instances where the Enforcement Directorate has attempted to attach assets during corporate insolvency resolution process of the corporate debtor, where such the CIRP period. On one hand, insolvency professionals and creditors of the debtor property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate 2 debtor” to certain specified persons. While this resolves many issues relating to 3 We do not, however, examine the attachment of assets of a debtor during the liquidation process, even in actions against property after the approval of a resolution plan or sale of property in cases where a going concern sale is being attempted in liquidation. We also do not specifically deal with situations where the assets are sought to be confiscated. However, we hope that our arguments may shape the debate on these instances/ issues as well. 2 Section 32A(2), Code 4 Section 14(1)(a), Code

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Abstract litigation, there is still a lack of clarity about actions against the property of the debtor during the CIRP before a resolution plan is approved or during the The enactment of the Insolvency and Bankruptcy Code, 2016 in India has also Liquidation process before the sale of assets occurs. brought into play its relation with several other existing laws in India. One such prominent interplay is between the Insolvency and Bankruptcy Code, 2016 and the While this lack of clarity raises the possibility of litigation relating to any Prevention of Money Laundering Act, 2002. In pursuance of the same, the authors, investigation, (including investigations under the Companies Act, 2013 and under in this article, examine whether attachment proceedings under section 5 of the general penal law), the possibility of litigation is higher where the governmental Prevention of Money Laundering Act, 2002 should be allowed during the pendency authority also has powers to take enforcement actions against the property of the of the Corporate Insolvency Resolution Process, when a moratorium under section debtor, such as under the Prevention of Money Laundering Act, 2002 (“PMLA”) 14 of the Insolvency and Bankruptcy Code, 2016. Further, they explain and analyse parallel to the investigation. This is particularly concerning during the CIRP or emerging case law and trends in jurisprudential development on this issue. While where the corporate debtor or its business is sought to be sold as a going concern in jurisprudence is still evolving, they argue that allowing attachment proceedings to Liquidation, as the assets of the debtor are sought to be kept together in both cases be instituted or continued against the property of the debtor even before the for most value maximising outcomes. approval of a resolution plan i.e. during the moratorium period, will be contrary to Given this context, in this article, we examine whether attachment proceedings legislative intent when reading both the Insolvency and Bankruptcy Code, 2016 under section 5 of the PMLA should be allowed during the pendency of the CIRP, and the Prevention of Money Laundering Act, 2002 together. when a moratorium under section 14 of the Code is in place.3 In this regard, we Keywords – Insolvency & Bankruptcy Code, 2016; IBC; IBC & PMLA; explain and analyse emerging case law and trends in jurisprudential development Attachment Proceedings during CIRP on this issue. While jurisprudence is still evolving, we argue that allowing attachment proceedings to be instituted or continued against the property of the BACKGROUND debtor even before the approval of a resolution plan i.e. during the moratorium period, will be contrary to legislative intent when reading both the Code and the The inter-play of criminal and insolvency law is becoming a source of increasing PMLA together. litigation in the corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). Scope for litigation arises both JURISPRUDENTIAL DEVELOPMENT when criminal investigations and enforcement actions are taken against the property of the debtor before the approval of the resolution plan by the Once a CIRP commences, section 14 of the Code introduces a moratorium on the Adjudicating Authority as well as when enforcement takes place after the approval insolvency commencement date that continues during the CIRP period. This of the resolution plan. moratorium inter alia provides that “the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of However, since the introduction of section 32A of the Code, in December, 2019, it any judgement, decree or order in any court of law, tribunal, arbitration panel or is now clear that “no action shall be taken against the property of the corporate other authority.”4 (emphasis supplied) However, despite this bar, there have been debtor in relation to an offence committed prior to the commencement of the instances where the Enforcement Directorate has attempted to attach assets during corporate insolvency resolution process of the corporate debtor, where such the CIRP period. On one hand, insolvency professionals and creditors of the debtor property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate 2 debtor” to certain specified persons. While this resolves many issues relating to 3 We do not, however, examine the attachment of assets of a debtor during the liquidation process, even in actions against property after the approval of a resolution plan or sale of property in cases where a going concern sale is being attempted in liquidation. We also do not specifically deal with situations where the assets are sought to be confiscated. However, we hope that our arguments may shape the debate on these instances/ issues as well. 2 Section 32A(2), Code 4 Section 14(1)(a), Code

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argue that the moratorium should prevent an attachment of assets during the CIRP Deputy Director, Enforcement Directorate,8 the NCLAT considered if the period so as to keep the assets of the debtor together for the efficient conclusion of Adjudicating Authority under the PMLA can, during the moratorium period, order the CIRP. On the other, the Enforcement Directorate argues that the moratorium confirmation of a provisional attachment that was made prior to the would not prevent the attachment of properties under the PMLA, which is critical commencement of the moratorium. The NCLAT opined that the moratorium to preserve the interest of the State in prosecuting crimes, and the pendency of the would not be applicable to a “criminal proceeding or any penal action taken CIRP should not allow debtors to evade the sanction against money laundering. pursuant to the criminal proceeding or any act having essence of crime or crime 9 In this context, the National Company Law Tribunal (“NCLT”), the National proceeds” and accordingly held that an order for provisional attachment under the Company Law Appellate Tribunal (“NCLAT”), Adjudicating and Appellate PMLA would not be prevented by section 14. As such, the NCLAT allowed Authorities under the PMLA and High Courts have dealt with the question of attachment proceedings to be continued during the CIRP, while implying that there whether proceedings for attachment under the PMLA during the CIRP period was no conflict in the first place. This ruling has subsequently been applied by the would be barred by the moratorium, or if they could continue in parallel. NCLAT in Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement10 as well, in context of liquidation. Interestingly, these rulings do not In SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure take into account judgements holding that attachment proceedings under the 5 Limited, the NCLT Mumbai was called to determine if a provisional attachment of PMLA are civil proceedings. Arguably, however, the NCLAT may have proceeded the property of Sterling SEZ and Infrastructure Ltd. would be allowed. In this case, on the basis that even though such proceedings are 'civil proceedings' they are the NCLT held that proceedings for attachment under PMLA are civil proceedings connected to 'proceeds of crimes'. and barred under section 14(1)(a) of the Code. Importantly, the NCLT also examined the objectives and economic aspects of both legislations, and held that The Delhi High Court also dealt with this issue in The Deputy Director of 11 since the Code offered a time-bound process to unlock the value in the assets of a Directorate of Enforcement, Delhi v. Axis Bank & Ors. In this case, both debtor, it would be preferable to the process under the PMLA. Although the attachment proceedings as well as debt recovery (under the Recovery of Debts and ultimate goal of the PMLA is also to confiscate the assets and compensate the Bankruptcy Act, 1993 (“RDB Act”) or Securitisation and Asset Reconstruction of affected parties, the NCLT observed that the process under the PMLA is more time- Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI consuming and is likely to cause erosion. This ruling of the NCLT was consistent Act”) or insolvency proceedings (under the Code) had been instituted against with the rulings of the Appellate Authority under the PMLA (“PMLAT”) in Bank of certain properties/ debtors by the Enforcement Directorate and the creditors, India v. Deputy Director,6 Enforcement Directorateand Punjab National Bank v. respectively. Deputy Director, Directorate of Enforcement, Raipur.7 In these cases, the PMLAT The High Court held that since the objective of the PMLA is distinct from that of specifically held that although both the Code and the PMLA contain non-obstante the RDB Act, SARFAESI Act and the Code, they would not prevail over the PMLA clauses, the provisions of the Code would override those of the PMLA as the Code and the legislations would have to be read harmoniously. As such, the High Court was a later legislation. Further, the PMLAT also held that as the proceedings of laid down detailed guidelines that allowed attachment proceedings to be instituted attachment under the PMLA were civil proceedings, they would be barred by the or continued, but also recognised the interest of third party secured creditors. operation of section 14 of the Code. While High Court dealt with various factual matrixes and opined on how However, the NCLAT has adopted a different approach. In Varrsana Ispat v.

8 Company Appeal (AT) (Insolvency) No. 493 of 2018, decision dated 2-05-2019 9 FPVarrsana Ispat v. Deputy Director, Enforcement Directorate, Company Appeal (AT) (Insolvency) No. 493 5 A. 1280/2080 in C.P. 405/2018 (NCLT Mumbai), decision dated 12-02-2019 of 2018, decision dated 2-05-2019, Para 8 10 6 FPA-PMLA-2173 & 2155/MUM/2018, decision dated 31-10-2018 (2019) 155 SCL 250 11 7 FPA-PMLA-596/LKW/2014, decision dated 19-07-2018 (2019) 259 DLT500

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argue that the moratorium should prevent an attachment of assets during the CIRP Deputy Director, Enforcement Directorate,8 the NCLAT considered if the period so as to keep the assets of the debtor together for the efficient conclusion of Adjudicating Authority under the PMLA can, during the moratorium period, order the CIRP. On the other, the Enforcement Directorate argues that the moratorium confirmation of a provisional attachment that was made prior to the would not prevent the attachment of properties under the PMLA, which is critical commencement of the moratorium. The NCLAT opined that the moratorium to preserve the interest of the State in prosecuting crimes, and the pendency of the would not be applicable to a “criminal proceeding or any penal action taken CIRP should not allow debtors to evade the sanction against money laundering. pursuant to the criminal proceeding or any act having essence of crime or crime 9 In this context, the National Company Law Tribunal (“NCLT”), the National proceeds” and accordingly held that an order for provisional attachment under the Company Law Appellate Tribunal (“NCLAT”), Adjudicating and Appellate PMLA would not be prevented by section 14. As such, the NCLAT allowed Authorities under the PMLA and High Courts have dealt with the question of attachment proceedings to be continued during the CIRP, while implying that there whether proceedings for attachment under the PMLA during the CIRP period was no conflict in the first place. This ruling has subsequently been applied by the would be barred by the moratorium, or if they could continue in parallel. NCLAT in Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement10 as well, in context of liquidation. Interestingly, these rulings do not In SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure take into account judgements holding that attachment proceedings under the 5 Limited, the NCLT Mumbai was called to determine if a provisional attachment of PMLA are civil proceedings. Arguably, however, the NCLAT may have proceeded the property of Sterling SEZ and Infrastructure Ltd. would be allowed. In this case, on the basis that even though such proceedings are 'civil proceedings' they are the NCLT held that proceedings for attachment under PMLA are civil proceedings connected to 'proceeds of crimes'. and barred under section 14(1)(a) of the Code. Importantly, the NCLT also examined the objectives and economic aspects of both legislations, and held that The Delhi High Court also dealt with this issue in The Deputy Director of 11 since the Code offered a time-bound process to unlock the value in the assets of a Directorate of Enforcement, Delhi v. Axis Bank & Ors. In this case, both debtor, it would be preferable to the process under the PMLA. Although the attachment proceedings as well as debt recovery (under the Recovery of Debts and ultimate goal of the PMLA is also to confiscate the assets and compensate the Bankruptcy Act, 1993 (“RDB Act”) or Securitisation and Asset Reconstruction of affected parties, the NCLT observed that the process under the PMLA is more time- Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI consuming and is likely to cause erosion. This ruling of the NCLT was consistent Act”) or insolvency proceedings (under the Code) had been instituted against with the rulings of the Appellate Authority under the PMLA (“PMLAT”) in Bank of certain properties/ debtors by the Enforcement Directorate and the creditors, India v. Deputy Director,6 Enforcement Directorateand Punjab National Bank v. respectively. Deputy Director, Directorate of Enforcement, Raipur.7 In these cases, the PMLAT The High Court held that since the objective of the PMLA is distinct from that of specifically held that although both the Code and the PMLA contain non-obstante the RDB Act, SARFAESI Act and the Code, they would not prevail over the PMLA clauses, the provisions of the Code would override those of the PMLA as the Code and the legislations would have to be read harmoniously. As such, the High Court was a later legislation. Further, the PMLAT also held that as the proceedings of laid down detailed guidelines that allowed attachment proceedings to be instituted attachment under the PMLA were civil proceedings, they would be barred by the or continued, but also recognised the interest of third party secured creditors. operation of section 14 of the Code. While High Court dealt with various factual matrixes and opined on how However, the NCLAT has adopted a different approach. In Varrsana Ispat v.

8 Company Appeal (AT) (Insolvency) No. 493 of 2018, decision dated 2-05-2019 9 FPVarrsana Ispat v. Deputy Director, Enforcement Directorate, Company Appeal (AT) (Insolvency) No. 493 5 A. 1280/2080 in C.P. 405/2018 (NCLT Mumbai), decision dated 12-02-2019 of 2018, decision dated 2-05-2019, Para 8 10 6 FPA-PMLA-2173 & 2155/MUM/2018, decision dated 31-10-2018 (2019) 155 SCL 250 11 7 FPA-PMLA-596/LKW/2014, decision dated 19-07-2018 (2019) 259 DLT500

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attachment and insolvency (or enforcement) proceedings will continue in each Section 14 unambiguously covers actions against the property of the debtor event, most crucially, it held that where the property attached is not tainted property As discussed previously,section 14 bars the institution or continuation of any suits but deemed tainted property or alternative attachable property, the charge of bona or proceedings against the corporate debtor. While the section itself is broadly fide third party secured creditors would have to be satisfied and the attachment worded, the NCLAT has held that section 14 does not cover criminal actions or would be “restricted to such part of the value of the property as is in excess of the actions having the essence of crime. Accordingly, it would not cover attachment of 12 claim of the said third party.” the properties of the debtor. As such, on an analysis of case law, three different approaches emerge. The first With respect, this analysis of the NCLAT doesn't take into account that actions approach, followed by the NCLT and the PMLAT indicate that attachment against asset scan be civil in nature,13 taking into account the objective of the proceedings under the PMLA would be barred by virtue of Section 14 of the Code, proceeding. Specifically, attachment proceedings under PMLA have been held to and the provisions of the Code would 'prevail'. The second approach, followed by be civil in nature,14 since they affect civil rights and are actually allowed as an the NCLAT indicates that the moratorium under the Code doesn't apply to action of the executive, whose confirmation is left to a quasi-judicial body, and not proceedings with an essence of crime and so there is no conflict, and attachment the criminal court. This removes the underlying basis of the NCLAT's decision. proceedings under the PMLA would not be barred by the moratorium. The third However, even if this is not the case, the interpretation of the NCLAT is contrary to approach, advocated by the Delhi High Court focusses on a harmonious the explicit wording of section 14, which doesn't preclude criminal proceedings interpretation of the two legislations, where PMLA attachment proceedings can that result in asset forfeiture, and is also contrary to the purpose of the moratorium. continue but must respect the legitimate interests of bona fide third parties. The moratorium's purpose is to keep the assets of the corporate debtor together, so Although jurisprudence on this issue is still evolving, the prevailing law allows that the creditors may assess its viability and attempt its resolution. The attachment proceedings under the PMLA to be carried out during the CIRP period. moratorium is also intended to ensure that multiple proceedings do not take place simultaneously, resulting in conflicting outcomes.15 Allowing proceedings that ACTIONS UNDER THE PMLA SHOULD NOT BE INITIATED OR attach the assets of the debtor would completely defeat these objectives, since they CONTINUED DURING THE CIRP would allow different assets to be kept out of the realm of the insolvency In this section, we argue that attachment proceedings under the PMLA should not proceedings, and if the adjudication of the crime is concluded within the period of be allowed to be initiated or continued. This is because the provisions of the Code the moratorium, it would result in the confiscation of the assets, which would would prevail over the provisions of the PMLA and section 14 unambiguously bars undermine the entire resolution process. As such, such an interpretation of section actions against the property of the debtor. 14 deserves to be reconsidered.

A. Section 14 prevents actions against the property of the debtor Section 14 needs to be read with Section 32A Taking the second argument first, we argue that section 14 of the Code bars all Further, since the enactment of Section 32A, it is clear that once a resolution plan is 'legal proceedings' against the corporate debtor and as such, attachment approved, not only can no actions be proceeded with against the property of the proceedings would be covered by the bar in Section 14. We further argue that this is corporate debtor, the corporate debtor cannot be prosecuted for any offence, if not just evident from the plain reading of the text of section 14, but is also evident certain conditions are met. on reading the Code as a whole.

13 Gunwant Lal Godawat v. Union of India and Anr., (2018) 12 SCC 309; The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors.,259(2019)DLT500 14 FPA-Bank of India v. The Deputy Director of Directorate of Enforcement, Mumbai, MANU/ML/0040/2018 12 The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors, (2019) 259 DLT500, Para 171 (xv) 15 Notes to Clause 14, Insolvency and Bankruptcy Bill, 2015

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attachment and insolvency (or enforcement) proceedings will continue in each Section 14 unambiguously covers actions against the property of the debtor event, most crucially, it held that where the property attached is not tainted property As discussed previously,section 14 bars the institution or continuation of any suits but deemed tainted property or alternative attachable property, the charge of bona or proceedings against the corporate debtor. While the section itself is broadly fide third party secured creditors would have to be satisfied and the attachment worded, the NCLAT has held that section 14 does not cover criminal actions or would be “restricted to such part of the value of the property as is in excess of the actions having the essence of crime. Accordingly, it would not cover attachment of 12 claim of the said third party.” the properties of the debtor. As such, on an analysis of case law, three different approaches emerge. The first With respect, this analysis of the NCLAT doesn't take into account that actions approach, followed by the NCLT and the PMLAT indicate that attachment against asset scan be civil in nature,13 taking into account the objective of the proceedings under the PMLA would be barred by virtue of Section 14 of the Code, proceeding. Specifically, attachment proceedings under PMLA have been held to and the provisions of the Code would 'prevail'. The second approach, followed by be civil in nature,14 since they affect civil rights and are actually allowed as an the NCLAT indicates that the moratorium under the Code doesn't apply to action of the executive, whose confirmation is left to a quasi-judicial body, and not proceedings with an essence of crime and so there is no conflict, and attachment the criminal court. This removes the underlying basis of the NCLAT's decision. proceedings under the PMLA would not be barred by the moratorium. The third However, even if this is not the case, the interpretation of the NCLAT is contrary to approach, advocated by the Delhi High Court focusses on a harmonious the explicit wording of section 14, which doesn't preclude criminal proceedings interpretation of the two legislations, where PMLA attachment proceedings can that result in asset forfeiture, and is also contrary to the purpose of the moratorium. continue but must respect the legitimate interests of bona fide third parties. The moratorium's purpose is to keep the assets of the corporate debtor together, so Although jurisprudence on this issue is still evolving, the prevailing law allows that the creditors may assess its viability and attempt its resolution. The attachment proceedings under the PMLA to be carried out during the CIRP period. moratorium is also intended to ensure that multiple proceedings do not take place simultaneously, resulting in conflicting outcomes.15 Allowing proceedings that ACTIONS UNDER THE PMLA SHOULD NOT BE INITIATED OR attach the assets of the debtor would completely defeat these objectives, since they CONTINUED DURING THE CIRP would allow different assets to be kept out of the realm of the insolvency In this section, we argue that attachment proceedings under the PMLA should not proceedings, and if the adjudication of the crime is concluded within the period of be allowed to be initiated or continued. This is because the provisions of the Code the moratorium, it would result in the confiscation of the assets, which would would prevail over the provisions of the PMLA and section 14 unambiguously bars undermine the entire resolution process. As such, such an interpretation of section actions against the property of the debtor. 14 deserves to be reconsidered.

A. Section 14 prevents actions against the property of the debtor Section 14 needs to be read with Section 32A Taking the second argument first, we argue that section 14 of the Code bars all Further, since the enactment of Section 32A, it is clear that once a resolution plan is 'legal proceedings' against the corporate debtor and as such, attachment approved, not only can no actions be proceeded with against the property of the proceedings would be covered by the bar in Section 14. We further argue that this is corporate debtor, the corporate debtor cannot be prosecuted for any offence, if not just evident from the plain reading of the text of section 14, but is also evident certain conditions are met. on reading the Code as a whole.

13 Gunwant Lal Godawat v. Union of India and Anr., (2018) 12 SCC 309; The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors.,259(2019)DLT500 14 FPA-Bank of India v. The Deputy Director of Directorate of Enforcement, Mumbai, MANU/ML/0040/2018 12 The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors, (2019) 259 DLT500, Para 171 (xv) 15 Notes to Clause 14, Insolvency and Bankruptcy Bill, 2015

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Section 32A was introduced in the backdrop of instances where companies that The provisions of the Code, being the latter legislation, would prevail were being rescued under the CIRP were facing prosecution for offences Both the Code and the PMLA are special legislations, and both have overriding committed prior to the commencement of the CIRP. There was a concern that any provisions. In such cases, the Supreme Court has held that prosecution of the company or pursuit of its assets would adversely affect third parties who had rescued the company, or purchased its assets in good faith. There “It is well-settled that when any law has been enacted, the Legislature must be was a concern that prolonged prosecution or actions against assets may make it presumed to be aware of all existing laws…Such a conflict, as laid down in several unfeasible to rescue the company or sell its assets. This would result in the cases, may be resolved by judiciary on various considerations; such as the policy stakeholders of the company (such as its employees) being adversely affected, and underlying the enactments, the language used, the object intended to be achieved; in lower realisations for creditors. This is particularly concerning since many or mischief sought to be remedied, etc. One of the tests applied by Courts is that 18 companies that undergo the CIRP are sources of stress of bank balance sheets, and normally a later enactment should prevail over the former.” one of the reasons for the enactment of the Code was to provide a time-bound Given that the Code is the latter legislation, it is clear that the legislative intent was resolution mechanism that could contribute to the reduction of stress on bank to give this provision an overriding effect over the PMLA. 16 balance sheets. If that had not been the case, the Code would have included a provision to allow it It is a well-established principle that, in general, a legislation should be read as a to co-exist alongside the provisions of the Code.19 For instance, section 34 of RDB whole.17 Given this, we argue that Section 14 should be read with section 32A, and Act, which gives this Act an overriding effect, also limits the 'overriding effect' of in a manner that would give effect to the objectives of section 32A. If actions the Act by providing that “The provisions of this Act or the rules made thereunder against assets are allowed during the pendency of insolvency proceedings, a key shall be in addition to, and not in derogation of, the Industrial Finance objective of Section 32A, as well as the Code, which is to ensure that the rescue of a Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 company is not impeded by actions against its properties will be undermined. (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Indeed, if pursuit of a company's assets prior to the approval of the resolution plan Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial is allowed, it would not be possible to find persons to rescue the company, and the Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries company would be pushed into liquidation. This cannot be the intended Development Bank of India Act, 1989 (39 of 1989)”20 interpretation of section 14 of the Code, keeping in mind the objective of the Code, Consequently, had it been legislative intent to allow both the PMLA and Code to and the clear exemption granted by Section 32A. operate simultaneously, the Code would have included special provisions recognising the continued applicability of the PMLA. This is not the case. A. Reading both legislations indicates that the Actions against the Assets of the Debtor would not be allowed during the CIRP Underlying objectives and policy considerations would be served if proceedings under section 5 of the PMLA are not barred during the moratorium period under Since section 14 cannot be read to allow for the continuation of actions against section 14 assets, through legislations such as the PMLA, as discussed above, and the PMLA does not make an explicit exception for the moratorium under the Code, there is a Further, on a broader consideration of the objects of both legislations, the conflict between the provisions of the Code and the PMLA, which needs to be moratorium under the Code should be given sway. For one, a key aim of allowing resolved. provisional attachment under the PMLA is to preserve and protect the property

16 See: Sixteenth Lok Sabha, Sixty Eighth Report of the Standing Committee on Finance: Banking Sector in India-Issues, Challenges and the Way Forward Including Non-Performing Assets/Stressed Assets in 18 KSL & Industries v. Arihant Threads Ltd. & Ors., (2008)9SCC763 Banks/Financial Institutions(August 2018) 19 See : Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and Ors. (2001)3SCC71 17 See:G.P. Singh, Principles of Statutory Interpretation, Chapter 1, Part 3; Union of India v. Elphinstone Spinning and Weaving Co. Ltd., (2001) 4 SCC 139 20 Section 34(2), Recovery of Debts and Bankruptcy Act, 1993

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Section 32A was introduced in the backdrop of instances where companies that The provisions of the Code, being the latter legislation, would prevail were being rescued under the CIRP were facing prosecution for offences Both the Code and the PMLA are special legislations, and both have overriding committed prior to the commencement of the CIRP. There was a concern that any provisions. In such cases, the Supreme Court has held that prosecution of the company or pursuit of its assets would adversely affect third parties who had rescued the company, or purchased its assets in good faith. There “It is well-settled that when any law has been enacted, the Legislature must be was a concern that prolonged prosecution or actions against assets may make it presumed to be aware of all existing laws…Such a conflict, as laid down in several unfeasible to rescue the company or sell its assets. This would result in the cases, may be resolved by judiciary on various considerations; such as the policy stakeholders of the company (such as its employees) being adversely affected, and underlying the enactments, the language used, the object intended to be achieved; in lower realisations for creditors. This is particularly concerning since many or mischief sought to be remedied, etc. One of the tests applied by Courts is that 18 companies that undergo the CIRP are sources of stress of bank balance sheets, and normally a later enactment should prevail over the former.” one of the reasons for the enactment of the Code was to provide a time-bound Given that the Code is the latter legislation, it is clear that the legislative intent was resolution mechanism that could contribute to the reduction of stress on bank to give this provision an overriding effect over the PMLA. 16 balance sheets. If that had not been the case, the Code would have included a provision to allow it It is a well-established principle that, in general, a legislation should be read as a to co-exist alongside the provisions of the Code.19 For instance, section 34 of RDB whole.17 Given this, we argue that Section 14 should be read with section 32A, and Act, which gives this Act an overriding effect, also limits the 'overriding effect' of in a manner that would give effect to the objectives of section 32A. If actions the Act by providing that “The provisions of this Act or the rules made thereunder against assets are allowed during the pendency of insolvency proceedings, a key shall be in addition to, and not in derogation of, the Industrial Finance objective of Section 32A, as well as the Code, which is to ensure that the rescue of a Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 company is not impeded by actions against its properties will be undermined. (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Indeed, if pursuit of a company's assets prior to the approval of the resolution plan Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial is allowed, it would not be possible to find persons to rescue the company, and the Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries company would be pushed into liquidation. This cannot be the intended Development Bank of India Act, 1989 (39 of 1989)”20 interpretation of section 14 of the Code, keeping in mind the objective of the Code, Consequently, had it been legislative intent to allow both the PMLA and Code to and the clear exemption granted by Section 32A. operate simultaneously, the Code would have included special provisions recognising the continued applicability of the PMLA. This is not the case. A. Reading both legislations indicates that the Actions against the Assets of the Debtor would not be allowed during the CIRP Underlying objectives and policy considerations would be served if proceedings under section 5 of the PMLA are not barred during the moratorium period under Since section 14 cannot be read to allow for the continuation of actions against section 14 assets, through legislations such as the PMLA, as discussed above, and the PMLA does not make an explicit exception for the moratorium under the Code, there is a Further, on a broader consideration of the objects of both legislations, the conflict between the provisions of the Code and the PMLA, which needs to be moratorium under the Code should be given sway. For one, a key aim of allowing resolved. provisional attachment under the PMLA is to preserve and protect the property

16 See: Sixteenth Lok Sabha, Sixty Eighth Report of the Standing Committee on Finance: Banking Sector in India-Issues, Challenges and the Way Forward Including Non-Performing Assets/Stressed Assets in 18 KSL & Industries v. Arihant Threads Ltd. & Ors., (2008)9SCC763 Banks/Financial Institutions(August 2018) 19 See : Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and Ors. (2001)3SCC71 17 See:G.P. Singh, Principles of Statutory Interpretation, Chapter 1, Part 3; Union of India v. Elphinstone Spinning and Weaving Co. Ltd., (2001) 4 SCC 139 20 Section 34(2), Recovery of Debts and Bankruptcy Act, 1993

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while the adjudication on the offence of money-laundering is on-going.21 As the offences committed by the company. Often, they are also victims of money property of the corporate debtor is kept within the protective custody of a regulated laundering.23 Preventing actions against the assets of the company during the insolvency professional during the pendency of proceedings under the Code, this moratorium then allows the CIRP to be conducted in an uninterrupted manner. This aim is fulfilled under the Code. efficient and effective conduct of the CIRP recognises this legitimate interest that Moreover, while the PMLA protects the State's legitimate interest in penalising creditors have in the property of the company, and as noted in SREI Infrastructure 24 criminal activity, and allows its instrumentalities to take actions against assets, it Finance Limited v. Sterling SEZ and Infrastructure Limited, it also provides a also recognises the legitimate interest of victims of money laundering as well as more efficient mechanism for victims of the crime of money-laundering to be given third parties. Indeed, it can be argued that the ultimate purpose of the confiscation restitution. of assets is to offer restitution to victims of money laundering. This is evidenced by At the same time, preventing actions against the properties of the debtor during the section 8(8) of the PMLA, which provides that CIRP does not undermine the interest of the State in prosecuting crimes, or the “Where a property stands confiscated to the Central Government under sub- interest of other victims of the crimes of money-laundering. This is because section (5), the Special Court, in such manner as may be prescribed, may also authorities may proceed against the assets of any third parties, including those who direct the Central Government to restore such confiscated property or part thereof were in charge of the corporate debtor at the time when the offence was allegedly of a claimant with a legitimate interest in the property, who may have suffered a committed during the CIRP, as the moratorium does not prevent actions against 25 quantifiable loss as a result of the offence of money laundering: third-parties. Consequently, these properties may be used to give restitution to the victims of the money laundering. Further, the moratorium is temporary and applies Provided that the Special Court shall not consider such claim unless it is satisfied only as long as the previous management which would have being the directing that the claimant has acted in good faith and has suffered the loss despite having mind for the commission of a crime of money laundering is not in charge. If the taken all reasonable precautions and is not involved in the offence of money CIRP results in a withdrawal of proceedings and control being given back to the laundering.” pre-existing management of the corporate debtor, section 32A too, would not Further, the PMLA also recognises the rights of bona fide third parties over the apply. In such cases authorities may take actions against the assets of the corporate property. For instance, at the stage when the provisional attachment of properties is debtor and prosecute the corporate debtor. As such, the legitimate interest of the confirmed by the Adjudicating Authority under the PMLA, third parties may argue State in prosecuting crimes is also preserved. that they have a legitimate interest in the property, and the provisional attachment Given this, we submit that actions under section 5 of the PMLA should be read to be 22 should not be confirmed, if they meet certain criteria. As such, the rights of third barred by the moratorium under section 14 of the Code. parties are recognised by the PMLA. Allowing the moratorium under the Code to be given sway protects both these CONCLUSION interests. In insolvency situations, the main stakeholders of the company are the On an analysis of the Code, it is clear that Section 14 of the Code intends to bar creditors of the company, who were not in charge of the company when the alleged coercive actions against the assets of the corporate debtor as well as any actions money laundering may have taken place. During the period of the moratorium, that may result in parallel proceedings with different outcomes. This squarely these persons gain charge of the corporate debtor, and determine the economic viability of the corporate debtor. In many cases, the creditors of the company have security over all the assets of the company, and are not aware of the alleged 13 See: Punjab National Bank v. The Deputy Director Directorate of Enforcement, FPA-PMLA- 596/LKW/2014, decision dated 19-07-2018 24 SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, M.A. 1280/2080 in C.P. 21 Kavitha Pillai v. Joint Director, 2017 SCCOnline Ker 10118 405/2018 (NCLT Mumbai), decision dated- 12.02.2019 22 See: The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors.,(2019) 259DLT500 15 See: State Bank of India v. V. Ramakrishnan, Civil Appeal No. 3595 of 2018, decision dated 14-08-2018

88 89 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 PMLA A2ctions against Company Property during the CIRP

while the adjudication on the offence of money-laundering is on-going.21 As the offences committed by the company. Often, they are also victims of money property of the corporate debtor is kept within the protective custody of a regulated laundering.23 Preventing actions against the assets of the company during the insolvency professional during the pendency of proceedings under the Code, this moratorium then allows the CIRP to be conducted in an uninterrupted manner. This aim is fulfilled under the Code. efficient and effective conduct of the CIRP recognises this legitimate interest that Moreover, while the PMLA protects the State's legitimate interest in penalising creditors have in the property of the company, and as noted in SREI Infrastructure 24 criminal activity, and allows its instrumentalities to take actions against assets, it Finance Limited v. Sterling SEZ and Infrastructure Limited, it also provides a also recognises the legitimate interest of victims of money laundering as well as more efficient mechanism for victims of the crime of money-laundering to be given third parties. Indeed, it can be argued that the ultimate purpose of the confiscation restitution. of assets is to offer restitution to victims of money laundering. This is evidenced by At the same time, preventing actions against the properties of the debtor during the section 8(8) of the PMLA, which provides that CIRP does not undermine the interest of the State in prosecuting crimes, or the “Where a property stands confiscated to the Central Government under sub- interest of other victims of the crimes of money-laundering. This is because section (5), the Special Court, in such manner as may be prescribed, may also authorities may proceed against the assets of any third parties, including those who direct the Central Government to restore such confiscated property or part thereof were in charge of the corporate debtor at the time when the offence was allegedly of a claimant with a legitimate interest in the property, who may have suffered a committed during the CIRP, as the moratorium does not prevent actions against 25 quantifiable loss as a result of the offence of money laundering: third-parties. Consequently, these properties may be used to give restitution to the victims of the money laundering. Further, the moratorium is temporary and applies Provided that the Special Court shall not consider such claim unless it is satisfied only as long as the previous management which would have being the directing that the claimant has acted in good faith and has suffered the loss despite having mind for the commission of a crime of money laundering is not in charge. If the taken all reasonable precautions and is not involved in the offence of money CIRP results in a withdrawal of proceedings and control being given back to the laundering.” pre-existing management of the corporate debtor, section 32A too, would not Further, the PMLA also recognises the rights of bona fide third parties over the apply. In such cases authorities may take actions against the assets of the corporate property. For instance, at the stage when the provisional attachment of properties is debtor and prosecute the corporate debtor. As such, the legitimate interest of the confirmed by the Adjudicating Authority under the PMLA, third parties may argue State in prosecuting crimes is also preserved. that they have a legitimate interest in the property, and the provisional attachment Given this, we submit that actions under section 5 of the PMLA should be read to be 22 should not be confirmed, if they meet certain criteria. As such, the rights of third barred by the moratorium under section 14 of the Code. parties are recognised by the PMLA. Allowing the moratorium under the Code to be given sway protects both these CONCLUSION interests. In insolvency situations, the main stakeholders of the company are the On an analysis of the Code, it is clear that Section 14 of the Code intends to bar creditors of the company, who were not in charge of the company when the alleged coercive actions against the assets of the corporate debtor as well as any actions money laundering may have taken place. During the period of the moratorium, that may result in parallel proceedings with different outcomes. This squarely these persons gain charge of the corporate debtor, and determine the economic viability of the corporate debtor. In many cases, the creditors of the company have security over all the assets of the company, and are not aware of the alleged 13 See: Punjab National Bank v. The Deputy Director Directorate of Enforcement, FPA-PMLA- 596/LKW/2014, decision dated 19-07-2018 24 SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, M.A. 1280/2080 in C.P. 21 Kavitha Pillai v. Joint Director, 2017 SCCOnline Ker 10118 405/2018 (NCLT Mumbai), decision dated- 12.02.2019 22 See: The Deputy Director of Directorate of Enforcement, Delhi v. Axis Bank & Ors.,(2019) 259DLT500 15 See: State Bank of India v. V. Ramakrishnan, Civil Appeal No. 3595 of 2018, decision dated 14-08-2018

88 89 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1

includes actions against assets taken under legislation such as the PMLA. On account of this, there is a conflict between the provisions of the Code and the PMLA. However, the Code is a special legislation that has come later in time than the PMLA. Moreover, the moratorium under the Code preserves the property of the debtor, protects legitimate interests of third parties in property that can be attached under the PMLA, and allows for protection of victims of the crime of money laundering as well. At the same time, the interests of the state in prosecuting crimes is also preserved even if actions against assets of the debtors are barred. Given this, it is clear that the provisions of the Code shall prevail, and the moratorium under section 14 of the Code would prevent such proceedings from being initiated or continued during the CIRP.

Fresh Start Policy : An Ephemeral Palliative of an enduring Rescue Mechanism

Urvashi Shahi

1 Ms. Urvashi Shahi is a Senior Research Fellow at IICA.

90 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1

includes actions against assets taken under legislation such as the PMLA. On account of this, there is a conflict between the provisions of the Code and the PMLA. However, the Code is a special legislation that has come later in time than the PMLA. Moreover, the moratorium under the Code preserves the property of the debtor, protects legitimate interests of third parties in property that can be attached under the PMLA, and allows for protection of victims of the crime of money laundering as well. At the same time, the interests of the state in prosecuting crimes is also preserved even if actions against assets of the debtors are barred. Given this, it is clear that the provisions of the Code shall prevail, and the moratorium under section 14 of the Code would prevent such proceedings from being initiated or continued during the CIRP.

Fresh Start Policy : An Ephemeral Palliative of an enduring Rescue Mechanism

Urvashi Shahi

1 Ms. Urvashi Shahi is a Senior Research Fellow at IICA.

90 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

Abstract eligibility criteria. Secondly, insolvency resolution process which enables renegotiation of resolution plan and lastly the bankruptcy process, applicable in Insolvency regime in India took a paradigm shift in its approach with the case of failed resolution, resulting in liquidation of debtor's asset. Though the Code introduction of Insolvency and Bankruptcy Code in 2016 (“the Code”). The Code provides a legislative framework for all the above, the provisions for individual is a consolidated law that provides for resolution and liquidation processes for insolvency, except for personal guarantors to the corporate debtors, are yet to be both corporate and individual insolvency. The code has proved to be a major notified. overhaul in case of corporate rescues but the provisions for individual insolvency have not been notified yet. Given the diverse Indian population, implementation of an insolvency framework for individuals would certainly be a challenging task. Hence it is pertinent to The Code provides for three ways to deal with default of an individual. Firstly, the address certain fundamental questions before its enforcement. fresh start process, which provides for debt waiver subject to very specific eligibility criteria. In essence, the process intends to facilitate fresh start for This piece seeks to explore the contours of the fresh start process and examine the individuals, especially those belonging to lower income group and serves as a feasibility of proposed policy which becomes more so relevant, given the rise in social insurance scheme. Secondly, the Code provides for insolvency resolution consumer bankruptcy cases due to Covid-19. process which enables renegotiation of resolution plan and lastly the bankruptcy process, applicable in case of failed resolution, resulting in liquidation of debtor's FRESH START PROCESS: MEANING AND SIGNIFICANCE assets. Since individual insolvency is the next big thing in the radar of the Fresh Start Process (“FSP”), commonly called as Debt discharge,2 is a well- government, the notification of these provisions is expected very soon. recognized concept worldwide. Countries such as the US, UK and Australia also Given the kind of diversity and population density in India, implementation of have provisions akin to the FSP under the Code. individual insolvency framework especially fresh start policy would be a It liberates the eligible debtors from the burden of previous debts, helping them challenging task. Fresh Start is one such rescue tool which has both social benefits towards having a new beginning. It is somewhat similar to social insurance as well as equivalent cost. Hence such a policy must be carefully crafted & schemes safeguarding individuals against future risk and instability. It also has a implemented in a way that the overall potential benefits exceed the cost. huge social cost in the form of increased cost of credit, moral hazards, This paper seeks to explore the contours of fresh start process and raise certain administrative costs etc.3 fundamental issues and challenges pertaining to implementation of extant Such policies must be carefully designed in a way that overall potential benefits provisions of fresh start process. exceed the cost. It must only be applicable to such cases where chances of recovery Keywords – Fresh Start Process; Individual Insolvency in India; Critical analysis may be so low that the cost of resolving the insolvency otherwise would only of Fresh Start Process. become an additional burden to either the debtor or the creditor or the State.4

INTRODUCTION PROPOSED LEGISLATIVE FRAMEWORK The Insolvency regime in India took a paradigm shift in its approach with the Part III of the Code, which is yet to be notified, provides for insolvency resolution introduction of the Insolvency and Bankruptcy Code, 2016 (“the Code”). The Code is a consolidated law that provides for resolution and liquidation processes 2 Maria Gerhardt, 'Consumer Bankruptcy Regimes and Credit Default in the US and Europe A comparative for both corporate and individual insolvency. After proving to be a major overhaul study', CEPS Working Document No. 318 (2009) accessed 25 August in corporate rescues, the next big thing is individual insolvency. 2020 3 Report of Bankruptcy Law and Reforms Committee, (Vol-1,Nov-2015) The Code provides for three ways to deal with the default of an individual. Firstly, accessed 14 August 2020 the fresh start process), which provides for debt waiver, subject to very specific 4 Id. at para 6.

92 93 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

Abstract eligibility criteria. Secondly, insolvency resolution process which enables renegotiation of resolution plan and lastly the bankruptcy process, applicable in Insolvency regime in India took a paradigm shift in its approach with the case of failed resolution, resulting in liquidation of debtor's asset. Though the Code introduction of Insolvency and Bankruptcy Code in 2016 (“the Code”). The Code provides a legislative framework for all the above, the provisions for individual is a consolidated law that provides for resolution and liquidation processes for insolvency, except for personal guarantors to the corporate debtors, are yet to be both corporate and individual insolvency. The code has proved to be a major notified. overhaul in case of corporate rescues but the provisions for individual insolvency have not been notified yet. Given the diverse Indian population, implementation of an insolvency framework for individuals would certainly be a challenging task. Hence it is pertinent to The Code provides for three ways to deal with default of an individual. Firstly, the address certain fundamental questions before its enforcement. fresh start process, which provides for debt waiver subject to very specific eligibility criteria. In essence, the process intends to facilitate fresh start for This piece seeks to explore the contours of the fresh start process and examine the individuals, especially those belonging to lower income group and serves as a feasibility of proposed policy which becomes more so relevant, given the rise in social insurance scheme. Secondly, the Code provides for insolvency resolution consumer bankruptcy cases due to Covid-19. process which enables renegotiation of resolution plan and lastly the bankruptcy process, applicable in case of failed resolution, resulting in liquidation of debtor's FRESH START PROCESS: MEANING AND SIGNIFICANCE assets. Since individual insolvency is the next big thing in the radar of the Fresh Start Process (“FSP”), commonly called as Debt discharge,2 is a well- government, the notification of these provisions is expected very soon. recognized concept worldwide. Countries such as the US, UK and Australia also Given the kind of diversity and population density in India, implementation of have provisions akin to the FSP under the Code. individual insolvency framework especially fresh start policy would be a It liberates the eligible debtors from the burden of previous debts, helping them challenging task. Fresh Start is one such rescue tool which has both social benefits towards having a new beginning. It is somewhat similar to social insurance as well as equivalent cost. Hence such a policy must be carefully crafted & schemes safeguarding individuals against future risk and instability. It also has a implemented in a way that the overall potential benefits exceed the cost. huge social cost in the form of increased cost of credit, moral hazards, This paper seeks to explore the contours of fresh start process and raise certain administrative costs etc.3 fundamental issues and challenges pertaining to implementation of extant Such policies must be carefully designed in a way that overall potential benefits provisions of fresh start process. exceed the cost. It must only be applicable to such cases where chances of recovery Keywords – Fresh Start Process; Individual Insolvency in India; Critical analysis may be so low that the cost of resolving the insolvency otherwise would only of Fresh Start Process. become an additional burden to either the debtor or the creditor or the State.4

INTRODUCTION PROPOSED LEGISLATIVE FRAMEWORK The Insolvency regime in India took a paradigm shift in its approach with the Part III of the Code, which is yet to be notified, provides for insolvency resolution introduction of the Insolvency and Bankruptcy Code, 2016 (“the Code”). The Code is a consolidated law that provides for resolution and liquidation processes 2 Maria Gerhardt, 'Consumer Bankruptcy Regimes and Credit Default in the US and Europe A comparative for both corporate and individual insolvency. After proving to be a major overhaul study', CEPS Working Document No. 318 (2009) accessed 25 August in corporate rescues, the next big thing is individual insolvency. 2020 3 Report of Bankruptcy Law and Reforms Committee, (Vol-1,Nov-2015) The Code provides for three ways to deal with the default of an individual. Firstly, accessed 14 August 2020 the fresh start process), which provides for debt waiver, subject to very specific 4 Id. at para 6.

92 93 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

and bankruptcy for individuals and partnership firms. In this regard, the Code inter core objective of FSP by the BLRC.13 alia envisages a FSP, which enables debts waiver, subject to the provisions of the However, there is existing literature that suggests otherwise. Porter and Thorne Code. (2006)14 in empirical study have established that “Fresh Start” is an incomplete tool Individuals who have an annual income ≤ INR 60,000, assets ≤ INR 20,000, debts to rehabilitate those in financial distress. They interviewed three hundred and fifty- ≤ INR 35,000 and do not have a dwelling unit are eligible for an FSP under the nine debtors to assess how they fare one-year post bankruptcy and discharge orders Code.5 The Insolvency Professional (“IP”) acts as a facilitator of the process who is and found that one in four debtors was struggling to pay routine bills, and one in bound to examine the application by the debtor and submit the report to the three debtors reported an overall financial situation similar to, or worse than, when Adjudicating Authority (“AA”), i.e. Debt Recovery Tribunal (“DRT”).6 If the AA that debtor filed for bankruptcy. There is as such no evidence to establish is satisfied, based on the examination of the IP, AA passes an order, admitting or effectiveness of such a policy on rehabilitation of distressed debtors. 7 rejecting the application. If an application is admitted, the creditors have an Further, FSP would amount to a double whammy on the cost of credit. Firstly, it 8 opportunity to object to the FSP on limited grounds, as prescribed under the Code. will impact the credibility of the eligible debtor. It has been proposed by the BLRC The process is concluded, once the AA passes an order for the discharge of the that FSP would be reflected in the credit history but the duration of the same is yet 9 debtor or revokes the admission of the application. The discharge order writes off not clear. Surprisingly, none of the extant provisions provide for the same except the unsecured debts, allowing the debtor to start afresh. However, it has been Section 196 of the Code, which states that a discharge order in the fresh start additionally proposed by the Bankruptcy Law Reforms Committee (BLRC), in its process shall be recorded in the register, maintained by the the Insolvency & 10 report in 2015, that it must also be reflected in the credit history of the individual. Bankruptcy Board of India (“IBBI”). Reflection in credit history will not only impact the availability of credit but also the rate at which it would be available. CRITICAL ASSESSMENT OF FSP Without any appropriate guidelines on this, lenders would not fail to impose high 1. Objective penalty interest and rates. The FSP evolved as a result of a shift in the purpose of individual insolvency laws Evidencing the aforesaid, a study by the Federal Bank of Boston in the paper titled from debt collecting mechanisms to social legislations that enables a systematic “Forgive and Forget: Who gets credit after bankruptcy and why?”15, showed there discharge from responsibilities that have grown onerous. In this sense, the was a rise in the credit rate and hit on the exposure in this sector after discharge is a "societal act of forgiveness or mercy, which is mandated by moral or implementation of their respective regimes; though, in long run, it was seen that the ethical concerns”11 and which enables individuals to start afresh and return back to credit culture gradually improved. Additionally, debt waivers in India have shown active participation in commercial society.12 This has also been envisaged as the enduring impact on market borrowings which can not only pose higher interest burden on the states but also crowd out private borrowers.16

5 Section 80, Insolvency and Bankruptcy Code, 2016. Secondly, it would create a substantial burden on Microfinance Institutions (MFI), 6 Section 81, Insolvency and Bankruptcy Code, 2016. 7 Section 84, Insolvency and Bankruptcy Code, 2016. 8 Section 86, Insolvency and Bankruptcy Code, 2016. 13 Supra Note 2 9 Section 92, Insolvency and Bankruptcy Code, 2016. 14 10 Katherine M. Porter & Deborah Thorne, 'The Failure of Bankruptcy's Fresh Start' (2006) Cornell Law Supra Note 2 Review (92) accessed 21 August 2020 11 John M. Czarnetzky, 'The Individual and Failure: A Theory of the Bankruptcy Discharge' 32 ARIZ. ST. L.J. 15 393, 393-94 (2000). Ethan Cohen-Cole, Burcu Duygan-Bump, & Judit Montoriol-Garriga.'Forgive and Forget: Who get credit accessed 18 after bankruptcy and why?', Federal Reserve Bank of Boston (Supervisory Research and Analysis Working August 2020 Papers, 2009) accessed 25 August 2020. 12 SSean C. Currie, 'The Multiple Purposes of Bankruptcy: Restoring Bankruptcy's Social Insurance Function after BAPCPA' (2009) 16 Sugandha Narayan, Nirupam Mehrotram,'Loan Waivers and Bank Credit: Reflections on the Evidence and accessed 15 August 2020 accessed 26 August 2020.

94 95 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

and bankruptcy for individuals and partnership firms. In this regard, the Code inter core objective of FSP by the BLRC.13 alia envisages a FSP, which enables debts waiver, subject to the provisions of the However, there is existing literature that suggests otherwise. Porter and Thorne Code. (2006)14 in empirical study have established that “Fresh Start” is an incomplete tool Individuals who have an annual income ≤ INR 60,000, assets ≤ INR 20,000, debts to rehabilitate those in financial distress. They interviewed three hundred and fifty- ≤ INR 35,000 and do not have a dwelling unit are eligible for an FSP under the nine debtors to assess how they fare one-year post bankruptcy and discharge orders Code.5 The Insolvency Professional (“IP”) acts as a facilitator of the process who is and found that one in four debtors was struggling to pay routine bills, and one in bound to examine the application by the debtor and submit the report to the three debtors reported an overall financial situation similar to, or worse than, when Adjudicating Authority (“AA”), i.e. Debt Recovery Tribunal (“DRT”).6 If the AA that debtor filed for bankruptcy. There is as such no evidence to establish is satisfied, based on the examination of the IP, AA passes an order, admitting or effectiveness of such a policy on rehabilitation of distressed debtors. 7 rejecting the application. If an application is admitted, the creditors have an Further, FSP would amount to a double whammy on the cost of credit. Firstly, it 8 opportunity to object to the FSP on limited grounds, as prescribed under the Code. will impact the credibility of the eligible debtor. It has been proposed by the BLRC The process is concluded, once the AA passes an order for the discharge of the that FSP would be reflected in the credit history but the duration of the same is yet 9 debtor or revokes the admission of the application. The discharge order writes off not clear. Surprisingly, none of the extant provisions provide for the same except the unsecured debts, allowing the debtor to start afresh. However, it has been Section 196 of the Code, which states that a discharge order in the fresh start additionally proposed by the Bankruptcy Law Reforms Committee (BLRC), in its process shall be recorded in the register, maintained by the the Insolvency & 10 report in 2015, that it must also be reflected in the credit history of the individual. Bankruptcy Board of India (“IBBI”). Reflection in credit history will not only impact the availability of credit but also the rate at which it would be available. CRITICAL ASSESSMENT OF FSP Without any appropriate guidelines on this, lenders would not fail to impose high 1. Objective penalty interest and rates. The FSP evolved as a result of a shift in the purpose of individual insolvency laws Evidencing the aforesaid, a study by the Federal Bank of Boston in the paper titled from debt collecting mechanisms to social legislations that enables a systematic “Forgive and Forget: Who gets credit after bankruptcy and why?”15, showed there discharge from responsibilities that have grown onerous. In this sense, the was a rise in the credit rate and hit on the exposure in this sector after discharge is a "societal act of forgiveness or mercy, which is mandated by moral or implementation of their respective regimes; though, in long run, it was seen that the ethical concerns”11 and which enables individuals to start afresh and return back to credit culture gradually improved. Additionally, debt waivers in India have shown active participation in commercial society.12 This has also been envisaged as the enduring impact on market borrowings which can not only pose higher interest burden on the states but also crowd out private borrowers.16

5 Section 80, Insolvency and Bankruptcy Code, 2016. Secondly, it would create a substantial burden on Microfinance Institutions (MFI), 6 Section 81, Insolvency and Bankruptcy Code, 2016. 7 Section 84, Insolvency and Bankruptcy Code, 2016. 8 Section 86, Insolvency and Bankruptcy Code, 2016. 13 Supra Note 2 9 Section 92, Insolvency and Bankruptcy Code, 2016. 14 10 Katherine M. Porter & Deborah Thorne, 'The Failure of Bankruptcy's Fresh Start' (2006) Cornell Law Supra Note 2 Review (92) accessed 21 August 2020 11 John M. Czarnetzky, 'The Individual and Failure: A Theory of the Bankruptcy Discharge' 32 ARIZ. ST. L.J. 15 393, 393-94 (2000). Ethan Cohen-Cole, Burcu Duygan-Bump, & Judit Montoriol-Garriga.'Forgive and Forget: Who get credit accessed 18 after bankruptcy and why?', Federal Reserve Bank of Boston (Supervisory Research and Analysis Working August 2020 Papers, 2009) accessed 25 August 2020. 12 SSean C. Currie, 'The Multiple Purposes of Bankruptcy: Restoring Bankruptcy's Social Insurance Function after BAPCPA' (2009) 16 Sugandha Narayan, Nirupam Mehrotram,'Loan Waivers and Bank Credit: Reflections on the Evidence and accessed 15 August 2020 accessed 26 August 2020.

94 95 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

which are a major source of finance, especially for lower income groups. As per a Similarly, the IPs are also inadequate in number. Currently there are three thousand study by Sane (2019),17 it is suggested that about 23 million MFI borrowers [those one hundred and twenty-two IPs registered with the IBBI. It is, therefore, with the status of Below Poverty Line (BPL)]) are likely to become eligible for the suggested that IBBI22 needs to ensure that there are enough professionals registered FSP. Waiver of their loans would severely impact the Microfinance industry that with it who can oversee smooth functioning of the process for individuals. Further, would have no option but to transfer this burden in form of higher lending rates to it is important to note that the role of an IP in FSP is restricted to verification of the the new borrowers. Given the ripple effect of FSP orders on credit culture and application23 and is more in the lines of clerical nature of work when compared with lending rates, it is difficult to say whether such a policy would be impactful in the role of an IP in corporate insolvency resolution process where the IP takes over providing any 'real fresh start' to the eligible debtors. the management of corporate debtor and steers the whole process till resolution is complete. Considering the possible number of cases that can outnumber the 2. Institutional Infrastructure registered IPs and the fact that the role of IP in individual insolvency matters is very Implementation of this policy will require a supporting institutional infrastructure limited, it is suggested for IBBI to evaluate a simple licensing procedure to ensure which is adequate, easily accessible and financially viable. The two instrumental availability of enough IPs to service individuals across India versus a minimum institutions i.e. DRT and IP, on which the success of FSP is dependent, are standard of qualifications to ensure service quality. However, assembling a inadequately equipped. considerable number of professionals would also require ample time. DRT, which is the adjudicating authority for FSP under the Code, is already Furthermore, mechanisms to discipline a large cadre of professionals will require overloaded with one lac nine thousand five hundred and eighteen cases pending, as an enforcement capacity that may be currently missing. of 30th June 2017.18 Sane19, finds that the case load on existing DRTs will rise Additionally, employing an IP to facilitate the process would increase its cost as the significantly even if 1% of personal loan accounts in banks in a district were to fees charged by IPs would be considerably high for an individual undergoing FSP. default, and just fewer than 10% of these were to be brought under the Code. The said issue has also been acknowledged in the Report by Working Group Addition of huge workload to DRT would hamper quick disposal and thereby the Committee on Individual Insolvency which further suggests that a cadre of purpose of individual insolvency. Given that most of the beneficiaries of FSP mediators regulated by IBBI can be made to handle matters where the debt is not would be low-income group or people mainly from rural background, DRT would disputed or does not require judicial intervention.24 also not be a very accessible option as it is situated at just twenty-five locations The recent report of Insolvency Law committee discusses this issue in detail and 20 currently. suggests to develop a different cadre of insolvency advisors to effectively This concern has also been discussed by the Insolvency Law committee21 which implement the FSP regime in India.25 has indicated the need to reassess the appropriate AA under the FSP. The Therefore, lack of required institutional infrastructure is possibly the biggest Insolvency Law committee suggests to designate IBBI for the same. hurdle that IBBI and lawmakers would need to address before bringing the FSP in effect.

17 Dr. Renuka Sane, 'The way forward for personal insolvency in the Indian Insolvency and Bankruptcy Code' (NIPFP Working paper series No. 251, 24 January 2019) 22 accessed 23 August 2020. Quarterly Newsletter for Apr-Jun, 2020, 18 IBBIaccessed 22 August 'Courts and Tribunals' (Law Economics Policy Conference, 4-6th December 2017) 2020.

accessed on 22 August 2020. 23 19 Report of the Working Group on Individual Insolvency, Insolvency and Bankruptcy Board of India (2017) < Supra Note 14. https://ibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdf> accessed 23 20 Prasanth V Regy and Shubho Roy, 'Understanding Judicial Delays in Debt Tribunals', (2 May 2017)> August 2020. accessed 14 July 2020. 24 Id. at page 12. 21 Report of The Insolvency Law committee, Ministry of Corporate Affairs, India, Feb 2020 25 Supra Note 20

96 97 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

which are a major source of finance, especially for lower income groups. As per a Similarly, the IPs are also inadequate in number. Currently there are three thousand study by Sane (2019),17 it is suggested that about 23 million MFI borrowers [those one hundred and twenty-two IPs registered with the IBBI. It is, therefore, with the status of Below Poverty Line (BPL)]) are likely to become eligible for the suggested that IBBI22 needs to ensure that there are enough professionals registered FSP. Waiver of their loans would severely impact the Microfinance industry that with it who can oversee smooth functioning of the process for individuals. Further, would have no option but to transfer this burden in form of higher lending rates to it is important to note that the role of an IP in FSP is restricted to verification of the the new borrowers. Given the ripple effect of FSP orders on credit culture and application23 and is more in the lines of clerical nature of work when compared with lending rates, it is difficult to say whether such a policy would be impactful in the role of an IP in corporate insolvency resolution process where the IP takes over providing any 'real fresh start' to the eligible debtors. the management of corporate debtor and steers the whole process till resolution is complete. Considering the possible number of cases that can outnumber the 2. Institutional Infrastructure registered IPs and the fact that the role of IP in individual insolvency matters is very Implementation of this policy will require a supporting institutional infrastructure limited, it is suggested for IBBI to evaluate a simple licensing procedure to ensure which is adequate, easily accessible and financially viable. The two instrumental availability of enough IPs to service individuals across India versus a minimum institutions i.e. DRT and IP, on which the success of FSP is dependent, are standard of qualifications to ensure service quality. However, assembling a inadequately equipped. considerable number of professionals would also require ample time. DRT, which is the adjudicating authority for FSP under the Code, is already Furthermore, mechanisms to discipline a large cadre of professionals will require overloaded with one lac nine thousand five hundred and eighteen cases pending, as an enforcement capacity that may be currently missing. of 30th June 2017.18 Sane19, finds that the case load on existing DRTs will rise Additionally, employing an IP to facilitate the process would increase its cost as the significantly even if 1% of personal loan accounts in banks in a district were to fees charged by IPs would be considerably high for an individual undergoing FSP. default, and just fewer than 10% of these were to be brought under the Code. The said issue has also been acknowledged in the Report by Working Group Addition of huge workload to DRT would hamper quick disposal and thereby the Committee on Individual Insolvency which further suggests that a cadre of purpose of individual insolvency. Given that most of the beneficiaries of FSP mediators regulated by IBBI can be made to handle matters where the debt is not would be low-income group or people mainly from rural background, DRT would disputed or does not require judicial intervention.24 also not be a very accessible option as it is situated at just twenty-five locations The recent report of Insolvency Law committee discusses this issue in detail and 20 currently. suggests to develop a different cadre of insolvency advisors to effectively This concern has also been discussed by the Insolvency Law committee21 which implement the FSP regime in India.25 has indicated the need to reassess the appropriate AA under the FSP. The Therefore, lack of required institutional infrastructure is possibly the biggest Insolvency Law committee suggests to designate IBBI for the same. hurdle that IBBI and lawmakers would need to address before bringing the FSP in effect.

17 Dr. Renuka Sane, 'The way forward for personal insolvency in the Indian Insolvency and Bankruptcy Code' (NIPFP Working paper series No. 251, 24 January 2019) 22 accessed 23 August 2020. Quarterly Newsletter for Apr-Jun, 2020, 18 IBBIaccessed 22 August 'Courts and Tribunals' (Law Economics Policy Conference, 4-6th December 2017) 2020.

accessed on 22 August 2020. 23 19 Report of the Working Group on Individual Insolvency, Insolvency and Bankruptcy Board of India (2017) < Supra Note 14. https://ibbi.gov.in/uploads/resources/Final-Report_of_WG_on_Indiv_Insol-Aug_2017.pdf> accessed 23 20 Prasanth V Regy and Shubho Roy, 'Understanding Judicial Delays in Debt Tribunals', (2 May 2017)> August 2020. accessed 14 July 2020. 24 Id. at page 12. 21 Report of The Insolvency Law committee, Ministry of Corporate Affairs, India, Feb 2020 25 Supra Note 20

96 97 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

3. Safeguard mechanism to prevent abuse of process CONCLUDING REMARKS It is important to have an inherent mechanism that addresses any abuse of the rights While the government with the assistance of the IBBI have been working that law intends to provide in order to ensure efficiency of the process. While the relentlessly on addressing possible issues arising out of the proposed process, the law in present case aims at providing a fresh start to individuals who are incapable above discussed challenges that the stakeholders are likely to face suggest that the of honoring their debt, the possibility of it being misused or abused cannot be idea of individual insolvency framework is way more farfetched than one can ignored. In the study by Sane,26 as mentioned before, interesting data was brought anticipate and requires more groundwork. There is a definite need to strengthen the in light that suggested MFI have gross outstanding portfolio of Rs. 688 billion with ecosystem in terms of availability and class of professionals and judicial approximately thirty-five million clients as of 2017-2018 and shows average loan infrastructure that is capable of handling the projected case load. It is therefore per borrowing to be around INR fourteen thousand and seven hundred, thereby suggested that informal mechanisms should be encouraged before one can avail making a large population eligible for FSP. Further, the industry report suggests the FSP to discharge their debt in order to ensure that the process is not misused and that, if (BPL) is used as a precondition to avail the FSP; it would allow 65% of the availed only as a last resort. 27 clients eligible for FSP. With regard to another condition of borrower not being a With regard to creating awareness regarding utilization of the process, it is homeowner, an eligibility criterion stipulated in the Code, 96% of women would suggested that IBBI should undertake initiatives for addressing issues on financial be likely to be eligible as they are not the primary home owners in most such literacy by providing literature and spreading awareness among a vulnerable 28 households. Considering that about twenty-three million MFI borrowers (those section of the society in dealing with situations where an individual is in the state of with the status of BPL) are likely to become eligible for FSP, a very huge risk of the insolvency. Inculcating the ability to take informed decisions regarding personal process being abused cannot be ignored. It can be feared that a large population that finance should ideally reduce the risk of abuse of process, as discussed before. 29 lacks awareness and basic financial knowledge may want to avail the FSP, as a Considering the challenges discussed above, it is a long way to go for 30 first option as opposed to the last resort. implementing fresh start policy as a rescue mechanism in its true spirit. Similar abuse of process was witnessed in the United States when the individuals there utilized for discharge of debt under Chapter 7 of the US Bankruptcy Code, 1978, similar to the FSP, as their first option rather than opting for it as a last resort, as intended by the law. This misuse of law, therefore, resulted in enactment of the Bankruptcy Abuse Prevention Consumer Protection Act, 2005.31 Therefore, measures to control such abuse should be premeditated before bringing the regime in effect.

26 Supra Note 14. 27 Supra Note 14. 28 Supra Note 14. 29 M. Gunther& S. Ghosh, “Deciphering Financial Literacy in India”, Economics & Political Weekly, March 2018. https://www.epw.in/author/manuela-kristin-g%C3%BCnther accessed 22 August 2020. 30 Samriti Kamboj, 'Current Scenario of Financial Literacy in India'(2014) accessed 22 August 2020. 31 Report of The Committee on The Judiciary House of Representatives to accompany S. 256 (109th Congress, 2005) accessed 31 August 2020.

98 99 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Fresh Start Policy : AN EPHEMERAL PALLIA2 TIVE OR AN ENDURING RESCUE MECHANISM

3. Safeguard mechanism to prevent abuse of process CONCLUDING REMARKS It is important to have an inherent mechanism that addresses any abuse of the rights While the government with the assistance of the IBBI have been working that law intends to provide in order to ensure efficiency of the process. While the relentlessly on addressing possible issues arising out of the proposed process, the law in present case aims at providing a fresh start to individuals who are incapable above discussed challenges that the stakeholders are likely to face suggest that the of honoring their debt, the possibility of it being misused or abused cannot be idea of individual insolvency framework is way more farfetched than one can ignored. In the study by Sane,26 as mentioned before, interesting data was brought anticipate and requires more groundwork. There is a definite need to strengthen the in light that suggested MFI have gross outstanding portfolio of Rs. 688 billion with ecosystem in terms of availability and class of professionals and judicial approximately thirty-five million clients as of 2017-2018 and shows average loan infrastructure that is capable of handling the projected case load. It is therefore per borrowing to be around INR fourteen thousand and seven hundred, thereby suggested that informal mechanisms should be encouraged before one can avail making a large population eligible for FSP. Further, the industry report suggests the FSP to discharge their debt in order to ensure that the process is not misused and that, if (BPL) is used as a precondition to avail the FSP; it would allow 65% of the availed only as a last resort. 27 clients eligible for FSP. With regard to another condition of borrower not being a With regard to creating awareness regarding utilization of the process, it is homeowner, an eligibility criterion stipulated in the Code, 96% of women would suggested that IBBI should undertake initiatives for addressing issues on financial be likely to be eligible as they are not the primary home owners in most such literacy by providing literature and spreading awareness among a vulnerable 28 households. Considering that about twenty-three million MFI borrowers (those section of the society in dealing with situations where an individual is in the state of with the status of BPL) are likely to become eligible for FSP, a very huge risk of the insolvency. Inculcating the ability to take informed decisions regarding personal process being abused cannot be ignored. It can be feared that a large population that finance should ideally reduce the risk of abuse of process, as discussed before. 29 lacks awareness and basic financial knowledge may want to avail the FSP, as a Considering the challenges discussed above, it is a long way to go for 30 first option as opposed to the last resort. implementing fresh start policy as a rescue mechanism in its true spirit. Similar abuse of process was witnessed in the United States when the individuals there utilized for discharge of debt under Chapter 7 of the US Bankruptcy Code, 1978, similar to the FSP, as their first option rather than opting for it as a last resort, as intended by the law. This misuse of law, therefore, resulted in enactment of the Bankruptcy Abuse Prevention Consumer Protection Act, 2005.31 Therefore, measures to control such abuse should be premeditated before bringing the regime in effect.

26 Supra Note 14. 27 Supra Note 14. 28 Supra Note 14. 29 M. Gunther& S. Ghosh, “Deciphering Financial Literacy in India”, Economics & Political Weekly, March 2018. https://www.epw.in/author/manuela-kristin-g%C3%BCnther accessed 22 August 2020. 30 Samriti Kamboj, 'Current Scenario of Financial Literacy in India'(2014) accessed 22 August 2020. 31 Report of The Committee on The Judiciary House of Representatives to accompany S. 256 (109th Congress, 2005) accessed 31 August 2020.

98 99 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Painting the Insolvency Canvas in White Texture

Rishika Jain & Daksh Aggarwal

1 Rishika Jain and Daksh Aggarwal are lawyers. Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Painting the Insolvency Canvas in White Texture

Rishika Jain & Daksh Aggarwal

1 Rishika Jain and Daksh Aggarwal are lawyers. Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Abstract PREFATORY The Insolvency and Bankruptcy Code (“Code”) came into force on 28 May 2016 “A good settlement is better than a good lawsuit”- Abraham Lincoln with a view to consolidate and unify the then existing regime of insolvency laws in Insolvency has been an intricate and essential element of trade laws around the India. The provisions of the Code concerning timely, efficient and impartial globe. The restructuring regime is no new phenomenon. Through a plethora of resolution of corporate insolvency have been acknowledged and applauded by cases, it can be deciphered that insolvency laws have been the life guards of many various policy institutions. However, intermittent involvement of judicial sinking boats. authorities in due completion of the resolution process makes it stiflingly linear In India, prior to 2016, there was no single law that dealt with insolvency and and costly for the parties. One of the fruitful exercises in minimizing the non- bankruptcy. Provisions relating to insolvency and bankruptcy for companies were judicial assistance in Corporate Insolvency Resolution Process (CIRP) is by primarily found in the Sick Industrial Companies (Special Provisions) Act 19852 promoting a legal framework which encourages mediation or sophisticated (hereinafter “the SICA”), the Recovery of Debt Due to Banks and Financial negotiation. Institutions Act 1993 (hereinafter “the RDDBFI Act”), the Securitisation and Mediation as a practice is not new in dealing with complex insolvency matters. It Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 has been adopted and successfully implemented in several jurisdictions including (hereinafter “the SARFAESI Act”) and the Companies Act 20133 (hereinafter, “the the United States and the European Union. However, the Indian legal system has 2013 Act”). These statutes provided for creation of multiple fora such as Board of still not adopted mediation as a processual intervention through statutory Industrial and Financial Reconstruction (hereinafter “BIFR”), Debt Recovery codification. Nevertheless, realising the significance of the practice, the Tribunal (hereinafter “DRT”) and National Company Law Tribunal (hereinafter, government made an attempt to introduce it as an alternative to traditional “the NCLT”), and their respective Appellate Tribunals. The aforesaid framework litigating avenues by passing the 2018 amendment to the Commercial Courts Act, for insolvency and bankruptcy was felt to be inadequate, ineffective and resulted in 2015, thereby, widening the application of this mode of resolution to commercial undue delays in resolution.4 Needless to mention, there was no specific provision matters. talking about formulating a resolution plan. While legislations like SICA called for This paper is an attempt by the authors to highlight the relevance and importance determination of sickness of industrial companies and then gradually prescribed of mediation as a complementary mechanism to the structure of insolvency by measures for revival of such companies, Insolvency & Bankruptcy Code2016 shedding some light on the existing insolvency and restructuring regime around (hereinafter, “I&B Code”), on the other hand, calls for maximization of value of the globe. Through the course of this paper, the authors shall endeavour to assets and to promote entrepreneurship, availability of credit and balance the establish the sanctity of the process of mediation followed by highlighting the need interest of all stakeholders.5 This highlights a paradigm shift in the approach of to raise a trained cadre of resolution mediators who can facilitate discussions these legislations from being passive to proactive in terms of revival of entities. between the parties. The authors shall also concentrate on explaining the rationale The major inconsistency that can be observed is that, the above-mentioned behind introducing mediation, as opposed to arbitration as a means to settle legislations did not provide for a holistic approach. Where on one hand liquidation disputes by taking their distinct peculiarities and characteristics into of companies was handled by the High Court vide the 2013 Act, individual consideration. The authors shall call attention of the readers to the attempts made bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency by Indian courts in introducing mediation as a reconciliation process to resolve

differences between debtors and creditors. Lastly, the authors shall conclude by 2 Repealed (Notified) by Companies Act 2013.

making suggestions and recommendations to alter the status quo to provide for a 3 Earlier, insolvency resolution was synonymous to liquidation process, the provisions for the same were holistic system of insolvency resolution using minimalistic resources. incorporated in the Companies Act 2013. After 2016, relevant sections pertaining to both insolvency and restructuring can now be found in I&B Code, 2016. Key Words: Mediation, CIRP, Insolvency, I&B Code, Alternate Dispute Resolution 4 Statement of Objects and Reasons, Insolvency &Bankruptcy Code 2016. 4 Preamble to Insolvency & Bankruptcy Code 2016.

102 103 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Abstract PREFATORY The Insolvency and Bankruptcy Code (“Code”) came into force on 28 May 2016 “A good settlement is better than a good lawsuit”- Abraham Lincoln with a view to consolidate and unify the then existing regime of insolvency laws in Insolvency has been an intricate and essential element of trade laws around the India. The provisions of the Code concerning timely, efficient and impartial globe. The restructuring regime is no new phenomenon. Through a plethora of resolution of corporate insolvency have been acknowledged and applauded by cases, it can be deciphered that insolvency laws have been the life guards of many various policy institutions. However, intermittent involvement of judicial sinking boats. authorities in due completion of the resolution process makes it stiflingly linear In India, prior to 2016, there was no single law that dealt with insolvency and and costly for the parties. One of the fruitful exercises in minimizing the non- bankruptcy. Provisions relating to insolvency and bankruptcy for companies were judicial assistance in Corporate Insolvency Resolution Process (CIRP) is by primarily found in the Sick Industrial Companies (Special Provisions) Act 19852 promoting a legal framework which encourages mediation or sophisticated (hereinafter “the SICA”), the Recovery of Debt Due to Banks and Financial negotiation. Institutions Act 1993 (hereinafter “the RDDBFI Act”), the Securitisation and Mediation as a practice is not new in dealing with complex insolvency matters. It Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 has been adopted and successfully implemented in several jurisdictions including (hereinafter “the SARFAESI Act”) and the Companies Act 20133 (hereinafter, “the the United States and the European Union. However, the Indian legal system has 2013 Act”). These statutes provided for creation of multiple fora such as Board of still not adopted mediation as a processual intervention through statutory Industrial and Financial Reconstruction (hereinafter “BIFR”), Debt Recovery codification. Nevertheless, realising the significance of the practice, the Tribunal (hereinafter “DRT”) and National Company Law Tribunal (hereinafter, government made an attempt to introduce it as an alternative to traditional “the NCLT”), and their respective Appellate Tribunals. The aforesaid framework litigating avenues by passing the 2018 amendment to the Commercial Courts Act, for insolvency and bankruptcy was felt to be inadequate, ineffective and resulted in 2015, thereby, widening the application of this mode of resolution to commercial undue delays in resolution.4 Needless to mention, there was no specific provision matters. talking about formulating a resolution plan. While legislations like SICA called for This paper is an attempt by the authors to highlight the relevance and importance determination of sickness of industrial companies and then gradually prescribed of mediation as a complementary mechanism to the structure of insolvency by measures for revival of such companies, Insolvency & Bankruptcy Code2016 shedding some light on the existing insolvency and restructuring regime around (hereinafter, “I&B Code”), on the other hand, calls for maximization of value of the globe. Through the course of this paper, the authors shall endeavour to assets and to promote entrepreneurship, availability of credit and balance the establish the sanctity of the process of mediation followed by highlighting the need interest of all stakeholders.5 This highlights a paradigm shift in the approach of to raise a trained cadre of resolution mediators who can facilitate discussions these legislations from being passive to proactive in terms of revival of entities. between the parties. The authors shall also concentrate on explaining the rationale The major inconsistency that can be observed is that, the above-mentioned behind introducing mediation, as opposed to arbitration as a means to settle legislations did not provide for a holistic approach. Where on one hand liquidation disputes by taking their distinct peculiarities and characteristics into of companies was handled by the High Court vide the 2013 Act, individual consideration. The authors shall call attention of the readers to the attempts made bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency by Indian courts in introducing mediation as a reconciliation process to resolve differences between debtors and creditors. Lastly, the authors shall conclude by 2 Repealed (Notified) by Companies Act 2013. making suggestions and recommendations to alter the status quo to provide for a 3 Earlier, insolvency resolution was synonymous to liquidation process, the provisions for the same were holistic system of insolvency resolution using minimalistic resources. incorporated in the Companies Act 2013. After 2016, relevant sections pertaining to both insolvency and restructuring can now be found in I&B Code, 2016. Key Words: Mediation, CIRP, Insolvency, I&B Code, Alternate Dispute Resolution 4 Statement of Objects and Reasons, Insolvency &Bankruptcy Code 2016. 4 Preamble to Insolvency & Bankruptcy Code 2016.

102 103 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Act 1909 (hereinafter, “the 1909 Act”), and the Provincial Insolvency Act 1920 Mediation, as defined under Article 1(3) of the United Nations Commission on (hereinafter, “the 1920 Act”). This resulted in chaos. Hence a need was felt to unify International Trade Law (hereinafter, “theUNCITRAL”) Model Laws, means a the laws in such a manner so as to formulate and codify the insolvency law in a process, whether referred to by the expression mediation, conciliation or an comprehensive and elaborate manner with the ultimate objective of assisting the expression of similar import, whereby parties request a third person or persons stakeholders of an entity in securing their position to the best possible effective (“the mediator”) to assist them in their attempt to reach an amicable settlement of means. their dispute arising out of or relating to a contractual or other legal relationship. Thus, it cannot be denied that a consolidated law pertaining to insolvency and The mediator does not have the authority to impose upon the parties a solution to 9 bankruptcy, though a new development, has proved to be fruitful. The objective of the dispute. the I&B Code was understood for the first time in the landmark judgment of the The International Chamber of Commerce defines mediation to be a flexible and Hon'ble Supreme Court of India (hereinafter, “the SC”) which led on to develop the consensual technique in which a neutral facility helps the parties reach a negotiated jurisprudence for the field of insolvency laws in the country, to consolidate and settlement of their dispute. The parties have control over the decision to settle and amend the laws relating to reorganization and insolvency resolution of corporate the terms of any agreement. Settlements are contractually binding and widely persons, partnership firms and individuals in a time bound manner for enforceable.10 6 maximization of value of assets of such persons. As rightly pointed out by Hon'ble Justice (Retd.) A.K. Sikri, mediation in According to the data as provided by the Ministry of Corporate affairs, over the Corporate Insolvency,11 if put forth into practice, can be a game changer. While past three years, since the enactment of I&B Code, the ease of doing business and highlighting the inherent spirit of I&B Code, he stated: recovery sought by sick and distressed establishments has significantly increased. Rehabilitation should be the first attempt, especially if insolvency is due to market India, as of October 2019, is ranked 63 among 190 economies in the ease of doing conditions. Even if insolvency is a result of mismanagement, endeavour should be 7 business, according to the latest World Bank annual ratings. In 2018, the rank of made to rehabilitate the company through a change in management. If 8 India was 77, which was a noteworthy shift from 139th rank in 2010. rehabilitation is impossible, the IBC aims at quicker liquidation while taking However, the resolution and recovery process, as provided under I&B Code suffer maximum care of creditor rights. If the IBC is utilised only for debt recovery, the from certain inevitable delays. Since the law is still at a nascent stage, the field aforesaid objectives are lost. This may result in a situation of tyranny of the IBC, an remains open with wide scope of development in terms of consequent otherwise well-considered legislation….. modifications in the process, restructuring policies adopted by various economies Through the course of this paper, an attempt will be made to highlight different around the globe and related jurisprudential evolution. sophisticated and not so sophisticated jurisdictions dealing with insolvency and A peculiar yet interesting aspect to this process of insolvency can be that of bankruptcy; providing for a well-defined manner involving alternative dispute involving the alternative dispute resolution mechanisms to escalate the process resolution like arbitration and mediation. Though the same is still not a codified and ensure speedy solution, especially during unforeseen times like that of Covid- practice vis-a-vis insolvency and bankruptcy under the Indian legal regime; 19 pandemic wherein justice delivery mechanism faced a drastic halt. Such however, the Indian judiciary, with its magnificent far-sightedness acknowledged situations must not result in any sort of impediment in the settlement of disputes.

9 UNCITRAL, Annex II UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation, 2018 (amending the UNCITRAL Model Law on 6 M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., Civil Appeal Nos. 8337-8338 of 2017. International Commercial Conciliation, 2002), art 1(3), 56. 7 The World Bank, Doing Business 2020: Reforms Boost India's Business Climate Rankings; Among Top Ten 10 ICC - International Chamber of Commerce, Mediation ,(last visited Aug 22, 2020) , Improvers for Third Straight Year, PRESS RELEASE (2019),(last visited Aug 22, 2020) https://iccwbo.org/dispute-resolution-services/mediation/

https://www.worldbank.org/en/news/press-release/2019/10/24/doing-business-india-top-10-improver- 11 business-climate-ranking Sikri A.K. J & Omkar Anuroop, Mediation In Corporate Insolvency A Game Changer, BW BUSINESSWORLD (2019), (last visited Aug 22, 2020),http://www.businessworld.in/article/Mediation-In- 8 Id. Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/

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Act 1909 (hereinafter, “the 1909 Act”), and the Provincial Insolvency Act 1920 Mediation, as defined under Article 1(3) of the United Nations Commission on (hereinafter, “the 1920 Act”). This resulted in chaos. Hence a need was felt to unify International Trade Law (hereinafter, “theUNCITRAL”) Model Laws, means a the laws in such a manner so as to formulate and codify the insolvency law in a process, whether referred to by the expression mediation, conciliation or an comprehensive and elaborate manner with the ultimate objective of assisting the expression of similar import, whereby parties request a third person or persons stakeholders of an entity in securing their position to the best possible effective (“the mediator”) to assist them in their attempt to reach an amicable settlement of means. their dispute arising out of or relating to a contractual or other legal relationship. Thus, it cannot be denied that a consolidated law pertaining to insolvency and The mediator does not have the authority to impose upon the parties a solution to 9 bankruptcy, though a new development, has proved to be fruitful. The objective of the dispute. the I&B Code was understood for the first time in the landmark judgment of the The International Chamber of Commerce defines mediation to be a flexible and Hon'ble Supreme Court of India (hereinafter, “the SC”) which led on to develop the consensual technique in which a neutral facility helps the parties reach a negotiated jurisprudence for the field of insolvency laws in the country, to consolidate and settlement of their dispute. The parties have control over the decision to settle and amend the laws relating to reorganization and insolvency resolution of corporate the terms of any agreement. Settlements are contractually binding and widely persons, partnership firms and individuals in a time bound manner for enforceable.10 6 maximization of value of assets of such persons. As rightly pointed out by Hon'ble Justice (Retd.) A.K. Sikri, mediation in According to the data as provided by the Ministry of Corporate affairs, over the Corporate Insolvency,11 if put forth into practice, can be a game changer. While past three years, since the enactment of I&B Code, the ease of doing business and highlighting the inherent spirit of I&B Code, he stated: recovery sought by sick and distressed establishments has significantly increased. Rehabilitation should be the first attempt, especially if insolvency is due to market India, as of October 2019, is ranked 63 among 190 economies in the ease of doing conditions. Even if insolvency is a result of mismanagement, endeavour should be 7 business, according to the latest World Bank annual ratings. In 2018, the rank of made to rehabilitate the company through a change in management. If 8 India was 77, which was a noteworthy shift from 139th rank in 2010. rehabilitation is impossible, the IBC aims at quicker liquidation while taking However, the resolution and recovery process, as provided under I&B Code suffer maximum care of creditor rights. If the IBC is utilised only for debt recovery, the from certain inevitable delays. Since the law is still at a nascent stage, the field aforesaid objectives are lost. This may result in a situation of tyranny of the IBC, an remains open with wide scope of development in terms of consequent otherwise well-considered legislation….. modifications in the process, restructuring policies adopted by various economies Through the course of this paper, an attempt will be made to highlight different around the globe and related jurisprudential evolution. sophisticated and not so sophisticated jurisdictions dealing with insolvency and A peculiar yet interesting aspect to this process of insolvency can be that of bankruptcy; providing for a well-defined manner involving alternative dispute involving the alternative dispute resolution mechanisms to escalate the process resolution like arbitration and mediation. Though the same is still not a codified and ensure speedy solution, especially during unforeseen times like that of Covid- practice vis-a-vis insolvency and bankruptcy under the Indian legal regime; 19 pandemic wherein justice delivery mechanism faced a drastic halt. Such however, the Indian judiciary, with its magnificent far-sightedness acknowledged situations must not result in any sort of impediment in the settlement of disputes.

9 UNCITRAL, Annex II UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation, 2018 (amending the UNCITRAL Model Law on 6 M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., Civil Appeal Nos. 8337-8338 of 2017. International Commercial Conciliation, 2002), art 1(3), 56. 7 The World Bank, Doing Business 2020: Reforms Boost India's Business Climate Rankings; Among Top Ten 10 ICC - International Chamber of Commerce, Mediation ,(last visited Aug 22, 2020) , Improvers for Third Straight Year, PRESS RELEASE (2019),(last visited Aug 22, 2020) https://iccwbo.org/dispute-resolution-services/mediation/ https://www.worldbank.org/en/news/press-release/2019/10/24/doing-business-india-top-10-improver- 11 business-climate-ranking Sikri A.K. J & Omkar Anuroop, Mediation In Corporate Insolvency A Game Changer, BW BUSINESSWORLD (2019), (last visited Aug 22, 2020),http://www.businessworld.in/article/Mediation-In- 8 Id. Corporate-Insolvency-A-Game-Changer/14-06-2019-171872/

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the amalgamation and collaboration of the two domains into one comprehensive However, the concerned provision gave the liberty to the courts to delve into the practice taking cue from established International insolvency regime(as discussed details and study the merits of the compromise or arrangement. In similar fashion, in the following sections). while interpreting section 391 of the 1956 Act (in pari material with section 153 of the 1913 Act), the highest judicial court went a step further and held that This paper traces the lacunae like high litigation costs in current regime and the compromise or arrangement is not just an alternative to liquidation but ‘where a ensuing need for mediation. The authors have endeavoured to put forth the inherent (compromise) scheme appears to be feasible and workable, it should be preferred established practice of compromise under the existing norms followed by varied to a winding up order.’15 The rulings by the two Courts make the significant role of judicial pronouncements, different working stages and recommendations that the 'compromise' in resolving disputes in the form of out of court settlement more authors intend to shed light of the said paper. The same shall be done by perceptible, even though the entire procedure was concluded under the supervision highlighting how mediation will assist in resolving Corporate Insolvency Dispute. of the court. Correspondingly, section 230 of the Companies Act 2013 (in pari Since the jurisprudential development of personal insolvency is still in its infancy, materia with section 391 of the 1956 Act), the law which is currently in force, aims the authors have endeavoured to focus and limit the ambit of this paper to to facilitate a compromise between a Corporate Debtor (hereinafter,“the CD”) and applicability of mediation in corporate insolvency. its creditors, and ensure the resuscitation of the company. In the matter of Jindal Steel and Power Ltd. v. Arun Kumar Jagatramka,16 the Hon'ble National Company COURT-SUPERVISED COMPROMISE IN INDIAN INSOLVENCY Law Appellate Tribunal (hereinafter, “the NCLAT”) observed that section 230 is REGIME applicable to a liquidation proceeding under the I&B Code. The appellate authority The concept of 'out of court settlement' is not alien to resolving debt repayment supported the view that compromise as a form of settlement can safeguard the issues in India. A strong evidence can be found in the 1909 Act. Section 68 (1)(h) of interests of the CD by advocating for its continuance and save it from liquidation. the 1909 Act had authorised the official assignee (corresponding to today's Taking into consideration the views expressed by various courts, it can be logically Resolution Professional as defined under section 5(27) of the I&B Code) to refer deduced that the judicial system in India has always encouraged out of court the insolvency dispute to arbitration and facilitate a compromise of all debts and settlement, be it court-assisted or court-supervised. liabilities. The philosophy underlying section 68 (1)(h) was to promote out of court Crucially, India has now taken up the mantle of change and is on the path to achieve settlement between the concerned parties. A few essential rudiments can also be 'pre-institution mediation' which calls for minimal participation of the courts in traced in the Indian Companies Act, 1913 (hereinafter, “the 1913 Act”) and the settling disputes. This claim can be corroborated by the recent amendment made to 1956 Act.12 Section 153 of the 1913 Act pertained to compromise or arrangement the Commercial Courts Commercial Division and Commercial Appellate Division between a company and its creditors. The compromise or arrangement was reached of High Courts Act 2015 in 2018. Section 12A of the the Commercial Courts, under the supervision of the court as the court had always envisaged the said Commercial Division and Commercial Appellate Division of High Courts compromise to be lawful and fair to the minority creditors. The Hon'ble Bombay (Amendment) Act 2018 provides for mandatory mediation except in cases where High Court aptly interpreted the 'compromise or arrangement' as 'an alternative 'urgent relief is sought'. The legislative intent behind section 12A fortuitously mode of liquidation'.13 The Court admitted that the compromise or arrangement draws inspiration from section 89 of the Code of Civil Procedure (hereinafter, “the ‘relieves the company and its contributories from ability further than that which is CPC”) which mandates the courts to explore possibilities of settling disputes contemplated or imposed by the scheme.’14 The Court was conscious of the fact through various Alternative Dispute Resolution (hereinafter, “ADR”) that a compromise can be a win-win situation for both the company and its mechanisms. In Afcons Infrastructure Ltd. & Another v Cherian Varkey creditors as it offered reconciliation with much less court's intervention. Construction Company Pvt. Ltd. & Others,17 the SC while studying the general

12 Repealed by the Companies Act 2013. 15 Ratnabali Capitals Markets Ltd. v.Securities and Exchange Board of India and Ors., AIR 2008 SC 290. 13 Motilal Kanji and Co. v.Natvarlal M. Jhaveri AIR 1932 Bom 78. 16 2019 SCC OnLine NCLAT 759. 14 Id. 17 2010 (8) SCC 24.

106 107 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE the amalgamation and collaboration of the two domains into one comprehensive However, the concerned provision gave the liberty to the courts to delve into the practice taking cue from established International insolvency regime(as discussed details and study the merits of the compromise or arrangement. In similar fashion, in the following sections). while interpreting section 391 of the 1956 Act (in pari material with section 153 of the 1913 Act), the highest judicial court went a step further and held that This paper traces the lacunae like high litigation costs in current regime and the compromise or arrangement is not just an alternative to liquidation but ‘where a ensuing need for mediation. The authors have endeavoured to put forth the inherent (compromise) scheme appears to be feasible and workable, it should be preferred established practice of compromise under the existing norms followed by varied to a winding up order.’15 The rulings by the two Courts make the significant role of judicial pronouncements, different working stages and recommendations that the 'compromise' in resolving disputes in the form of out of court settlement more authors intend to shed light of the said paper. The same shall be done by perceptible, even though the entire procedure was concluded under the supervision highlighting how mediation will assist in resolving Corporate Insolvency Dispute. of the court. Correspondingly, section 230 of the Companies Act 2013 (in pari Since the jurisprudential development of personal insolvency is still in its infancy, materia with section 391 of the 1956 Act), the law which is currently in force, aims the authors have endeavoured to focus and limit the ambit of this paper to to facilitate a compromise between a Corporate Debtor (hereinafter,“the CD”) and applicability of mediation in corporate insolvency. its creditors, and ensure the resuscitation of the company. In the matter of Jindal Steel and Power Ltd. v. Arun Kumar Jagatramka,16 the Hon'ble National Company COURT-SUPERVISED COMPROMISE IN INDIAN INSOLVENCY Law Appellate Tribunal (hereinafter, “the NCLAT”) observed that section 230 is REGIME applicable to a liquidation proceeding under the I&B Code. The appellate authority The concept of 'out of court settlement' is not alien to resolving debt repayment supported the view that compromise as a form of settlement can safeguard the issues in India. A strong evidence can be found in the 1909 Act. Section 68 (1)(h) of interests of the CD by advocating for its continuance and save it from liquidation. the 1909 Act had authorised the official assignee (corresponding to today's Taking into consideration the views expressed by various courts, it can be logically Resolution Professional as defined under section 5(27) of the I&B Code) to refer deduced that the judicial system in India has always encouraged out of court the insolvency dispute to arbitration and facilitate a compromise of all debts and settlement, be it court-assisted or court-supervised. liabilities. The philosophy underlying section 68 (1)(h) was to promote out of court Crucially, India has now taken up the mantle of change and is on the path to achieve settlement between the concerned parties. A few essential rudiments can also be 'pre-institution mediation' which calls for minimal participation of the courts in traced in the Indian Companies Act, 1913 (hereinafter, “the 1913 Act”) and the settling disputes. This claim can be corroborated by the recent amendment made to 1956 Act.12 Section 153 of the 1913 Act pertained to compromise or arrangement the Commercial Courts Commercial Division and Commercial Appellate Division between a company and its creditors. The compromise or arrangement was reached of High Courts Act 2015 in 2018. Section 12A of the the Commercial Courts, under the supervision of the court as the court had always envisaged the said Commercial Division and Commercial Appellate Division of High Courts compromise to be lawful and fair to the minority creditors. The Hon'ble Bombay (Amendment) Act 2018 provides for mandatory mediation except in cases where High Court aptly interpreted the 'compromise or arrangement' as 'an alternative 'urgent relief is sought'. The legislative intent behind section 12A fortuitously mode of liquidation'.13 The Court admitted that the compromise or arrangement draws inspiration from section 89 of the Code of Civil Procedure (hereinafter, “the ‘relieves the company and its contributories from ability further than that which is CPC”) which mandates the courts to explore possibilities of settling disputes contemplated or imposed by the scheme.’14 The Court was conscious of the fact through various Alternative Dispute Resolution (hereinafter, “ADR”) that a compromise can be a win-win situation for both the company and its mechanisms. In Afcons Infrastructure Ltd. & Another v Cherian Varkey creditors as it offered reconciliation with much less court's intervention. Construction Company Pvt. Ltd. & Others,17 the SC while studying the general

12 Repealed by the Companies Act 2013. 15 Ratnabali Capitals Markets Ltd. v.Securities and Exchange Board of India and Ors., AIR 2008 SC 290. 13 Motilal Kanji and Co. v.Natvarlal M. Jhaveri AIR 1932 Bom 78. 16 2019 SCC OnLine NCLAT 759. 14 Id. 17 2010 (8) SCC 24.

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scope of section 89 of the CPC, unequivocally held that it is mandatory for the and individuals. Under the IBC 2016 scheme, section 60 designates the NCLT as courts to consider ADR recourse to process after completion of pleadings. the Adjudicating Authority (hereinafter, “the AA”) in relation to insolvency It is also imperative to note that ADR modes including arbitration, conciliation, resolution and liquidation of corporate persons, including corporate debtors and mediation and lok adalats are sensible and cost-effective options available to the personal liquidators, and an appeal against the order of the NCLT lies in the parties, and can replace litigation. Deliberating on the same, the highest court in the NCLAT as per section 61. Section 179 of the I&B Code states that the Debt land In Salem Advocate Bar Association v. Union of India-I,18 reckoned that: Recovery Tribunal (hereinafter, “the DRT”) shall exercise its territorial 'Keeping in mind the laws delay and the limited number of Judges which are jurisdiction as a designated AA in relation to insolvency matters of individuals and available, it has now become imperative that resort should be had to Alternative partnership firms (except in some situations) and an appeal from the DRT shall lie Dispute Resolution Mechanism with a view to bring to an end litigation between with the Debt Recovery Appellate Tribunal (hereinafter, “the DRAT”) in the parties at an early date.' It cannot be gainsaid that litigation is fraught with consonance with section 180 of I&B Code. In both the aforementioned cases, the delays and exorbitant attorney's fees. Therefore, it is of fundamental importance to highest court of appeal is the Supreme Court of India, where the aggrieved party discuss major immanent setbacks litigation and adjudication process suffers from. (corporate debtor or creditor) has a statutory right to appeal to from the orders passed either by the NCLAT or DRAT. However, many law professionals, LITIGATION IN INDIAN INSOLVENCY ADJUDICATORY renowned jurists and legal scholars have overlooked some serious shortcomings FRAMEWORK: STIRRING UP A HORNET'S NEST associated with litigation and adjudicatory mechanism. The authors make an attempt to list some of the substantial hiccups below. The insolvency regime in India has always been subjected to judicial scrutiny. Traditionally, the legal sanctity has been granted to insolvency and bankruptcy Intervention of the High Courts disputes settled only through 'not so' innovative procedures, including court- The I&B Code is a complete legislation in itself, which designated the NCLT as the assisted or judge-supervised insolvency proceedings. Unsurprisingly, the parties AA for corporate persons and the DRT as the AA for individuals and partnership involved in the insolvency legal battles have worked their fingers to the bone to firms. The Code does not, explicitly, vest absolute control over the tribunals in the obtain a seal of approval from the Indian superior judicial courts (including High Courts (hereinafter, “the HC”). In Madras Bar Association v. Union of adjudicating authorities after the enactment of the I&B Code) before they can India,19 the SC upheld the constitutional validity of the tribunals, namely the NCLT collectively reach a consensus regarding payment and recovery of debts. The and the NCLAT, including the manner of their constitution and functioning. The influence of courts is ubiquitous in resolving matters relating to insolvency and highest judicial court also opined that the NCLAT, being the first appellate forum, bankruptcy. This claim can be buttressed by considering some essential provisions can exercise the powers and jurisdiction in examining the factual and legal issues, of the existing and older legislations. For instance, section 6(2) of the 1909 Act and hence the formation of the tribunals does not amount to dilution of powers and permitted the High Courts in Calcutta, Madras and Bombay (now Kolkata, functions of the HCs. However, the judgment delivered by the apex court did not Chennai and Mumbai, respectively) to exercise the jurisdiction to examine the put intervention by the high courts to rest. From 2017 to 2018, the writ jurisdiction petitions presented by the debtor and adjudicate on the questions in accordance under Article 226 of the Indian Constitution was invoked in a number of cases to with section 7. In mofussil regions, the 1920 Act dealt with insolvency of challenge the constitutionality of some provisions of the I&B Code.20 However, the individuals, including individuals as proprietors. Section 4 of the 1920 Act Code passed constitutional muster as the SC observed that the Code must be empowered the District Courts to decide all questions concerned with the title or accepted in its entirety.21 priority over the insolvent's property by dealing with abstruse questions of law or fact. The existing framework, the I&B Code, aims to provide a skeleton for 19 (2015) 8 SCC 583. reorganization and insolvency resolution of corporate persons, partnership firms 20 Sree Metaliks Limited and Anr. v. Union of India [2017] 140 CLA 30 (Cal);Shivam Water Treaters v. Union of India C/SCA/19808/2017; Akshay Jhunjhunwala & Anr. v. Union of India through the Ministry of Corporate Affairs & Ors. AIR 2018 Cal 139. 18 AIR 2003 SC 189 21 Swiss Ribbons Pvt. Ltd. v. Union of India AIR 2019 SC 739.

108 109 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE scope of section 89 of the CPC, unequivocally held that it is mandatory for the and individuals. Under the IBC 2016 scheme, section 60 designates the NCLT as courts to consider ADR recourse to process after completion of pleadings. the Adjudicating Authority (hereinafter, “the AA”) in relation to insolvency It is also imperative to note that ADR modes including arbitration, conciliation, resolution and liquidation of corporate persons, including corporate debtors and mediation and lok adalats are sensible and cost-effective options available to the personal liquidators, and an appeal against the order of the NCLT lies in the parties, and can replace litigation. Deliberating on the same, the highest court in the NCLAT as per section 61. Section 179 of the I&B Code states that the Debt land In Salem Advocate Bar Association v. Union of India-I,18 reckoned that: Recovery Tribunal (hereinafter, “the DRT”) shall exercise its territorial 'Keeping in mind the laws delay and the limited number of Judges which are jurisdiction as a designated AA in relation to insolvency matters of individuals and available, it has now become imperative that resort should be had to Alternative partnership firms (except in some situations) and an appeal from the DRT shall lie Dispute Resolution Mechanism with a view to bring to an end litigation between with the Debt Recovery Appellate Tribunal (hereinafter, “the DRAT”) in the parties at an early date.' It cannot be gainsaid that litigation is fraught with consonance with section 180 of I&B Code. In both the aforementioned cases, the delays and exorbitant attorney's fees. Therefore, it is of fundamental importance to highest court of appeal is the Supreme Court of India, where the aggrieved party discuss major immanent setbacks litigation and adjudication process suffers from. (corporate debtor or creditor) has a statutory right to appeal to from the orders passed either by the NCLAT or DRAT. However, many law professionals, LITIGATION IN INDIAN INSOLVENCY ADJUDICATORY renowned jurists and legal scholars have overlooked some serious shortcomings FRAMEWORK: STIRRING UP A HORNET'S NEST associated with litigation and adjudicatory mechanism. The authors make an attempt to list some of the substantial hiccups below. The insolvency regime in India has always been subjected to judicial scrutiny. Traditionally, the legal sanctity has been granted to insolvency and bankruptcy Intervention of the High Courts disputes settled only through 'not so' innovative procedures, including court- The I&B Code is a complete legislation in itself, which designated the NCLT as the assisted or judge-supervised insolvency proceedings. Unsurprisingly, the parties AA for corporate persons and the DRT as the AA for individuals and partnership involved in the insolvency legal battles have worked their fingers to the bone to firms. The Code does not, explicitly, vest absolute control over the tribunals in the obtain a seal of approval from the Indian superior judicial courts (including High Courts (hereinafter, “the HC”). In Madras Bar Association v. Union of adjudicating authorities after the enactment of the I&B Code) before they can India,19 the SC upheld the constitutional validity of the tribunals, namely the NCLT collectively reach a consensus regarding payment and recovery of debts. The and the NCLAT, including the manner of their constitution and functioning. The influence of courts is ubiquitous in resolving matters relating to insolvency and highest judicial court also opined that the NCLAT, being the first appellate forum, bankruptcy. This claim can be buttressed by considering some essential provisions can exercise the powers and jurisdiction in examining the factual and legal issues, of the existing and older legislations. For instance, section 6(2) of the 1909 Act and hence the formation of the tribunals does not amount to dilution of powers and permitted the High Courts in Calcutta, Madras and Bombay (now Kolkata, functions of the HCs. However, the judgment delivered by the apex court did not Chennai and Mumbai, respectively) to exercise the jurisdiction to examine the put intervention by the high courts to rest. From 2017 to 2018, the writ jurisdiction petitions presented by the debtor and adjudicate on the questions in accordance under Article 226 of the Indian Constitution was invoked in a number of cases to with section 7. In mofussil regions, the 1920 Act dealt with insolvency of challenge the constitutionality of some provisions of the I&B Code.20 However, the individuals, including individuals as proprietors. Section 4 of the 1920 Act Code passed constitutional muster as the SC observed that the Code must be empowered the District Courts to decide all questions concerned with the title or accepted in its entirety.21 priority over the insolvent's property by dealing with abstruse questions of law or fact. The existing framework, the I&B Code, aims to provide a skeleton for 19 (2015) 8 SCC 583. reorganization and insolvency resolution of corporate persons, partnership firms 20 Sree Metaliks Limited and Anr. v. Union of India [2017] 140 CLA 30 (Cal);Shivam Water Treaters v. Union of India C/SCA/19808/2017; Akshay Jhunjhunwala & Anr. v. Union of India through the Ministry of Corporate Affairs & Ors. AIR 2018 Cal 139. 18 AIR 2003 SC 189 21 Swiss Ribbons Pvt. Ltd. v. Union of India AIR 2019 SC 739.

108 109 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Interestingly, the seminal question of whether the HCs can be allowed to interfere, The Preamble of the Code vouches for time bound insolvency resolution for under Article 226, with an order of the AAs remained debatable and unsettled for maximisation of value of assets of the debtor.26 The apex court also ingeminated quite some time. The highest constitutional court of India in M/s Embassy Property the importance of timeline by stating that time bound resolution process not only Developments Pvt. Ltd. v. State of Karnataka,22 dealt with the legal issue of whether supports the credit market but also protects the CD's assets from losing their the HCs possess the right to interfere with an order passed by the NCLT. The Court potential value.27 However, strictly sticking to the deadline appears to be a far held that: 'The NCLT, being a creature of a special statute to discharge certain fetched dream in the Indian insolvency regime. According to the report published specific functions, cannot be elevated to the status of a superior court having the by the CRISIL and the Associated Chambers of Commerce and Industry of India power of judicial review over administrative action.'23 The Bombay High Court, in (ASSOCHAM) in May 2019, 'the average resolution timeline for the resolved 94 Anthony Raphael Kallarakkal v. National Company Law Tribunal,24 went a step cases (considered only the resolution plan for 94 stressed assets till March 31, further by opining that the HC can exercise the jurisdiction under Article 226 when 2019) was 324 days vis-à-vis the stipulated time period of 270 days.'28 When it was exceptional facts and circumstances have been made out by the petitioner discovered that completion of the CIRP within two hundred and seventy days irrespective of availability of alternate efficacious remedy. The courts have now seems to be implausible in a substantial number of cases, the legislature extended made it pellucid that it is the prerogative of the HCs to decide which case the deadline to three hundred and thirty days in August 2019.29 However, this constitutes exceptional facts and circumstances and which does not. However, the proved to be forlorn attempt as it was observed that the CIRP could not be entire procedure prescribed by the I&B Code to knock the doors of the NCLAT / concluded even within three hundred and thirty days. This claim was substantiated DRAT will be be futile if the HCs continue to intervene with the orders of the AAs. by the statistical data made available by the Insolvency and Bankruptcy Board of The HCs taking the opportunity to deal with the substantial question of law or India (hereinafter, “the IBBI”). As per the E-Newsletter (January-March, 2020 interpret some provisions concerned with the Code, would lead to redundancy of issue) published by the IBBI, the average time for approval of resolution plans (in the adjudicatory mechanism or necessary route devised in a special statute. 221 CIRPs covered) was three hundred and seventy-five days vis-à-vis the Nevertheless, the increasing intervention by the HCs would adversely impact the sanctioned three hundred and thirty days.30 Corporate Insolvency Resolution Process (hereinafter, “the CIRP”), which is In Jaiprakash Associates Ltd. & Anr. v. IDBI Bank Ltd. & Anr.,31 the SC aptly 25 required to be completed within three hundred and thirty days. In such a case, the passed an order affirming that any delay under the I&B Code is 'attributable to law's time period for conclusion of the CIRP will be extended. Extension of the time delay' and the case at hand is a perfect example of how the 'entire process gets period will not only make the process more cumbersome for all the stakeholders embroiled in litigation…because of confusion or lack of clarity in respect of (debtors and creditors), but also pave the way for something which is distinctly foundational processes to be followed by the CoC.'32 No one can decry that the unappetizing, i.e. may lead to 'high economic rate of depreciation of the assets of delay in completion of the process reflects institutional incapacity of the the concerned debtor'. adjudicatory framework and manifests the 'never-ending' nature of litigation. No Adherence to Time Limit: One of the primary goals of the I& B Code is to provide a concrete legal skeleton for timely and accurate resolution of insolvency and bankruptcy matters in India. 27 Swiss Ribbon, supra note xx at 38. 28 CRISIL& ASSOCHAM, Strengthening the Code (2019), (last visited Aug 22, 2020), https://www.crisil.com/content/dam/crisil/our-analysis/reports/Ratings/documents/2019/april/strengthening- the-code.pdf 22 Civil Appeal Nos. 9170-9172 of 2019. 29 The Insolvency and Bankruptcy Code (Amendment) Act 2019 (Act 26 of 2019), s 4. 23 Id.at 31 30 Insolvency and Bankruptcy Board of India, The Quarterly Newsletter of the Insolvency and Bankruptcy 24 Writ Petition No. 2193 of 2018. Board of India, 14 (2019), https://ibbi.gov.in/uploads/whatsnew/d8e55e1e6d81c49b90a20324f2745175.pdf 25 The Insolvency and Bankruptcy Code 2016 (No. 31 of 2016), s 12(3). 31 Civil Appeal No. 6486 of 2019. 26 Preamble, supra note iv. 32 Idat 15.

110 111 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Interestingly, the seminal question of whether the HCs can be allowed to interfere, The Preamble of the Code vouches for time bound insolvency resolution for under Article 226, with an order of the AAs remained debatable and unsettled for maximisation of value of assets of the debtor.26 The apex court also ingeminated quite some time. The highest constitutional court of India in M/s Embassy Property the importance of timeline by stating that time bound resolution process not only Developments Pvt. Ltd. v. State of Karnataka,22 dealt with the legal issue of whether supports the credit market but also protects the CD's assets from losing their the HCs possess the right to interfere with an order passed by the NCLT. The Court potential value.27 However, strictly sticking to the deadline appears to be a far held that: 'The NCLT, being a creature of a special statute to discharge certain fetched dream in the Indian insolvency regime. According to the report published specific functions, cannot be elevated to the status of a superior court having the by the CRISIL and the Associated Chambers of Commerce and Industry of India power of judicial review over administrative action.'23 The Bombay High Court, in (ASSOCHAM) in May 2019, 'the average resolution timeline for the resolved 94 Anthony Raphael Kallarakkal v. National Company Law Tribunal,24 went a step cases (considered only the resolution plan for 94 stressed assets till March 31, further by opining that the HC can exercise the jurisdiction under Article 226 when 2019) was 324 days vis-à-vis the stipulated time period of 270 days.'28 When it was exceptional facts and circumstances have been made out by the petitioner discovered that completion of the CIRP within two hundred and seventy days irrespective of availability of alternate efficacious remedy. The courts have now seems to be implausible in a substantial number of cases, the legislature extended made it pellucid that it is the prerogative of the HCs to decide which case the deadline to three hundred and thirty days in August 2019.29 However, this constitutes exceptional facts and circumstances and which does not. However, the proved to be forlorn attempt as it was observed that the CIRP could not be entire procedure prescribed by the I&B Code to knock the doors of the NCLAT / concluded even within three hundred and thirty days. This claim was substantiated DRAT will be be futile if the HCs continue to intervene with the orders of the AAs. by the statistical data made available by the Insolvency and Bankruptcy Board of The HCs taking the opportunity to deal with the substantial question of law or India (hereinafter, “the IBBI”). As per the E-Newsletter (January-March, 2020 interpret some provisions concerned with the Code, would lead to redundancy of issue) published by the IBBI, the average time for approval of resolution plans (in the adjudicatory mechanism or necessary route devised in a special statute. 221 CIRPs covered) was three hundred and seventy-five days vis-à-vis the Nevertheless, the increasing intervention by the HCs would adversely impact the sanctioned three hundred and thirty days.30 Corporate Insolvency Resolution Process (hereinafter, “the CIRP”), which is In Jaiprakash Associates Ltd. & Anr. v. IDBI Bank Ltd. & Anr.,31 the SC aptly 25 required to be completed within three hundred and thirty days. In such a case, the passed an order affirming that any delay under the I&B Code is 'attributable to law's time period for conclusion of the CIRP will be extended. Extension of the time delay' and the case at hand is a perfect example of how the 'entire process gets period will not only make the process more cumbersome for all the stakeholders embroiled in litigation…because of confusion or lack of clarity in respect of (debtors and creditors), but also pave the way for something which is distinctly foundational processes to be followed by the CoC.'32 No one can decry that the unappetizing, i.e. may lead to 'high economic rate of depreciation of the assets of delay in completion of the process reflects institutional incapacity of the the concerned debtor'. adjudicatory framework and manifests the 'never-ending' nature of litigation. No Adherence to Time Limit: One of the primary goals of the I& B Code is to provide a concrete legal skeleton for timely and accurate resolution of insolvency and bankruptcy matters in India. 27 Swiss Ribbon, supra note xx at 38. 28 CRISIL& ASSOCHAM, Strengthening the Code (2019), (last visited Aug 22, 2020), https://www.crisil.com/content/dam/crisil/our-analysis/reports/Ratings/documents/2019/april/strengthening- the-code.pdf 22 Civil Appeal Nos. 9170-9172 of 2019. 29 The Insolvency and Bankruptcy Code (Amendment) Act 2019 (Act 26 of 2019), s 4. 23 Id.at 31 30 Insolvency and Bankruptcy Board of India, The Quarterly Newsletter of the Insolvency and Bankruptcy 24 Writ Petition No. 2193 of 2018. Board of India, 14 (2019), https://ibbi.gov.in/uploads/whatsnew/d8e55e1e6d81c49b90a20324f2745175.pdf 25 The Insolvency and Bankruptcy Code 2016 (No. 31 of 2016), s 12(3). 31 Civil Appeal No. 6486 of 2019. 26 Preamble, supra note iv. 32 Idat 15.

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High Litigation Costs: burdensome for business debtors. In particular, the UNCITRAL noted that The current insolvency and restructuring structure imposes great financial burden insolvency resolution mechanism may be too complex, lengthy and expensive for on the parties involved in the CIRP by exposing them to expensive litigation. From small businesses as they lack sufficient assets to cover the costs of insolvency 38 the appointment of an Interim Resolution Professional (hereinafter, “IRP”) to proceedings. Alternatively, the option of ADR, particularly mediation, can be incurring expenses related to insolvency resolution process and liquidation costs explored to avoid litigation and adjudication. (if required), the concerned stakeholders are sometimes caught in a web of Undermining the Interests of Operational Creditors: spending hefty amount to conclude the proceedings. Adding to the misery, the Insolvency Resolution Process Costs (hereinafter, “IRPC”)33 are also borne by the In Indian insolvency regime, the Financial Creditors (hereinafter, “FCs”) enjoy concerned CD, and only the IRPC, to the extent not paid during the CIRP from the pre-eminence with respect to repayment of debts. As is discernible, section 30 39 internal sources of the CD, are met in the manner provided in section 30 or section provides that the CoC (comprising only of the FCs) has the absolute right to 53 of the I&B Code.34 In addition to the IRPC, the total expenditure associated with decide on the feasibility and viability of the resolution plan. The highest forum for the CIRP also includes costs of the interim resolution professional as elucidated in adjudication echoed the same message and spelled out that the CoC can exercise its regulation 33 of the CIRP regulations. In S3 Electricals and Electronics Private commercial wisdom to arrive at a decision to pay the dues of all classes of 40 Limited v Brian Lau & Anr.,35 the highest court of appeal, on bare reading of creditors. Therefore, it has now been made certain that the Operational Creditors regulation 33(3), opined that the costs of the Interim Resolution Professional (hereinafter, “OCs”) would not get an equal opportunity to strike a different (hereinafter, “IRP”) are to be incurred by the applicant, which shall then be commercial bargain with the CD (represented by the Resolution Professional as reimbursed by the Committee of Creditors (hereinafter, “the CoC”) to the extent per section 25 of I&B Code) as they don't possess the authority to question the such expenses are ratified. However, it was also noted that if the CoC is not resolution plan. The OCs are placed at a significant 'weaker' and an 'undesirable' constituted, then the expenses shall be fixed by the AA and will be borne by the position even during distribution of payments at the time of liquidation. Adding to 41 creditor who moved an application before the AA.36 Another form of expenditure of woes of the OCs, in the matter of IDBI Bank Ltd v. EPC Constructions India Ltd., significance, though peripheral to the aforementioned categories, is associated the Mumbai bench of the NCLT held that a possibility exists that the OCs might go with public announcement (hereinafter, “the PA”).37 With the PA, all the details of empty handed even if the amount distributed in the event of liquidation is achieved the CIRP are placed readily in the public domain. The expenses of the PA are to be as per the priority rule prescribed under section 53 of the I&B Code. By depriving borne by the applicant in compliance with regulation 6(3) of the CIRP Regulations. the OCs of the opportunity to be an integral part of the CoC and have a powerful All are above-mentioned overheads are successful examples on how a huge voice in deciding the efficacy of the insolvency process and soundness of the amount of money is spent on litigation. The UNCITRAL also observed that the resolution plan, the adjudicatory system does consider OCs inferior to FCs. In such standard insolvency business regimes may prove to be time-consuming and a situation, exploring distinct and unique methods to address the concerns of the OCs is a desideratum.

33 According to section 5(13) of the I&B Code 2016, “insolvency resolution process costs mean – (a) the No Room for Engaging Dissentient Financial Creditors: amount of any interim finance and the costs incurred in raising such finance; (b) the fees payable to any person acting as aresolution professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the Government According to section 30(4) of the I&B Code, a resolution plan needs to be approved to facilitate the insolvency resolution process; (e) any other costs as may be specified by the Insolvency and Bankruptcy Board of India.” 34 INSOLVENCY AND BANKRUPTCY BOARD OF INDIA, Circular No. IBBI/IP/013/2018 (2018), (last 38 UNITED NATIONS GENERAL ASSEMBLY, Insolvency of micro, small and medium-sized enterprises visited Aug 22, 2020), https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jun/Circular on Fee and other Draft text on a simplified insolvency regime, A/CN.9/WG.V/WP.166 (2019). Expenses incurred for CIRP %5BJune 2018%5D_2018-06-18 14:06:58.pdf 39 The Insolvency and Bankruptcy Code 2016, s 21. 35 Civil Appeal No. 103 of 2018. 40 Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta 36 Id. at 2. & Ors.,Civil Appeal No. 8766-67 of 2019. 37 The Insolvency and Bankruptcy Code 2016, s 13(1)(b). 41 MA 2738/2019 & MA 354/2019 in CP No. 1832/IBC/NCLT/MB/MAH/2017.

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High Litigation Costs: burdensome for business debtors. In particular, the UNCITRAL noted that The current insolvency and restructuring structure imposes great financial burden insolvency resolution mechanism may be too complex, lengthy and expensive for on the parties involved in the CIRP by exposing them to expensive litigation. From small businesses as they lack sufficient assets to cover the costs of insolvency 38 the appointment of an Interim Resolution Professional (hereinafter, “IRP”) to proceedings. Alternatively, the option of ADR, particularly mediation, can be incurring expenses related to insolvency resolution process and liquidation costs explored to avoid litigation and adjudication. (if required), the concerned stakeholders are sometimes caught in a web of Undermining the Interests of Operational Creditors: spending hefty amount to conclude the proceedings. Adding to the misery, the Insolvency Resolution Process Costs (hereinafter, “IRPC”)33 are also borne by the In Indian insolvency regime, the Financial Creditors (hereinafter, “FCs”) enjoy concerned CD, and only the IRPC, to the extent not paid during the CIRP from the pre-eminence with respect to repayment of debts. As is discernible, section 30 39 internal sources of the CD, are met in the manner provided in section 30 or section provides that the CoC (comprising only of the FCs) has the absolute right to 53 of the I&B Code.34 In addition to the IRPC, the total expenditure associated with decide on the feasibility and viability of the resolution plan. The highest forum for the CIRP also includes costs of the interim resolution professional as elucidated in adjudication echoed the same message and spelled out that the CoC can exercise its regulation 33 of the CIRP regulations. In S3 Electricals and Electronics Private commercial wisdom to arrive at a decision to pay the dues of all classes of 40 Limited v Brian Lau & Anr.,35 the highest court of appeal, on bare reading of creditors. Therefore, it has now been made certain that the Operational Creditors regulation 33(3), opined that the costs of the Interim Resolution Professional (hereinafter, “OCs”) would not get an equal opportunity to strike a different (hereinafter, “IRP”) are to be incurred by the applicant, which shall then be commercial bargain with the CD (represented by the Resolution Professional as reimbursed by the Committee of Creditors (hereinafter, “the CoC”) to the extent per section 25 of I&B Code) as they don't possess the authority to question the such expenses are ratified. However, it was also noted that if the CoC is not resolution plan. The OCs are placed at a significant 'weaker' and an 'undesirable' constituted, then the expenses shall be fixed by the AA and will be borne by the position even during distribution of payments at the time of liquidation. Adding to 41 creditor who moved an application before the AA.36 Another form of expenditure of woes of the OCs, in the matter of IDBI Bank Ltd v. EPC Constructions India Ltd., significance, though peripheral to the aforementioned categories, is associated the Mumbai bench of the NCLT held that a possibility exists that the OCs might go with public announcement (hereinafter, “the PA”).37 With the PA, all the details of empty handed even if the amount distributed in the event of liquidation is achieved the CIRP are placed readily in the public domain. The expenses of the PA are to be as per the priority rule prescribed under section 53 of the I&B Code. By depriving borne by the applicant in compliance with regulation 6(3) of the CIRP Regulations. the OCs of the opportunity to be an integral part of the CoC and have a powerful All are above-mentioned overheads are successful examples on how a huge voice in deciding the efficacy of the insolvency process and soundness of the amount of money is spent on litigation. The UNCITRAL also observed that the resolution plan, the adjudicatory system does consider OCs inferior to FCs. In such standard insolvency business regimes may prove to be time-consuming and a situation, exploring distinct and unique methods to address the concerns of the OCs is a desideratum.

33 According to section 5(13) of the I&B Code 2016, “insolvency resolution process costs mean – (a) the No Room for Engaging Dissentient Financial Creditors: amount of any interim finance and the costs incurred in raising such finance; (b) the fees payable to any person acting as aresolution professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the Government According to section 30(4) of the I&B Code, a resolution plan needs to be approved to facilitate the insolvency resolution process; (e) any other costs as may be specified by the Insolvency and Bankruptcy Board of India.” 34 INSOLVENCY AND BANKRUPTCY BOARD OF INDIA, Circular No. IBBI/IP/013/2018 (2018), (last 38 UNITED NATIONS GENERAL ASSEMBLY, Insolvency of micro, small and medium-sized enterprises visited Aug 22, 2020), https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jun/Circular on Fee and other Draft text on a simplified insolvency regime, A/CN.9/WG.V/WP.166 (2019). Expenses incurred for CIRP %5BJune 2018%5D_2018-06-18 14:06:58.pdf 39 The Insolvency and Bankruptcy Code 2016, s 21. 35 Civil Appeal No. 103 of 2018. 40 Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta 36 Id. at 2. & Ors.,Civil Appeal No. 8766-67 of 2019. 37 The Insolvency and Bankruptcy Code 2016, s 13(1)(b). 41 MA 2738/2019 & MA 354/2019 in CP No. 1832/IBC/NCLT/MB/MAH/2017.

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by majority vote of sixty-six per cent of the voting share of the FCs. Dissenting Loss of Goodwill of the Corporate Debtor: Financial Creditors (hereinafter, “DFCs”) are financial creditors who have either In simple terms, 'goodwill of a business is however an intangible asset being the 42 abstained from voting or voted against the resolution plan approved by the CoC. whole advantage of the reputation and connections formed with the customers In the Indian insolvency arrangement, the majority vote involves cram down together with the circumstances that make the connection durable.'48 Among the 43 option on the dissenting creditors. Even the UNCITRAL Legislative Guide on most prominent challenges faced by the CD during the CIRP, the loss of goodwill is Insolvency Law makes it clear beyond any doubt that once the plan is approved by the most neglected one. The CD may suffer from loss of goodwill in the the requisite majority, the same can be made binding on all the creditors, including marketplace once the CIRP is initiated against it. The mandatory issuing of the 44 those who do not support it. Adding to woes of the DFCs, it was also noted by the Public Announcement by the IRP regarding commencement of the insolvency SC that preferential treatment of the 'unsecured DFCs' is out of the question as such proceedings against the CP as per section 15 of the I&B Code read with regulation a treatment may incentivise assenting financial creditors to vote in favour of 6 of the CIRP Regulations jeopardises the company's reputation. No data is liquidation and hence the purpose of the would get defeated.45 Reiterating the same, available to authenticate how goodwill of a debtor firm is hampered upon the the NCLAT also observed that the DFCs cannot scuttle the CIRP and only the commencement of the CIRP. However, it can be presumed that potential customers collective decision (as per the requisite majority vote) of the CoC is enforceable by and investors tend to defect owing to the inexplicable fear associated with the law.46 The Insolvency Law Committee formed in 2018 suggested that the only insolvency of a corporate entity. The trading partners become less willing to do viable solution available to take care of the requirements of the DFCs is to improve business with a firm that is unlikely to survive, making it terribly difficult to keep 49 the overall quality of the resolution plan.47 However, this suggestion did not gain a the company as a going concern. In such a scenario, out of court settlement can be footing in the insolvency mechanism dominated by the assenting secured financial a boon for a debtor as the mechanism would not only protect it from unnecessary creditors. The court-led procedure suppresses the voice of the dissenters by not public debt shaming but also aid in resolving the dispute in regard to debt allowing them to commercially bargain for a better deal with respect to repayment repayment amicably. of debt. The existing framework does not give an appropriate shape to the opinions and concerns of the dissenters. A mediation based approach can be deployed to MEDIATION IN INDIAN INSOLVENCY ARRANGEMENT: A GREAT ensure that principle of fairness is upheld, provision of fall-back remedy is DESIDERATUM available for DFCs to avoid cram down option and majority creditors are not able In the above section, while establishing the inherent defects in the litigating to ride roughshod over the minority. system, the authors have highlighted the necessity for adopting an alternate course of action for dealing with commercial disputes pertaining to insolvency of the corporate entities, the same can be resolved by opting for a less complex and more congenial approach. However, amongst a plethora of alternate mechanisms, 42 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) mediation being the most sought after practice can be elaborated by following Regulations 2016, Reg 2(f). means: 43 BANKRUPTCY LAW REFORMS COMMITTEE, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015), (last visited Aug 22, 2020), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf Developing Trust 44 UNITED NATIONS COMMISSIONON INTERNATIONAL TRADE LAW, Legislative Guide on One necessary element of insolvency which most of us often tend to forget is the Insolvency Law (2005), (last visited Aug 22, 2020)https://www.uncitral.org/pdf/english/texts/insolven/05- 80722_Ebook.pdf fact that the insolvency so triggered is not merely limited to the possibility of debt 45 Essar Steel, supra note xxxix at 54. recovery. 46 Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corporation. (P) Ltd.2019 SCC OnLine NCLAT 921. 48 Khushal Khemgar Shah and Ors. v. Khorshed Banu Dadiba Boatwalla anf Ors., AIR 1970 SC 1147. 47 GOI MINISTRY OF CORPORATE AFFAIRS, Report of The Insolvency Law Committee (2018),http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf (last visited Aug 49 G. MEEKS & J. G. MEEKS, Self-Fulfilling Prophecies of Failure: The Endogenous Balance Sheets of 22, 2020) Distressed Companies, 45 ABACUS 22–43 (2009).

114 115 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE by majority vote of sixty-six per cent of the voting share of the FCs. Dissenting Loss of Goodwill of the Corporate Debtor: Financial Creditors (hereinafter, “DFCs”) are financial creditors who have either In simple terms, 'goodwill of a business is however an intangible asset being the 42 abstained from voting or voted against the resolution plan approved by the CoC. whole advantage of the reputation and connections formed with the customers In the Indian insolvency arrangement, the majority vote involves cram down together with the circumstances that make the connection durable.'48 Among the 43 option on the dissenting creditors. Even the UNCITRAL Legislative Guide on most prominent challenges faced by the CD during the CIRP, the loss of goodwill is Insolvency Law makes it clear beyond any doubt that once the plan is approved by the most neglected one. The CD may suffer from loss of goodwill in the the requisite majority, the same can be made binding on all the creditors, including marketplace once the CIRP is initiated against it. The mandatory issuing of the 44 those who do not support it. Adding to woes of the DFCs, it was also noted by the Public Announcement by the IRP regarding commencement of the insolvency SC that preferential treatment of the 'unsecured DFCs' is out of the question as such proceedings against the CP as per section 15 of the I&B Code read with regulation a treatment may incentivise assenting financial creditors to vote in favour of 6 of the CIRP Regulations jeopardises the company's reputation. No data is liquidation and hence the purpose of the would get defeated.45 Reiterating the same, available to authenticate how goodwill of a debtor firm is hampered upon the the NCLAT also observed that the DFCs cannot scuttle the CIRP and only the commencement of the CIRP. However, it can be presumed that potential customers collective decision (as per the requisite majority vote) of the CoC is enforceable by and investors tend to defect owing to the inexplicable fear associated with the law.46 The Insolvency Law Committee formed in 2018 suggested that the only insolvency of a corporate entity. The trading partners become less willing to do viable solution available to take care of the requirements of the DFCs is to improve business with a firm that is unlikely to survive, making it terribly difficult to keep 49 the overall quality of the resolution plan.47 However, this suggestion did not gain a the company as a going concern. In such a scenario, out of court settlement can be footing in the insolvency mechanism dominated by the assenting secured financial a boon for a debtor as the mechanism would not only protect it from unnecessary creditors. The court-led procedure suppresses the voice of the dissenters by not public debt shaming but also aid in resolving the dispute in regard to debt allowing them to commercially bargain for a better deal with respect to repayment repayment amicably. of debt. The existing framework does not give an appropriate shape to the opinions and concerns of the dissenters. A mediation based approach can be deployed to MEDIATION IN INDIAN INSOLVENCY ARRANGEMENT: A GREAT ensure that principle of fairness is upheld, provision of fall-back remedy is DESIDERATUM available for DFCs to avoid cram down option and majority creditors are not able In the above section, while establishing the inherent defects in the litigating to ride roughshod over the minority. system, the authors have highlighted the necessity for adopting an alternate course of action for dealing with commercial disputes pertaining to insolvency of the corporate entities, the same can be resolved by opting for a less complex and more congenial approach. However, amongst a plethora of alternate mechanisms, 42 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) mediation being the most sought after practice can be elaborated by following Regulations 2016, Reg 2(f). means: 43 BANKRUPTCY LAW REFORMS COMMITTEE, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015), (last visited Aug 22, 2020), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf Developing Trust 44 UNITED NATIONS COMMISSIONON INTERNATIONAL TRADE LAW, Legislative Guide on One necessary element of insolvency which most of us often tend to forget is the Insolvency Law (2005), (last visited Aug 22, 2020)https://www.uncitral.org/pdf/english/texts/insolven/05- 80722_Ebook.pdf fact that the insolvency so triggered is not merely limited to the possibility of debt 45 Essar Steel, supra note xxxix at 54. recovery. 46 Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corporation. (P) Ltd.2019 SCC OnLine NCLAT 921. 48 Khushal Khemgar Shah and Ors. v. Khorshed Banu Dadiba Boatwalla anf Ors., AIR 1970 SC 1147. 47 GOI MINISTRY OF CORPORATE AFFAIRS, Report of The Insolvency Law Committee (2018),http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf (last visited Aug 49 G. MEEKS & J. G. MEEKS, Self-Fulfilling Prophecies of Failure: The Endogenous Balance Sheets of 22, 2020) Distressed Companies, 45 ABACUS 22–43 (2009).

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In a business and contractual set up, an important factor that plays a pivotal role is relationship between the parties.52 These benefits become even more pronounced the exercise of trust building. An entity or an individual would only enter into a in situations displaying cross-border elements. contract once they are satisfied about the veracity of the opposite party. During financial breakdown, the corporate debtor faces a major challenge of trust amongst Convenient for Unforeseeable circumstances the creditors towards the debtor. This minor crack in the relationship so built The current pandemic scenario of COVID-19 has resulted in stagnation of varied between both the parties acts as a catalyst in raising disputes further, rather than arenas of the country. For more than three months, the country seems to be at a halt resolving them. from a larger perspective. This has indeed severely impacted the economic 53 This calls for intervention which must be by such an individual who is conditions of the various entities and business organisations. In a situation of such accommodative, has an independent unbiased opinion and involves both the financial distress, needless to say, it can be easily fathomed that early economic parties to engage in a discourse on the situation at hand and seek effective remedy stimulus becomes the need of the hour. while maintaining due trust and confidence in the process so sought for. This makes Thus, the main priority of the stakeholders is stabilising the operations to restore it it imperative to involve a third-party, i.e., mediator at the early stages of financial to pre-lockdown stage as far as possible. For this, it is necessary to prepare an distress and insolvency, rather than seeking their assistance at a later stage of effective strategy to stop the valuations from sliding towards insolvency and bankruptcy. thereby preventing liquidation. The mediator acts as a facilitator in such situations, wherein her/his primary aim is With the announcement by the Finance Minister in lieu of economic packages to to ensure that various stakeholders to the dispute, i.e., the corporate debtor, the different sectors,54 and the subsequent ordinance55 assented by the President of creditors, employees etc., get involved in a productive and constructive approach India, initiation of insolvency under section 7, 9 or 1056 under the I&B Code has to respond to the financial distress. While on one hand, the creditors are helped by been deferred for a period of six months exceeding up to one year for such defaults providing them with the assistance in evaluating the merits of the situation, the arising on or after 25th March 2020.57 Though it effectively provides for a buffer corporate debtor envisages possible resolution mechanisms. period for the distressed entities to regain their momentum, albeit, it does not In States where mediation is, or will soon be, an accepted form of dispute resolve the problem in entirety. It is so because, this deference will not suffice the resolution in commercial cases, professional organisations should be encouraged stake of the pool of creditors, thereby rendering their grievances infructuous. It to include mediators in restructuring and insolvency matters.A system of further gives an alternative way out for the creditors to seek measures under the adherence must be formulated to fulfil the requisite standards of performance 'schemes' as provided under the Companies Act 2013, thereby resulting in a necessary for a fit and proper exercise of their task.Where there exists a dispute, a conundrum for the distressed. It must be noted that the post pandemic effect of such mediator should usefully play a role, subject to controls designed to avoid measures can be much more drastic resulting in sudden hike in the pendency. unnecessary costs. However, a more effective strategy like mediating the concerns of various parties

Cost effective and Efficient

Mediation can provide a cost-effective and quick extrajudicial resolution of 52 Idat 111. disputes in civil and commercial matters through processes tailored to the needs of 53 PTI, Economic impact of COVID-19 in India has been substantial: IMF, WION (2020), (last visited Aug 22, the parties.51 Agreements resulting from mediation encourage voluntary 2020), https://www.wionews.com/business-economy/economic-impact-of-covid-19-in-india-has-been- substantial-imf-312308

compliance, and are more likely to preserve an amicable and sustainable 54 Ministry of Finance, Finance Minister announces Government Reforms and Enablers across Seven Sectors under Aatma Nirbhar Bharat Abhiyaan, PIB (2020), (last visited Aug 22, 2020), https://pib.gov.in/PressReleasePage.aspx?PRID=1624661

55 50 Bob Wessels, European Law European Law Institute & Madaus Stephan, Rescue of Business in Insolvency The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020. Law (2020). 56 Insolvency &Bankruptcy Code, 2016. 51 Idat 110. 57 I&B Code Ordinance, supra note liv, s 10A.

116 117 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

In a business and contractual set up, an important factor that plays a pivotal role is relationship between the parties.52 These benefits become even more pronounced the exercise of trust building. An entity or an individual would only enter into a in situations displaying cross-border elements. contract once they are satisfied about the veracity of the opposite party. During financial breakdown, the corporate debtor faces a major challenge of trust amongst Convenient for Unforeseeable circumstances the creditors towards the debtor. This minor crack in the relationship so built The current pandemic scenario of COVID-19 has resulted in stagnation of varied between both the parties acts as a catalyst in raising disputes further, rather than arenas of the country. For more than three months, the country seems to be at a halt resolving them. from a larger perspective. This has indeed severely impacted the economic 53 This calls for intervention which must be by such an individual who is conditions of the various entities and business organisations. In a situation of such accommodative, has an independent unbiased opinion and involves both the financial distress, needless to say, it can be easily fathomed that early economic parties to engage in a discourse on the situation at hand and seek effective remedy stimulus becomes the need of the hour. while maintaining due trust and confidence in the process so sought for. This makes Thus, the main priority of the stakeholders is stabilising the operations to restore it it imperative to involve a third-party, i.e., mediator at the early stages of financial to pre-lockdown stage as far as possible. For this, it is necessary to prepare an distress and insolvency, rather than seeking their assistance at a later stage of effective strategy to stop the valuations from sliding towards insolvency and bankruptcy. thereby preventing liquidation. The mediator acts as a facilitator in such situations, wherein her/his primary aim is With the announcement by the Finance Minister in lieu of economic packages to to ensure that various stakeholders to the dispute, i.e., the corporate debtor, the different sectors,54 and the subsequent ordinance55 assented by the President of creditors, employees etc., get involved in a productive and constructive approach India, initiation of insolvency under section 7, 9 or 1056 under the I&B Code has to respond to the financial distress. While on one hand, the creditors are helped by been deferred for a period of six months exceeding up to one year for such defaults providing them with the assistance in evaluating the merits of the situation, the arising on or after 25th March 2020.57 Though it effectively provides for a buffer corporate debtor envisages possible resolution mechanisms. period for the distressed entities to regain their momentum, albeit, it does not In States where mediation is, or will soon be, an accepted form of dispute resolve the problem in entirety. It is so because, this deference will not suffice the resolution in commercial cases, professional organisations should be encouraged stake of the pool of creditors, thereby rendering their grievances infructuous. It to include mediators in restructuring and insolvency matters.A system of further gives an alternative way out for the creditors to seek measures under the adherence must be formulated to fulfil the requisite standards of performance 'schemes' as provided under the Companies Act 2013, thereby resulting in a necessary for a fit and proper exercise of their task.Where there exists a dispute, a conundrum for the distressed. It must be noted that the post pandemic effect of such mediator should usefully play a role, subject to controls designed to avoid measures can be much more drastic resulting in sudden hike in the pendency. unnecessary costs. However, a more effective strategy like mediating the concerns of various parties

Cost effective and Efficient

Mediation can provide a cost-effective and quick extrajudicial resolution of 52 Idat 111. disputes in civil and commercial matters through processes tailored to the needs of 53 PTI, Economic impact of COVID-19 in India has been substantial: IMF, WION (2020), (last visited Aug 22, the parties.51 Agreements resulting from mediation encourage voluntary 2020), https://www.wionews.com/business-economy/economic-impact-of-covid-19-in-india-has-been- substantial-imf-312308 compliance, and are more likely to preserve an amicable and sustainable 54 Ministry of Finance, Finance Minister announces Government Reforms and Enablers across Seven Sectors under Aatma Nirbhar Bharat Abhiyaan, PIB (2020), (last visited Aug 22, 2020), https://pib.gov.in/PressReleasePage.aspx?PRID=1624661

55 50 Bob Wessels, European Law European Law Institute & Madaus Stephan, Rescue of Business in Insolvency The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020. Law (2020). 56 Insolvency &Bankruptcy Code, 2016. 51 Idat 110. 57 I&B Code Ordinance, supra note liv, s 10A.

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to the dispute by providing them with certain pre-packages, through virtual means, resolving dispute.61 However, pertaining to insolvency disputes, the use of in the form of plausible resolution plans in the initial phase of distress can prove to arbitration is not being negated. What is being proposed, is the methodology of be fruitful. resorting to mediation as a first step in negotiating and mediating the interests of the Processes like mediation, pre-pack, fresh start, individual insolvency need to concerned parties. The primary reason for the same is the very nature of the entire engage with technology and online processes so that even if there is a lockdown, process which furthers an effective communication which might not be possible in individuals and the corporates can be assisted to mitigate the impact of Covid-19.58 a more formal process. Dr. Vijayawargiya, whole time member, IBBI, further suggested that the process of This line of argument of the authors draws its inference from the med-arb model mediation can be adopted for settling the claims, instead of filing applications adopted by Hong Kong Monetary Authority (HKMA). In 2008, the HKMA before the NCLT and waiting for the orders thereby resulting in delaying the appointed Hong Kong International Arbitration Centre (HKIAC) to administer a process. The strategy so envisioned and shared by her provided for a simplistic mediation scheme of the claims subject to references made by the HKMA and 62 process.59 She sought assistance from all professionals, requiring them to learn the Securities and Future Commission and both parties' consent for mediation. The process and technique of mediation. By adopting the role of mediator, the scheme provided for arbitration if mediation failed generally, known as the 'med- 63 professionals, in a sense can resolve the dispute and the insolvency process within arb' model. a span of 100 days as against 180 days. She further envisaged that if we adopt pre- pack, it can be completed in 80 days also.60 JUDICIAL PRONOUNCEMENTS ADVOCATING FOR OUT-OF-COURT SETTLEMENT: Having a predominant role of mediation will not only enable the country to deal with the economic distress in the current Covid-19 situation, but in long run as It can be rightly argued that the position and application of ADR mechanisms well. (specifically mediation) in resolving insolvency disputes are still at an embryonic stage in India as they are still not statutorily recognised by any Indian law. MEDIATION v. ARBITRATION: WHICH ONE OFFERS A MORE However, several judicial pronouncements have paved the way for a detailed VIABLE SOLUTION? exploration of out of court settlement in the Indian insolvency regime. In Lokhandwala Kataria Construction Private Limited v Nisus Finance and Using ADR-processes of resolving insolvency and bankruptcy cases is a general 64 Investment Managers LLP, the SC utilised its inherent powers under Article 142 norm on a global level. It has been intricately established that the use of arbitration of the Indian Constitution and allowed the compromise between the CD and its and mediation in insolvency disputes provides for a more effective and efficient 65 creditors even after the admission of application under section 7 of the I&B Code. solution as compared to stereotypical litigating measures. The next question which 66 The highest judicial court expressed the same opinion in other matters as well. In needs to be addressed is which form of dispute resolution is more effective. A all the cases, the SC set aside the orders of the NCLAT and concomitantly primary glance on the two processes of mediation and arbitration provide for a basic difference of structural and formal method of resolution; the former being convenient and informal as compared to the latter. 61 Edna Sussman, Developing an Effective Med-Arb / Arb-Med Process, 2 NEW YORK DISPUT. The changing global regimes have led to the parties to dispute adopting a hybrid RESOLUT. LAWYER 71–74 (2009) 62 approach of Med-Arb or Arb-Med, as the case may be, in their specified order for Sikri, supra note x. 63 Id.

64 58 ASSOCHAM, Insolvency Professionals should use technology and keep working for revival of companies Civil Appeal No. 9279 of 2017. under IBC: IBBI official (2020), (last visited Aug 22, 2020), 65 Id.at 2. https://www.assocham.org/newsdetail.php?id=7329 66 59 Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited Civil Id. Appeal No.9286 of 2017 (Supreme Court of India); Uttara Foods and Feeds Private Limited v. Mona 60 Id. Pharmachem Civil Appeal No. 18520 of 2017 (Supreme Court of India).

118 119 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE to the dispute by providing them with certain pre-packages, through virtual means, resolving dispute.61 However, pertaining to insolvency disputes, the use of in the form of plausible resolution plans in the initial phase of distress can prove to arbitration is not being negated. What is being proposed, is the methodology of be fruitful. resorting to mediation as a first step in negotiating and mediating the interests of the Processes like mediation, pre-pack, fresh start, individual insolvency need to concerned parties. The primary reason for the same is the very nature of the entire engage with technology and online processes so that even if there is a lockdown, process which furthers an effective communication which might not be possible in individuals and the corporates can be assisted to mitigate the impact of Covid-19.58 a more formal process. Dr. Vijayawargiya, whole time member, IBBI, further suggested that the process of This line of argument of the authors draws its inference from the med-arb model mediation can be adopted for settling the claims, instead of filing applications adopted by Hong Kong Monetary Authority (HKMA). In 2008, the HKMA before the NCLT and waiting for the orders thereby resulting in delaying the appointed Hong Kong International Arbitration Centre (HKIAC) to administer a process. The strategy so envisioned and shared by her provided for a simplistic mediation scheme of the claims subject to references made by the HKMA and 62 process.59 She sought assistance from all professionals, requiring them to learn the Securities and Future Commission and both parties' consent for mediation. The process and technique of mediation. By adopting the role of mediator, the scheme provided for arbitration if mediation failed generally, known as the 'med- 63 professionals, in a sense can resolve the dispute and the insolvency process within arb' model. a span of 100 days as against 180 days. She further envisaged that if we adopt pre- pack, it can be completed in 80 days also.60 JUDICIAL PRONOUNCEMENTS ADVOCATING FOR OUT-OF-COURT SETTLEMENT: Having a predominant role of mediation will not only enable the country to deal with the economic distress in the current Covid-19 situation, but in long run as It can be rightly argued that the position and application of ADR mechanisms well. (specifically mediation) in resolving insolvency disputes are still at an embryonic stage in India as they are still not statutorily recognised by any Indian law. MEDIATION v. ARBITRATION: WHICH ONE OFFERS A MORE However, several judicial pronouncements have paved the way for a detailed VIABLE SOLUTION? exploration of out of court settlement in the Indian insolvency regime. In Lokhandwala Kataria Construction Private Limited v Nisus Finance and Using ADR-processes of resolving insolvency and bankruptcy cases is a general 64 Investment Managers LLP, the SC utilised its inherent powers under Article 142 norm on a global level. It has been intricately established that the use of arbitration of the Indian Constitution and allowed the compromise between the CD and its and mediation in insolvency disputes provides for a more effective and efficient 65 creditors even after the admission of application under section 7 of the I&B Code. solution as compared to stereotypical litigating measures. The next question which 66 The highest judicial court expressed the same opinion in other matters as well. In needs to be addressed is which form of dispute resolution is more effective. A all the cases, the SC set aside the orders of the NCLAT and concomitantly primary glance on the two processes of mediation and arbitration provide for a basic difference of structural and formal method of resolution; the former being convenient and informal as compared to the latter. 61 Edna Sussman, Developing an Effective Med-Arb / Arb-Med Process, 2 NEW YORK DISPUT. The changing global regimes have led to the parties to dispute adopting a hybrid RESOLUT. LAWYER 71–74 (2009) 62 approach of Med-Arb or Arb-Med, as the case may be, in their specified order for Sikri, supra note x. 63 Id.

64 58 ASSOCHAM, Insolvency Professionals should use technology and keep working for revival of companies Civil Appeal No. 9279 of 2017. under IBC: IBBI official (2020), (last visited Aug 22, 2020), 65 Id.at 2. https://www.assocham.org/newsdetail.php?id=7329 66 59 Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited Civil Id. Appeal No.9286 of 2017 (Supreme Court of India); Uttara Foods and Feeds Private Limited v. Mona 60 Id. Pharmachem Civil Appeal No. 18520 of 2017 (Supreme Court of India).

118 119 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

encouraged compromise between the parties involved. Until the introduction of NCLAT in this case acceded to the request of the parties and referred the matter to the 2018 Amendment,67 the I&B Code was silent on whether the application filed Hon'ble Mr. Justice (Retd.) A.K. Sikri for mediation.77 The Appellate Tribunal under section 7 or 9 or 10 could be withdrawn and eventually the concerned parties explicitly held that the terms of settlement as recorded by the mediator should be opt for out of court settlement. The insertion of section 12A by the 2018 treated as the order and directed the parties to comply with the same.78 The most Amendment gave rise to a piquant situation.68 The said section made it perspicuous appealing aspect is that an amicable settlement was reached in merely two that the AA can exercise its jurisdiction to allow the withdrawal of the insolvency mediation proceedings (conducted on 19.11.2019 and 23.11.2019).79 This case is a application admitted under section 7 or 9 or 10.69 There exist several instances perfect specimen of how disputes can be settled in a convivial atmosphere devoid where both the SC and AA invoked section 12A and allowed the withdrawal of the of hostile litigation. No one can decry that both the debtors and lenders prefer out of application and gave the opportunity to the CD to settle its claims. The apex court court settlement over court-supervised process. This claim can be concretised by a in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors.,70 permitted the CD to enter piece written by Shri Injeti Shrinivas, where he submitted that “an estimated 4,500 into a settlement with the FC and OC, and set aside the order of NCLT Chennai cases have been settled by mediation compared to 66 reported resolution.”80 Bench disallowing the withdrawal of the CIRP application.71 Following in the However, no authentic data is within easy reach to strengthen the assertion as the footsteps of the SC, the NCLAT also gave its nod to the settlement reached before settlements are taking place outside the remit of Indian judicial system. constitution of the CoC.72 Different benches of the NCLT have followed suit and assented to settlement proposals. In Satyanarayan Malu v SBM Paper Mills Ltd.,73 UNDERTAKING GRANULAR ASSESSMENT OF PREVALENCE OF the NCLT Mumbai Bench approved the withdrawal of the CIRP application and MEDIATION IN OTHER JURISDICTIONS allowed One Time Settlement (OTS) proposed by the CD to the financial creditor In several jurisdictions, mediation has enjoyed unstinting support and emerged as a (consisting of Allahabad Bank only) as the AA found that the OTS offer is 'more successful tool in resolving complex disputes in a congenial environment. 74 economically advantageous than the offer made through the resolution plan'. Crucially, discussing how mediation has allowed the parties to engage in a More recently, the NCLT Hyderabad Bench in the matter of Café D Lake Private meaningful negotiation in a time bound manner, particularly in the sophisticated Limited, accepted the OTS proposal submitted by the CD to the only financial jurisdictions is our area of focus. The principal raison d'être of comparative creditor, i.e. Tourism Finance Corporation of India and closed the CIRP against the analysis is to scrutinise what kind of matters can be referred to mediation and that 75 CD. too at what stage. The authors make an effort to study the merits of the ideal However, unlike the aforementioned cases, mediation got formally recognised in existing global frameworks and identify key takeaways for India. Parvinder Singh v. Intec Capital Ltd. and Ors.76 In an unprecedented move, the United Stated of America In the United Stated of America (hereinafter, “the USA”), mediation is frequently used in insolvency procedures, including Chapter 11 cases.81 The United States 67 The Insolvency and Bankruptcy Code (Second Amendment) Act 2018 (Act 26 of 2018). 68 The I&B Code (Second Amendment) Act 2018, s9. 69 Insolvency & Bankruptcy Code, S. 12A. 77 Id. at 4. 70 SLP (Civil) No. 31557/2018. 78 Id. at 11. 71 Id. at 2. 79 Id. 72 Arjun Puri v. Kunal Prasad Company Appeal(AT)(Ins) 52/19. 80 Shri Injeti Srinivas, India Leapfrogs to Bankruptcy Reform, CHAZEN GLOBAL INSIGHTS (2019), (last 73 M.A. 1396/2018, 827/2018, 1142/2018, & 828/2018 in C.P. (IB)-1362(MB)/2017. visited Aug 22, 2020),https://www8.gsb.columbia.edu/articles/chazen-global-insights/india-leapfrogs-

74 bankruptcy-reform Id. at 14. 81 75 I. Meier, 'Mediation and Negotiation in a Court or in an Out-of-Court Reorganization Procedure' in H. IA No. 1113 of 2019 in CP (IB) No. 202/07/HDB/2018. Peter, The Challenges of Insolvency Law reform in the 21st Century: facilitating Investment and Recovery to 76 Company Appeal (AT) (Insolvency) No. 968 of 2019. enhance Economic Growth (Zürich: Schulthess 2006), p. 292 et seq.

120 121 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE encouraged compromise between the parties involved. Until the introduction of NCLAT in this case acceded to the request of the parties and referred the matter to the 2018 Amendment,67 the I&B Code was silent on whether the application filed Hon'ble Mr. Justice (Retd.) A.K. Sikri for mediation.77 The Appellate Tribunal under section 7 or 9 or 10 could be withdrawn and eventually the concerned parties explicitly held that the terms of settlement as recorded by the mediator should be opt for out of court settlement. The insertion of section 12A by the 2018 treated as the order and directed the parties to comply with the same.78 The most Amendment gave rise to a piquant situation.68 The said section made it perspicuous appealing aspect is that an amicable settlement was reached in merely two that the AA can exercise its jurisdiction to allow the withdrawal of the insolvency mediation proceedings (conducted on 19.11.2019 and 23.11.2019).79 This case is a application admitted under section 7 or 9 or 10.69 There exist several instances perfect specimen of how disputes can be settled in a convivial atmosphere devoid where both the SC and AA invoked section 12A and allowed the withdrawal of the of hostile litigation. No one can decry that both the debtors and lenders prefer out of application and gave the opportunity to the CD to settle its claims. The apex court court settlement over court-supervised process. This claim can be concretised by a in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors.,70 permitted the CD to enter piece written by Shri Injeti Shrinivas, where he submitted that “an estimated 4,500 into a settlement with the FC and OC, and set aside the order of NCLT Chennai cases have been settled by mediation compared to 66 reported resolution.”80 Bench disallowing the withdrawal of the CIRP application.71 Following in the However, no authentic data is within easy reach to strengthen the assertion as the footsteps of the SC, the NCLAT also gave its nod to the settlement reached before settlements are taking place outside the remit of Indian judicial system. constitution of the CoC.72 Different benches of the NCLT have followed suit and assented to settlement proposals. In Satyanarayan Malu v SBM Paper Mills Ltd.,73 UNDERTAKING GRANULAR ASSESSMENT OF PREVALENCE OF the NCLT Mumbai Bench approved the withdrawal of the CIRP application and MEDIATION IN OTHER JURISDICTIONS allowed One Time Settlement (OTS) proposed by the CD to the financial creditor In several jurisdictions, mediation has enjoyed unstinting support and emerged as a (consisting of Allahabad Bank only) as the AA found that the OTS offer is 'more successful tool in resolving complex disputes in a congenial environment. 74 economically advantageous than the offer made through the resolution plan'. Crucially, discussing how mediation has allowed the parties to engage in a More recently, the NCLT Hyderabad Bench in the matter of Café D Lake Private meaningful negotiation in a time bound manner, particularly in the sophisticated Limited, accepted the OTS proposal submitted by the CD to the only financial jurisdictions is our area of focus. The principal raison d'être of comparative creditor, i.e. Tourism Finance Corporation of India and closed the CIRP against the analysis is to scrutinise what kind of matters can be referred to mediation and that 75 CD. too at what stage. The authors make an effort to study the merits of the ideal However, unlike the aforementioned cases, mediation got formally recognised in existing global frameworks and identify key takeaways for India. Parvinder Singh v. Intec Capital Ltd. and Ors.76 In an unprecedented move, the United Stated of America In the United Stated of America (hereinafter, “the USA”), mediation is frequently used in insolvency procedures, including Chapter 11 cases.81 The United States 67 The Insolvency and Bankruptcy Code (Second Amendment) Act 2018 (Act 26 of 2018). 68 The I&B Code (Second Amendment) Act 2018, s9. 69 Insolvency & Bankruptcy Code, S. 12A. 77 Id. at 4. 70 SLP (Civil) No. 31557/2018. 78 Id. at 11. 71 Id. at 2. 79 Id. 72 Arjun Puri v. Kunal Prasad Company Appeal(AT)(Ins) 52/19. 80 Shri Injeti Srinivas, India Leapfrogs to Bankruptcy Reform, CHAZEN GLOBAL INSIGHTS (2019), (last 73 M.A. 1396/2018, 827/2018, 1142/2018, & 828/2018 in C.P. (IB)-1362(MB)/2017. visited Aug 22, 2020),https://www8.gsb.columbia.edu/articles/chazen-global-insights/india-leapfrogs-

74 bankruptcy-reform Id. at 14. 81 75 I. Meier, 'Mediation and Negotiation in a Court or in an Out-of-Court Reorganization Procedure' in H. IA No. 1113 of 2019 in CP (IB) No. 202/07/HDB/2018. Peter, The Challenges of Insolvency Law reform in the 21st Century: facilitating Investment and Recovery to 76 Company Appeal (AT) (Insolvency) No. 968 of 2019. enhance Economic Growth (Zürich: Schulthess 2006), p. 292 et seq.

120 121 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

insolvencies are governed by the Bankruptcy Code,82 which is generally case wherein it was provided that 495 ADR processes have resulted in a sum above administered by specialized bankruptcy courts. These courts have jurisdiction over the $3billion mark for the various Lehman estates. Settlements have been achieved 'all civil proceedings arising under, or arising in or related to cases under the in 424 ADR matters involving541 counter-parties. 245 ADR matters have reached Bankruptcy Code. As an alternative to bankruptcy court litigation, in personal the mediation stage and have been concluded, 232have been settled in or bankruptcy cases ,unlike India, mediation has been used in disputes in relation to subsequent to mediation; only 13mediations have terminated but remain recovering assets from third parties/OR PARTY for the benefit of the estate,83 unsettled.89 disputes relating to claims against a debtor and inter-creditor disputes about This approach of applying mediation in their complex case led to the completion of 84 distribution of the assets of the estate. the humongous dispute, in a systematic consensual manner, within a span of less The Alternative Dispute Resolution Act in 1998 provided for all federal district than three and a half years. courts to authorize, by local rule, an ADR procedure in all civil cases, including In the USA, negotiation and mediation of multiple disputes amongst the concerned adversary proceedings in bankruptcy. This reference to district courts includes the parties for effective disposal and recovery for bankruptcy cases is generally carried 85 bankruptcy court. Prior to passing of this Act, bankruptcy courts did not shy away out by those filed under Chapter 11. The relevancy of ADR in matters pertaining to from using the ADR mechanism in resolving the disputes. They used their general insolvency manifests their emergence from increasing number of court mandated immanent powers granted to the courts under section 105 of the Bankruptcy Code mediation for such aforesaid disputes.90 This has eventually led to the speedy and and the provisions relating to the appointment of examiners under sections 1104 efficient disposal of insolvency and bankruptcy cases in the United States, thereby and 1106 of the Code to appoint individuals to mediate negotiations in making the entire process cost effective. reorganization plan cases. One of the most famous and highly referred cases in the jurisprudence of mediation European Union qua insolvency law is that concerning the Lehman Brothers liquidation wherein In the European Union mediation in matters of insolvency are not uniformly debtors engaged in hundreds of mediations under court-ordered ADR procedures adopted. Some Member States have established their practices but its development in place to avoid litigation in every individual case, recovering over $2 billion in is still in its infancy. In many Member States, mediation is a tool used in proceeds for distribution to creditors.86 This case owes its relevance and restructuring negotiations without specific provisions in the respective insolvency importance to the modern day insolvency regime owing to its intricate or law91 while a number of jurisdictions actually provide for a type of mediator. complexities qua derivative transactions. It is believed that no Chapter 11 debtor In the United Kingdom, erstwhile member of the European Union, the Chancery has ever had as many as complex derivative contracts as the Lehman Brother Court Guide 2016 stated that 'where appropriate the court will encourage the 87 case. The importance and success of adopting mediation as a measure for parties to use alternative dispute resolution or otherwise help them settle the case.'92 resolving dispute could be understood from the 2016 report88 of Lehman Brothers In the French legal system, Ad Hoc Mediation and Conciliation (mandataire ad- hoc and règlement) provides for an out-of-court workout. It is typically initiated by 82 Adam Brenneman et al., You Have Options: The Use of Alternative Dispute Resolution in Insolvency Proceedings, EMERG. MARK. RESTRUCT. J. (2017). 83 In re Eagle Bus Mfg. Inc., 134 B.R. 584 (Bankr. S.D. Tex. 1991). 89 84 Jacob Aaron Esher, Lisa Hill Fenning, Erwin I. Katz, The ABI Guide to Bankruptcy Mediation (2nd ed. Bob Wessels, Mediation in Restructuring and Insolvency, EUROFENIX 24–25 (2016) 2009). 90 In re Public Services Co. of New Hampshire, 99 B.R. 177 (Bankr. D. N.H. 1989). 85 In re Zale Corp., et. al., debtors Case No. 392-30001-SAF-11. 91 UWE KASSING, 'MEDIATION IM INSOLVENZRECHT – SANIERUNGSMEDIATION', IN FRITJOF 86 Lehman Brothers Holdings, Inc., No 08-13555 (Bankr. S.D.N.Y.). HAFT AND KATHARINA GRÄFIN VON SCHLIEFFEN (EDS), HANDBUCH MEDIATION(3rd ed. Beck 2016). 87 A.J. Olejnik, Lehman Brother's ADR Procedures for Resolving its Derivative Contracts in Bankruptcy, 29 92 BANKRUPTCY STRATEG. (2012). CHANCERY GUIDE, 75 (2016), Art. 18.2 (last visited Aug 22, 2020). https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/869071/cha 88 Madaus, supra note xlix at 129. ncery-guide-eng.pdf

122 123 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE insolvencies are governed by the Bankruptcy Code,82 which is generally case wherein it was provided that 495 ADR processes have resulted in a sum above administered by specialized bankruptcy courts. These courts have jurisdiction over the $3billion mark for the various Lehman estates. Settlements have been achieved 'all civil proceedings arising under, or arising in or related to cases under the in 424 ADR matters involving541 counter-parties. 245 ADR matters have reached Bankruptcy Code. As an alternative to bankruptcy court litigation, in personal the mediation stage and have been concluded, 232have been settled in or bankruptcy cases ,unlike India, mediation has been used in disputes in relation to subsequent to mediation; only 13mediations have terminated but remain recovering assets from third parties/OR PARTY for the benefit of the estate,83 unsettled.89 disputes relating to claims against a debtor and inter-creditor disputes about This approach of applying mediation in their complex case led to the completion of 84 distribution of the assets of the estate. the humongous dispute, in a systematic consensual manner, within a span of less The Alternative Dispute Resolution Act in 1998 provided for all federal district than three and a half years. courts to authorize, by local rule, an ADR procedure in all civil cases, including In the USA, negotiation and mediation of multiple disputes amongst the concerned adversary proceedings in bankruptcy. This reference to district courts includes the parties for effective disposal and recovery for bankruptcy cases is generally carried 85 bankruptcy court. Prior to passing of this Act, bankruptcy courts did not shy away out by those filed under Chapter 11. The relevancy of ADR in matters pertaining to from using the ADR mechanism in resolving the disputes. They used their general insolvency manifests their emergence from increasing number of court mandated immanent powers granted to the courts under section 105 of the Bankruptcy Code mediation for such aforesaid disputes.90 This has eventually led to the speedy and and the provisions relating to the appointment of examiners under sections 1104 efficient disposal of insolvency and bankruptcy cases in the United States, thereby and 1106 of the Code to appoint individuals to mediate negotiations in making the entire process cost effective. reorganization plan cases. One of the most famous and highly referred cases in the jurisprudence of mediation European Union qua insolvency law is that concerning the Lehman Brothers liquidation wherein In the European Union mediation in matters of insolvency are not uniformly debtors engaged in hundreds of mediations under court-ordered ADR procedures adopted. Some Member States have established their practices but its development in place to avoid litigation in every individual case, recovering over $2 billion in is still in its infancy. In many Member States, mediation is a tool used in proceeds for distribution to creditors.86 This case owes its relevance and restructuring negotiations without specific provisions in the respective insolvency importance to the modern day insolvency regime owing to its intricate or law91 while a number of jurisdictions actually provide for a type of mediator. complexities qua derivative transactions. It is believed that no Chapter 11 debtor In the United Kingdom, erstwhile member of the European Union, the Chancery has ever had as many as complex derivative contracts as the Lehman Brother Court Guide 2016 stated that 'where appropriate the court will encourage the 87 case. The importance and success of adopting mediation as a measure for parties to use alternative dispute resolution or otherwise help them settle the case.'92 resolving dispute could be understood from the 2016 report88 of Lehman Brothers In the French legal system, Ad Hoc Mediation and Conciliation (mandataire ad- hoc and règlement) provides for an out-of-court workout. It is typically initiated by 82 Adam Brenneman et al., You Have Options: The Use of Alternative Dispute Resolution in Insolvency Proceedings, EMERG. MARK. RESTRUCT. J. (2017). 83 In re Eagle Bus Mfg. Inc., 134 B.R. 584 (Bankr. S.D. Tex. 1991). 89 84 Jacob Aaron Esher, Lisa Hill Fenning, Erwin I. Katz, The ABI Guide to Bankruptcy Mediation (2nd ed. Bob Wessels, Mediation in Restructuring and Insolvency, EUROFENIX 24–25 (2016) 2009). 90 In re Public Services Co. of New Hampshire, 99 B.R. 177 (Bankr. D. N.H. 1989). 85 In re Zale Corp., et. al., debtors Case No. 392-30001-SAF-11. 91 UWE KASSING, 'MEDIATION IM INSOLVENZRECHT – SANIERUNGSMEDIATION', IN FRITJOF 86 Lehman Brothers Holdings, Inc., No 08-13555 (Bankr. S.D.N.Y.). HAFT AND KATHARINA GRÄFIN VON SCHLIEFFEN (EDS), HANDBUCH MEDIATION(3rd ed. Beck 2016). 87 A.J. Olejnik, Lehman Brother's ADR Procedures for Resolving its Derivative Contracts in Bankruptcy, 29 92 BANKRUPTCY STRATEG. (2012). CHANCERY GUIDE, 75 (2016), Art. 18.2 (last visited Aug 22, 2020). https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/869071/cha 88 Madaus, supra note xlix at 129. ncery-guide-eng.pdf

122 123 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

the debtor.93 These pre-insolvency proceedings have existed in practice for many published in the National Gazette on December 19, 2018.99 This law regulates the years and were formally introduced into the insolvency law since 2005. Ad Hoc functioning of the mediation process as a threshold requirement for commercial Mediation (mandat ad hoc) is a confidential procedure that allows debtors to avoid cases to be heard as of January 1, 2019. The mediation process is referred to as publicity that may cause panic among customers and creditors.94 'concordat proceedings'. According to the amendment, any debtor who has either In 2013, the Spanish Insolvency Act has included a new chapter regulating the not paid its debts or has a possibility of default on the due date may request 'Insolvency Mediator' and the extrajudicial settlement of payments as a form of concordat. Creditors who have the right to request bankruptcy may also apply to 100 negotiating the debts of the entrepreneurs.95 the concordat proceedings. 101 In the Netherlands, mediation occurs significantly less often in insolvency cases in Article 20 stipulates that the parties must have triggered the mediation process comparison to other domains of law like family law cases. The District Court in before applying to commercial courts to bring a monetary claim. It further Amsterdam started a pilot project for mediation in bankruptcy liquidation cases. elucidates that the mediator must conclude the mediation process within six weeks Like India, mediation processes in Netherland are supervised by experienced as of their appointment. The mediation process can be extended by two weeks. mediators, and the Dutch judge supervises the settlement reached. Though in Singapore nascent stage, the pilot project appears as a welcoming step and a foundation for development of subsequent comprehensive legal framework.96 Singapore, being a hub of Alternative Dispute Resolution has significantly developed its legal regime to incorporate elements of mediation in insolvency Thus, it can be seen that various European Nations have developed the practice of laws.102 On April 20, 2016, the Committee to Strengthen Singapore as an mediation in insolvency law, albeit, the mode and usage varies according to International Centre for Debt Restructuring issued a comprehensive report which different jurisdictions. However, to streamline the functioning to certain extent, the categorically provided for mediation as an effective tool in restructuring European Parliament and Council, in 2008, provided for Directive on certain proceedings to:103 aspects of mediation in civil and commercial matters.97 The Directive primarily l concerns mediation in cross-border disputes and not individual domestic cases, in Resolve individual creditor disputes with a debtor (in the context of a which at least one party is a domiciled resident in a Member State other than that of multi-creditor restructuring); any other party on the date on which the parties agree to use mediation after the l Manage multiple creditor disputes of the same nature; and 98 dispute has arisen. l Achieve consensus in the restructuring plan between a debtor and its Turkey creditors. Under the Turkish Law, The Law on the Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155 was

99 Baydar Burak, Cetinkaya Orcun & Hazal Baydar, Amendments to Turkey's Execution and Bankruptcy Law | ICLG, COMMERCIAL DISPUTE RESOLUTION (2018), (last visited Aug 22, 2020),https://iclg.com/cdr/expert-views/8289-amendments-to-turkey-s-execution-and-bankruptcy-law 93 OFFICIAL JOURNAL OF THE EUROPEAN UNION, DIRECTIVE 2008/52/EC OF THE EUROPEAN 100 Id. PARLIAMENT AND OF THE COUNCIL, Directives on Certain aspects of mediation in civil and commercial matters (Mediation Directives) (2004). 101 The Law on the Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155. 94 Id. 102 95 Tan Meiyen et al., Alternative dispute resolution in insolvency and restructuring proceedings, Id. NEWSLETTERS - INTERNATIONAL LAW OFFICE (2019),(last visited Aug 22, 96 Wessels, supra note lxxxviii. 2020),https://www.internationallawoffice.com/Newsletters/Insolvency-Restructuring/Singapore/Oon-Bazul- LLP/Alternative-dispute-resolution-in-insolvency-and-restructuring-proceedings 97 Mediation Directives, supra note xcii. 103 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, 98 Id. Report of the Committee (20 April 2016) at 3.54.

124 125 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE the debtor.93 These pre-insolvency proceedings have existed in practice for many published in the National Gazette on December 19, 2018.99 This law regulates the years and were formally introduced into the insolvency law since 2005. Ad Hoc functioning of the mediation process as a threshold requirement for commercial Mediation (mandat ad hoc) is a confidential procedure that allows debtors to avoid cases to be heard as of January 1, 2019. The mediation process is referred to as publicity that may cause panic among customers and creditors.94 'concordat proceedings'. According to the amendment, any debtor who has either In 2013, the Spanish Insolvency Act has included a new chapter regulating the not paid its debts or has a possibility of default on the due date may request 'Insolvency Mediator' and the extrajudicial settlement of payments as a form of concordat. Creditors who have the right to request bankruptcy may also apply to 100 negotiating the debts of the entrepreneurs.95 the concordat proceedings. 101 In the Netherlands, mediation occurs significantly less often in insolvency cases in Article 20 stipulates that the parties must have triggered the mediation process comparison to other domains of law like family law cases. The District Court in before applying to commercial courts to bring a monetary claim. It further Amsterdam started a pilot project for mediation in bankruptcy liquidation cases. elucidates that the mediator must conclude the mediation process within six weeks Like India, mediation processes in Netherland are supervised by experienced as of their appointment. The mediation process can be extended by two weeks. mediators, and the Dutch judge supervises the settlement reached. Though in Singapore nascent stage, the pilot project appears as a welcoming step and a foundation for development of subsequent comprehensive legal framework.96 Singapore, being a hub of Alternative Dispute Resolution has significantly developed its legal regime to incorporate elements of mediation in insolvency Thus, it can be seen that various European Nations have developed the practice of laws.102 On April 20, 2016, the Committee to Strengthen Singapore as an mediation in insolvency law, albeit, the mode and usage varies according to International Centre for Debt Restructuring issued a comprehensive report which different jurisdictions. However, to streamline the functioning to certain extent, the categorically provided for mediation as an effective tool in restructuring European Parliament and Council, in 2008, provided for Directive on certain proceedings to:103 aspects of mediation in civil and commercial matters.97 The Directive primarily l concerns mediation in cross-border disputes and not individual domestic cases, in Resolve individual creditor disputes with a debtor (in the context of a which at least one party is a domiciled resident in a Member State other than that of multi-creditor restructuring); any other party on the date on which the parties agree to use mediation after the l Manage multiple creditor disputes of the same nature; and 98 dispute has arisen. l Achieve consensus in the restructuring plan between a debtor and its Turkey creditors. Under the Turkish Law, The Law on the Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155 was

99 Baydar Burak, Cetinkaya Orcun & Hazal Baydar, Amendments to Turkey's Execution and Bankruptcy Law | ICLG, COMMERCIAL DISPUTE RESOLUTION (2018), (last visited Aug 22, 2020),https://iclg.com/cdr/expert-views/8289-amendments-to-turkey-s-execution-and-bankruptcy-law 93 OFFICIAL JOURNAL OF THE EUROPEAN UNION, DIRECTIVE 2008/52/EC OF THE EUROPEAN 100 Id. PARLIAMENT AND OF THE COUNCIL, Directives on Certain aspects of mediation in civil and commercial matters (Mediation Directives) (2004). 101 The Law on the Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155. 94 Id. 102 95 Tan Meiyen et al., Alternative dispute resolution in insolvency and restructuring proceedings, Id. NEWSLETTERS - INTERNATIONAL LAW OFFICE (2019),(last visited Aug 22, 96 Wessels, supra note lxxxviii. 2020),https://www.internationallawoffice.com/Newsletters/Insolvency-Restructuring/Singapore/Oon-Bazul- LLP/Alternative-dispute-resolution-in-insolvency-and-restructuring-proceedings 97 Mediation Directives, supra note xcii. 103 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, 98 Id. Report of the Committee (20 April 2016) at 3.54.

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Like the United States, the committee envisages two types of mediation:104 the applicants to carry on with their restructuring plans.110 l Plan mediation; and It is evident that plan and similar claims mediation are two successful mechanisms l Similar claims mediation. that should be adopted by parties involved in a restructuring, subject to the viability of a particular process in an individual case. These processes will assist parties in Plan mediation resolving disputes in a cost effective and time saving manner.111 Plan mediation refers to a process wherein a mediator is appointed to help various stakeholders achieve consensus in a restructuring plan. Alternatively, it covers World Bank and other Organisations those situations where debtors are subject to dual insolvency proceedings in The World Bank112 in its principles, World Bank Principles for Effective Insolvency competing jurisdictions.105 and Creditor Rights Systems, Principle B4 ('Informal Workout Procedures') In reMF Global Holdings Ltd.,106 planned mediation was a huge success and provided for and focused on using informal methods of negotiation and mediation produced the desired global settlement, resulting in the creditors receiving over $1 for resolving insolvency disputes. It stated: billion in aggregate distributions. 'B4.1 An informal workout process may work better if it enables creditors and Similar claims mediation debtors to use informal techniques, such as voluntary negotiation or mediation or informal dispute resolution… Similar claims mediation refers to a process in which a mediator establishes a common nexus of law and fact to facilitate the resolution of multiple claims.107 It is B4.2 where the informal procedure relies on a formal reorganization, the formal a structured mediation protocol which aims to lead to an expedient resolution of proceeding should be able to quickly process the informal, pre-negotiated multiple related claims, resulting in cost and time savings.108 agreement. Lehman Brothers Holdings Inc.109 is an example of a case which employed similar B4.3 In the context of a systemic crisis, or where levels of corporate insolvency claims mediation. In this case, the collapse of the financial institution and its have reached systemic levels, informal rules and procedures may need to be affiliates (the applicants) resulted in 75 simultaneous legal proceedings in over 40 supplemented by interim framework enhancement measures in order to address countries which were then sought for mediation by the bankruptcy court at the the special needs and circumstances encountered with a view to encouraging request of the concerned parties. Of the 77 proceedings which reached the restructuring. Such interim measures are typically designed to cover the crisis and mediation stage, only four were terminated without settlement. The mediation resolution period without undermining the conventional proceedings and systems.' process proved successful and enabled the applicants to avoid costly and time- The aforementioned recitals can be easily comprehended to advocating the usage consuming legal proceedings, thereby achieving greater efficiency and allowing of negotiation and other informal mechanisms of settlement of disputes in Insolvency matters. The informal workout process envisaged, contextualises assistance via voluntary negotiation or mediation conducted by a country's 104 Tan Meiyen, supra note ci financial supervisor. In other words, the elementary practice of adopting mediation 105 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, Report of the Committee (20 April 2016) at 3.56. at pre insolvency stage, as an informal measure needs to be given due attention. 106 11-150559 (MG) (Bankr SDNY). However, in cases pertaining to corporate insolvency, a more structured and 107 Tan Meiyen, supra note ci. comprehensive scheme could be adopted to suit the needs of the concerned 108 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, Report of the Committee (20 April 2016) at 3.55. 111 Tan Meiyen, supra note ci. 109 (08-13555 (JMP) (Bankr SDNY)). 112 THE WORLD BANK, PRINCIPLES FOR EFFECTIVE INSOLVENCY AND CREDITOR/DEBTOR 110 Dasan Kayjal & Seow Samuel, Mediation in International Insolvency Disputes , INTERNATIONAL REGIMES PrinciPles for effective insolvency and creditor/debtor regimes the World bank (2016), (last visited ARBITRATION ASIA (2015), (last visited Aug 22, Aug 22, 2020),http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor- 2020),http://www.internationalarbitrationasia.com/mediation_in_international_insolvency_disputes Debtor-Regimes-2016.pdf.

126 127 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Like the United States, the committee envisages two types of mediation:104 the applicants to carry on with their restructuring plans.110 l Plan mediation; and It is evident that plan and similar claims mediation are two successful mechanisms l Similar claims mediation. that should be adopted by parties involved in a restructuring, subject to the viability of a particular process in an individual case. These processes will assist parties in Plan mediation resolving disputes in a cost effective and time saving manner.111 Plan mediation refers to a process wherein a mediator is appointed to help various stakeholders achieve consensus in a restructuring plan. Alternatively, it covers World Bank and other Organisations those situations where debtors are subject to dual insolvency proceedings in The World Bank112 in its principles, World Bank Principles for Effective Insolvency competing jurisdictions.105 and Creditor Rights Systems, Principle B4 ('Informal Workout Procedures') In reMF Global Holdings Ltd.,106 planned mediation was a huge success and provided for and focused on using informal methods of negotiation and mediation produced the desired global settlement, resulting in the creditors receiving over $1 for resolving insolvency disputes. It stated: billion in aggregate distributions. 'B4.1 An informal workout process may work better if it enables creditors and Similar claims mediation debtors to use informal techniques, such as voluntary negotiation or mediation or informal dispute resolution… Similar claims mediation refers to a process in which a mediator establishes a common nexus of law and fact to facilitate the resolution of multiple claims.107 It is B4.2 where the informal procedure relies on a formal reorganization, the formal a structured mediation protocol which aims to lead to an expedient resolution of proceeding should be able to quickly process the informal, pre-negotiated multiple related claims, resulting in cost and time savings.108 agreement. Lehman Brothers Holdings Inc.109 is an example of a case which employed similar B4.3 In the context of a systemic crisis, or where levels of corporate insolvency claims mediation. In this case, the collapse of the financial institution and its have reached systemic levels, informal rules and procedures may need to be affiliates (the applicants) resulted in 75 simultaneous legal proceedings in over 40 supplemented by interim framework enhancement measures in order to address countries which were then sought for mediation by the bankruptcy court at the the special needs and circumstances encountered with a view to encouraging request of the concerned parties. Of the 77 proceedings which reached the restructuring. Such interim measures are typically designed to cover the crisis and mediation stage, only four were terminated without settlement. The mediation resolution period without undermining the conventional proceedings and systems.' process proved successful and enabled the applicants to avoid costly and time- The aforementioned recitals can be easily comprehended to advocating the usage consuming legal proceedings, thereby achieving greater efficiency and allowing of negotiation and other informal mechanisms of settlement of disputes in Insolvency matters. The informal workout process envisaged, contextualises assistance via voluntary negotiation or mediation conducted by a country's 104 Tan Meiyen, supra note ci financial supervisor. In other words, the elementary practice of adopting mediation 105 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, Report of the Committee (20 April 2016) at 3.56. at pre insolvency stage, as an informal measure needs to be given due attention. 106 11-150559 (MG) (Bankr SDNY). However, in cases pertaining to corporate insolvency, a more structured and 107 Tan Meiyen, supra note ci. comprehensive scheme could be adopted to suit the needs of the concerned 108 Committee to Strengthen Singapore as an International Centre for Debt Restructuring, Ministry of Law, Report of the Committee (20 April 2016) at 3.55. 111 Tan Meiyen, supra note ci. 109 (08-13555 (JMP) (Bankr SDNY)). 112 THE WORLD BANK, PRINCIPLES FOR EFFECTIVE INSOLVENCY AND CREDITOR/DEBTOR 110 Dasan Kayjal & Seow Samuel, Mediation in International Insolvency Disputes , INTERNATIONAL REGIMES PrinciPles for effective insolvency and creditor/debtor regimes the World bank (2016), (last visited ARBITRATION ASIA (2015), (last visited Aug 22, Aug 22, 2020),http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor- 2020),http://www.internationalarbitrationasia.com/mediation_in_international_insolvency_disputes Debtor-Regimes-2016.pdf.

126 127 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

stakeholders for the purpose of resolving insolvency disputes. Such informal followed, addressing issues such as commencement; opting-out; timetable; choice measures can be addressed in the interim.113 and appointment of the mediator; compensation; immunity; as well as the 118 The Insolvency and Debt Resolution team of the World Bank Group further assists confidentiality of the process.' governments in improving their credit environments through the development of All these countries and organisations, in one way or another, have adopted the more effective insolvency systems. This is achieved through international practice of out of court settlement in Insolvency laws with a high success rate. standard-setting, detailed diagnostics and technical assistance for Needless to say, India, being a developing economy with its recent consolidation in implementation.114 The World Bank Group also provides technical assistance to insolvency laws must include such measures, taking cue from the aforesaid countries interested in improving their debt resolution, insolvency, and alternative economies and institutions in order to pave way for a futuristically successful dispute resolution (ADR) systems, through advising governments on legislative judicious economy. 115 and institutional reforms like Furthermore, with regard to international disputes, India, being a signatory to the 1. Review and development of the legal and regulatory framework for out- Singapore Convention119 sees its obligations towards the promotion and use of of-court dispute resolution (arbitration and mediation) and debt recovery. mediation in resolving disputes of insolvency and bankruptcy laws. 2. Development of professional standards and regulations for Thus, on a close analysis of all different regimes throughout the world, needless to licensing of insolvency and training and certification of mediation say, mediation has proved to be a success, regardless of the complexities of the practitioners. case. Though majority jurisdictions suggest mediation at pre insolvency initiation Apart from the World Bank, other international organisations engaged in stage, reliance can be drawn on UNCITRAL Practical Guide by indulging in development and systematisation of commercial laws have unequivocally workouts as well as formal structured mediation strategies. The same can be supported the need and necessity of using out of court settlement procedures like exercised in the form of pre-packaged deals at the onset. This will equally ensure mediation and negotiation in Insolvency and Bankruptcy laws. confidentiality of the entire process and give corporate debtor sufficient scope in protecting its integrity while dealing with financial distress and subsequent INSOL International, the worldwide federation of national organizations of defaults. accountants and lawyers, specializing in the broad field of insolvency, has published in a Statement of Principles for A Global Approach to Multi-Creditor IDEAL STAGES FOR REFERRING THE MATTER TO MEDIATION Workouts.116 The statement comprises eight principles indicating 'best practice' for a company experiencing financial difficulties and which has a large number of A mediator creates an environment wherein all the concerned stakeholders, i.e., the (foreign) creditors.117 creditors, employees and the CD can enter into discussions which would enable them to resolve trivial issues and amicably settle their disputes. Broadly,mediation The UNCITRAL Practice Guide, 2009 has found that some dispute resolution can be applied for at two stages to resolve business disputes — (a) Workouts and clauses used are those in which the appointment of a third-party to resolve disputes (b) Workout supporting proceedings. is included: '… The agreement can particularize the mediation procedure to be ‘An out-of-court restructuring or workout is a contract between the debtor and its

113 Id. creditors, which binds the debtor vis-à-vis the creditors and also binds the creditors 114 Id. 115 Id. 116 INSOL INTERNATIONAL, STATEMENT OF PRINCIPLES FOR A GLOBAL APPROACH TO MULTI- 118 UNCITRAL, Practice Guide on Cross-Border Insolvency Cooperation (2009), (last visited Aug 22, CREDITOR WORKOUTS II (2017), (last visited Aug 22, 2020),https://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_english.pdf.

2020),https://www.insol.org/_files/Publications/StatementOfPrinciples/Statement of Principles II 18 April 119 2017 BML.pdf. UNITED NATIONS CONVENTION ON INTERNATIONAL SETTLEMENT AGREEMENTS RESULTING FROM MEDIATION (NEW YORK, 2018) (THE “SINGAPORE CONVENTION ON 117 Id. MEDIATION”) (2018).

128 129 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE stakeholders for the purpose of resolving insolvency disputes. Such informal followed, addressing issues such as commencement; opting-out; timetable; choice measures can be addressed in the interim.113 and appointment of the mediator; compensation; immunity; as well as the 118 The Insolvency and Debt Resolution team of the World Bank Group further assists confidentiality of the process.' governments in improving their credit environments through the development of All these countries and organisations, in one way or another, have adopted the more effective insolvency systems. This is achieved through international practice of out of court settlement in Insolvency laws with a high success rate. standard-setting, detailed diagnostics and technical assistance for Needless to say, India, being a developing economy with its recent consolidation in implementation.114 The World Bank Group also provides technical assistance to insolvency laws must include such measures, taking cue from the aforesaid countries interested in improving their debt resolution, insolvency, and alternative economies and institutions in order to pave way for a futuristically successful dispute resolution (ADR) systems, through advising governments on legislative judicious economy. 115 and institutional reforms like Furthermore, with regard to international disputes, India, being a signatory to the 1. Review and development of the legal and regulatory framework for out- Singapore Convention119 sees its obligations towards the promotion and use of of-court dispute resolution (arbitration and mediation) and debt recovery. mediation in resolving disputes of insolvency and bankruptcy laws. 2. Development of professional standards and regulations for Thus, on a close analysis of all different regimes throughout the world, needless to licensing of insolvency and training and certification of mediation say, mediation has proved to be a success, regardless of the complexities of the practitioners. case. Though majority jurisdictions suggest mediation at pre insolvency initiation Apart from the World Bank, other international organisations engaged in stage, reliance can be drawn on UNCITRAL Practical Guide by indulging in development and systematisation of commercial laws have unequivocally workouts as well as formal structured mediation strategies. The same can be supported the need and necessity of using out of court settlement procedures like exercised in the form of pre-packaged deals at the onset. This will equally ensure mediation and negotiation in Insolvency and Bankruptcy laws. confidentiality of the entire process and give corporate debtor sufficient scope in protecting its integrity while dealing with financial distress and subsequent INSOL International, the worldwide federation of national organizations of defaults. accountants and lawyers, specializing in the broad field of insolvency, has published in a Statement of Principles for A Global Approach to Multi-Creditor IDEAL STAGES FOR REFERRING THE MATTER TO MEDIATION Workouts.116 The statement comprises eight principles indicating 'best practice' for a company experiencing financial difficulties and which has a large number of A mediator creates an environment wherein all the concerned stakeholders, i.e., the (foreign) creditors.117 creditors, employees and the CD can enter into discussions which would enable them to resolve trivial issues and amicably settle their disputes. Broadly,mediation The UNCITRAL Practice Guide, 2009 has found that some dispute resolution can be applied for at two stages to resolve business disputes — (a) Workouts and clauses used are those in which the appointment of a third-party to resolve disputes (b) Workout supporting proceedings. is included: '… The agreement can particularize the mediation procedure to be ‘An out-of-court restructuring or workout is a contract between the debtor and its

113 Id. creditors, which binds the debtor vis-à-vis the creditors and also binds the creditors 114 Id. 115 Id. 116 INSOL INTERNATIONAL, STATEMENT OF PRINCIPLES FOR A GLOBAL APPROACH TO MULTI- 118 UNCITRAL, Practice Guide on Cross-Border Insolvency Cooperation (2009), (last visited Aug 22, CREDITOR WORKOUTS II (2017), (last visited Aug 22, 2020),https://www.uncitral.org/pdf/english/texts/insolven/Practice_Guide_english.pdf.

2020),https://www.insol.org/_files/Publications/StatementOfPrinciples/Statement of Principles II 18 April 119 2017 BML.pdf. UNITED NATIONS CONVENTION ON INTERNATIONAL SETTLEMENT AGREEMENTS RESULTING FROM MEDIATION (NEW YORK, 2018) (THE “SINGAPORE CONVENTION ON 117 Id. MEDIATION”) (2018).

128 129 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

inter se.’120 In workouts, the debtor is still solvent and explores with creditors the this process is that small creditors and shareholders may not be adequately different options available to resolve the dispute, for instance: re-financing, a represented in the critical phases of the negotiation, and hence would be at the property/property swap etc.121 Succinctly, a workout is a non-judicial process mercy of the FCs.127 where the CD negotiates with its creditors on the repayment of debt. Since In India, no statutory framework exists for out-of-court settlement of insolvency workouts are completely informal and voluntary in nature, it can be initiated by any related disputes. In authors' opinion, mediation would be efficient and successful if party — the CD or any class of creditor. Workouts invite least amount of judiciary's applied for at any stage prior to the constitution of the CoC, i.e. at workout support intervention and hence they are not only flexible but also time and cost effective as proceedings stage. This claim can be corroborated by the success stories of matters they save on litigation costs and judicial delays. However, the efficacy and success like Arjun Puri case128 and Parvinder case129 where the CD and the respective of the process will invariably depend on the participation of the FCs that hold the creditor(s) were able to come on the same page and attempted to resolve all the debt 122 major portion of the debt. It is imperative to note that the workouts suffer from related issues peacefully. If done after the constitution of the CoC, then all the aggregation problem. The most serious impediment is to bring all the creditors to a business decisions shall be taken by the FCs,130 and the interests of other classes of table to settlement. A possibility exists that many small creditors (including creditors may be put on the back burner. In such a case, the whole exercise would operational creditors) may not be in a position to negotiate the terms with big be fruitless. Also, such a procedure should be adopted purely on an experimental financial creditors as they may not have time and adequate resources to participate basis and in special circumstances, i.e. only where number of creditors is in such proceedings. The only workable solution to accommodate the claims of significantly less (i.e. could be counted on the fingers of one hand) so that big 123 multiple creditors is to ensure that the creditors must act in good faith. Good faith secured financial creditors are not just driven by selfish motives and impose their requires the parties (especially creditors) to repose trust in transparency and show will on other creditors. willingness to reach agreements on several points of the workout.124 'Workout support proceedings are court proceedings that aim at finalising a EXPLORING THE UNCHARTERED TERRITORY: ANSWERING restructuring agreement that was negotiated voluntarily and privately (workout), PERTINENT QUESTIONS 125 but did not find the support of all required creditors.' In such a scenario, unlike Who can initiate the mediation process? workouts, the CD may or may not necessarily be insolvent. This procedure does not provide for more tools other than a stay (moratorium) at the most, and The authors recommend that the process of mediation can be initiated by either witnesses participation of only certain creditors (usually financial creditors like party to the dispute, i.e., the Creditor (Financial or Operational), or, the Corporate banks).126 Such proceedings aim to achieve twin objectives: (a) keep the business of Debtor. However, the first attempt of mediation must precede the initiation of the CD a going concern and (b) minimal court intervention in resolving the dispute insolvency under section 7, 9 or 10. In cases where the concerned party directly between the CD and its creditors. However, one of the significant weaknesses of approaches the NCLT, the Bench can refer the matter to court annexed mediation before the constitution of the CoC under section 21 of the I&B Code wherein, all commercial matters can be exclusively dealt by a panel of mediators, so qualified to adjudicate upon the said issue. 120 JOSE M GARRIDO, Out-of-Court Debt Restructuring (2012). 121 Remigijus Jokubauskas, ALTERNATIVE DISPUTE RESOLUTION IN INSOLVENCY DISPUTES, 9 This court annexed mediation can be in line with the methodology so adopted by SOC. MOKSL. STUD. SOC. STUD. 244–265 (2017), (last visited Aug 22, 2020), the lower courts in family disputes. The twin purposes of suggesting this http://www.mruni.eu/lt/mokslo_darbai/SMS/http://www.mruni.eu/en/mokslo_darbai/SMS/. 122 Garrido, supra note cxix at 56. 123 Garrido, supra note cxix at 65. 127 Garrido, supra note cxix at104 124 Garrido, supra note cxix at 73. 128 Arjun Puri, supra note lxxi at 6. 125 WESSELS, INSTITUTE, AND STEPHAN, supra note 49. 129 Parvinder Singh, supra note lxxv at11. 126 Jokubauskas, supra note cxx at 251. 130 Essar Steels, supra note xxxix at 62.

130 131 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE inter se.’120 In workouts, the debtor is still solvent and explores with creditors the this process is that small creditors and shareholders may not be adequately different options available to resolve the dispute, for instance: re-financing, a represented in the critical phases of the negotiation, and hence would be at the property/property swap etc.121 Succinctly, a workout is a non-judicial process mercy of the FCs.127 where the CD negotiates with its creditors on the repayment of debt. Since In India, no statutory framework exists for out-of-court settlement of insolvency workouts are completely informal and voluntary in nature, it can be initiated by any related disputes. In authors' opinion, mediation would be efficient and successful if party — the CD or any class of creditor. Workouts invite least amount of judiciary's applied for at any stage prior to the constitution of the CoC, i.e. at workout support intervention and hence they are not only flexible but also time and cost effective as proceedings stage. This claim can be corroborated by the success stories of matters they save on litigation costs and judicial delays. However, the efficacy and success like Arjun Puri case128 and Parvinder case129 where the CD and the respective of the process will invariably depend on the participation of the FCs that hold the creditor(s) were able to come on the same page and attempted to resolve all the debt 122 major portion of the debt. It is imperative to note that the workouts suffer from related issues peacefully. If done after the constitution of the CoC, then all the aggregation problem. The most serious impediment is to bring all the creditors to a business decisions shall be taken by the FCs,130 and the interests of other classes of table to settlement. A possibility exists that many small creditors (including creditors may be put on the back burner. In such a case, the whole exercise would operational creditors) may not be in a position to negotiate the terms with big be fruitless. Also, such a procedure should be adopted purely on an experimental financial creditors as they may not have time and adequate resources to participate basis and in special circumstances, i.e. only where number of creditors is in such proceedings. The only workable solution to accommodate the claims of significantly less (i.e. could be counted on the fingers of one hand) so that big 123 multiple creditors is to ensure that the creditors must act in good faith. Good faith secured financial creditors are not just driven by selfish motives and impose their requires the parties (especially creditors) to repose trust in transparency and show will on other creditors. willingness to reach agreements on several points of the workout.124 'Workout support proceedings are court proceedings that aim at finalising a EXPLORING THE UNCHARTERED TERRITORY: ANSWERING restructuring agreement that was negotiated voluntarily and privately (workout), PERTINENT QUESTIONS 125 but did not find the support of all required creditors.' In such a scenario, unlike Who can initiate the mediation process? workouts, the CD may or may not necessarily be insolvent. This procedure does not provide for more tools other than a stay (moratorium) at the most, and The authors recommend that the process of mediation can be initiated by either witnesses participation of only certain creditors (usually financial creditors like party to the dispute, i.e., the Creditor (Financial or Operational), or, the Corporate banks).126 Such proceedings aim to achieve twin objectives: (a) keep the business of Debtor. However, the first attempt of mediation must precede the initiation of the CD a going concern and (b) minimal court intervention in resolving the dispute insolvency under section 7, 9 or 10. In cases where the concerned party directly between the CD and its creditors. However, one of the significant weaknesses of approaches the NCLT, the Bench can refer the matter to court annexed mediation before the constitution of the CoC under section 21 of the I&B Code wherein, all commercial matters can be exclusively dealt by a panel of mediators, so qualified to adjudicate upon the said issue. 120 JOSE M GARRIDO, Out-of-Court Debt Restructuring (2012). 121 Remigijus Jokubauskas, ALTERNATIVE DISPUTE RESOLUTION IN INSOLVENCY DISPUTES, 9 This court annexed mediation can be in line with the methodology so adopted by SOC. MOKSL. STUD. SOC. STUD. 244–265 (2017), (last visited Aug 22, 2020), the lower courts in family disputes. The twin purposes of suggesting this http://www.mruni.eu/lt/mokslo_darbai/SMS/http://www.mruni.eu/en/mokslo_darbai/SMS/. 122 Garrido, supra note cxix at 56. 123 Garrido, supra note cxix at 65. 127 Garrido, supra note cxix at104 124 Garrido, supra note cxix at 73. 128 Arjun Puri, supra note lxxi at 6. 125 WESSELS, INSTITUTE, AND STEPHAN, supra note 49. 129 Parvinder Singh, supra note lxxv at11. 126 Jokubauskas, supra note cxx at 251. 130 Essar Steels, supra note xxxix at 62.

130 131 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

alternative to the basic attempt of mediation on the part of the creditors or debtor, as negotiation must be deemed as a recurring process. the case may be are: As stated, the pre-insolvency mediation, being time bound, should assist the The panel of such mediators would be specialists in the field of commercial laws parties in reaching a settlement. However, in case where the CIRP has commenced, with adequate training imparted to them for officiating as a mediator. This will the IRP, may, seek assistance of a mediator, with the permission and on directions enable them to interact and understand the averments of the concerned parties in of the NCLT to deal with the situations of deadlock. This will enable the IRP to depth and give a prior solution or a suggestive strategy to deal with the crisis. negotiate with the stakeholders, with the aid of the mediating skills of the neutral This court annexed mediation will provide for a stipulated timeline for all the third party and timely deal with the situation at hand. concerned parties to reach a settlement and develop a prima facie resolution Who should be eligible to get appointed as a mediator? strategy, which could eventually be used to develop the resolution plan. It must be noted that the process of mediation should effectively be deemed as a pre- The eligibility criteria of certifying a mediator can be in consonance with such insolvency stage, i.e. wherein all the parties try to negotiate on their claims and norms as provided by the International Mediation Institute (hereinafter, “IMI”), a assist the corporate debtor in developing a comprehensive financial structure as non-profit charity registered in The Hague, supported practically and financially discussed above. by corporate users and by a group comprising the main international ADR service providers. It is the only organisation in the world providing for such uniform global Does the IRP play the role of a Mediator? norms for certification and accreditation of mediators.131 Another major recommendation that the authors would like to put forth is that a The IMI broadly divides its certification in three categories, they are:132 proper distinction must be made between the role played by the mediator and the IMI Certified Mediator: These are experienced mediators who desire to obtain IRP. Though both the professionals are supposed to be neutral in assisting the expertise by certifying against IMI's international standards. They are required to parties and carrying out the process; however, their functioning must not overlap. complete 20 mediations, or 200 hours of mediations. One simple reason behind this opinion is to avoid any form of conflict of interests of either parties. The role of mediator must not be confused with the powers and IMI Qualified Mediator: For those aspiring to start their professional career by functioning of the Interim Resolution Professional in the CIRP. completing certified IMI training and become a qualified mediation, this category suits well. They may not have yet completed 20 mediations or 200 hours of A mediator's role is to assist the parties in reaching a compromise on a restructuring mediations. For such mediators, a training course has been laid down that is plan. A mediator may be appointed ex officio or on request by the debtor or certified to have met IMI's independent training standards. creditors where the parties cannot manage the negotiations by themselves. Young Mediator: This is the third and most novice category of mediators as The role of IRP as supervisors is to keep a vigil eye on the actions of the debtor and provided by IMI. It is for those mediators who are just starting out. In order to creditors, and ensure they are fair to the body of creditors and comply with the law. become a mediator, these young aspirants require to undergo and complete 40 S/he does not take over the day-to-day operation of the business of the debtor. A hours of training to become a mediator. Resolution Professional, on other hand, must conform to all such duties and responsibilities as put forth on her/him in lieu of the statutory provisions of the Similar approach can be adopted in India as well. Pursuant to the training 133 code. programmes offered by Indian Institute of Corporate Affairs (IICA), and the

Should Mediation be applied at pre-insolvency stage only? 131 International Mediation Institute, Vision and Mission,(last visited Aug 22, 2020), https://www.imimediation.org/about/vision-and-mission/. The practice of mediation, as established, must be carried out prior to constitution 132 International Mediation Institute, Certify, (last visited Aug 22, 2020), of the CoC. However, it does not imply that the process of mediation and https://www.imimediation.org/practitioners/certify/. 133 International Mediation Institute, Certify, (last visited Aug 22, 2020), https://www.imimediation.org/practitioners/certify/.

132 133 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE alternative to the basic attempt of mediation on the part of the creditors or debtor, as negotiation must be deemed as a recurring process. the case may be are: As stated, the pre-insolvency mediation, being time bound, should assist the The panel of such mediators would be specialists in the field of commercial laws parties in reaching a settlement. However, in case where the CIRP has commenced, with adequate training imparted to them for officiating as a mediator. This will the IRP, may, seek assistance of a mediator, with the permission and on directions enable them to interact and understand the averments of the concerned parties in of the NCLT to deal with the situations of deadlock. This will enable the IRP to depth and give a prior solution or a suggestive strategy to deal with the crisis. negotiate with the stakeholders, with the aid of the mediating skills of the neutral This court annexed mediation will provide for a stipulated timeline for all the third party and timely deal with the situation at hand. concerned parties to reach a settlement and develop a prima facie resolution Who should be eligible to get appointed as a mediator? strategy, which could eventually be used to develop the resolution plan. It must be noted that the process of mediation should effectively be deemed as a pre- The eligibility criteria of certifying a mediator can be in consonance with such insolvency stage, i.e. wherein all the parties try to negotiate on their claims and norms as provided by the International Mediation Institute (hereinafter, “IMI”), a assist the corporate debtor in developing a comprehensive financial structure as non-profit charity registered in The Hague, supported practically and financially discussed above. by corporate users and by a group comprising the main international ADR service providers. It is the only organisation in the world providing for such uniform global Does the IRP play the role of a Mediator? norms for certification and accreditation of mediators.131 Another major recommendation that the authors would like to put forth is that a The IMI broadly divides its certification in three categories, they are:132 proper distinction must be made between the role played by the mediator and the IMI Certified Mediator: These are experienced mediators who desire to obtain IRP. Though both the professionals are supposed to be neutral in assisting the expertise by certifying against IMI's international standards. They are required to parties and carrying out the process; however, their functioning must not overlap. complete 20 mediations, or 200 hours of mediations. One simple reason behind this opinion is to avoid any form of conflict of interests of either parties. The role of mediator must not be confused with the powers and IMI Qualified Mediator: For those aspiring to start their professional career by functioning of the Interim Resolution Professional in the CIRP. completing certified IMI training and become a qualified mediation, this category suits well. They may not have yet completed 20 mediations or 200 hours of A mediator's role is to assist the parties in reaching a compromise on a restructuring mediations. For such mediators, a training course has been laid down that is plan. A mediator may be appointed ex officio or on request by the debtor or certified to have met IMI's independent training standards. creditors where the parties cannot manage the negotiations by themselves. Young Mediator: This is the third and most novice category of mediators as The role of IRP as supervisors is to keep a vigil eye on the actions of the debtor and provided by IMI. It is for those mediators who are just starting out. In order to creditors, and ensure they are fair to the body of creditors and comply with the law. become a mediator, these young aspirants require to undergo and complete 40 S/he does not take over the day-to-day operation of the business of the debtor. A hours of training to become a mediator. Resolution Professional, on other hand, must conform to all such duties and responsibilities as put forth on her/him in lieu of the statutory provisions of the Similar approach can be adopted in India as well. Pursuant to the training 133 code. programmes offered by Indian Institute of Corporate Affairs (IICA), and the

Should Mediation be applied at pre-insolvency stage only? 131 International Mediation Institute, Vision and Mission,(last visited Aug 22, 2020), https://www.imimediation.org/about/vision-and-mission/. The practice of mediation, as established, must be carried out prior to constitution 132 International Mediation Institute, Certify, (last visited Aug 22, 2020), of the CoC. However, it does not imply that the process of mediation and https://www.imimediation.org/practitioners/certify/. 133 International Mediation Institute, Certify, (last visited Aug 22, 2020), https://www.imimediation.org/practitioners/certify/.

132 133 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Delhi High Court,134 an individual with prior knowledge and experience in recommendations made by the Committee would subsequently be sent to the commercial and insolvency laws, who undergoes such a training from an Government of India as a suggestion. Considering it as a progressive step, many authorised institution/entity recognised by the Government of India and/or legal experts welcomed the move as it adequately vouches for a comprehensive respective States/UT should be made eligible to become a mediator in matters scheme for dealing with all commercial qua mediation. pertaining to the I&B Code. Small yet remarkable initiatives like the one stated above potentially provide due This specialisation is to provide exclusivity to the matters being dealt by such credibility to the mediation process, thereby reducing the overall litigative burden concerned mediators who could effectively understand the nuances of the crisis, and increasing the efficiency of the courts. Additionally, Indian courts (and better than those mediators, who, with similar training, possesses knowledge and adjudicating authorities) have been both cautious and mindful in laying the 136 experience in other fields. Needless to say, sufficient reliance can be drawn from foundation for mediation. Parvinder Singh case is an exemplar of how the international standards for determining the eligibility criteria for the appointment NCLAT tactfully made ample space for reconciliation between the parties. of a mediator. However, it cannot be denied that the absence of statutory framework can invite constructive ambiguity. Hence, it is crucial to preserve the conceptual underpinnings by bringing in the law which can give mediation a status of decree CONCLUSION and guide the courts (and adjudicating authorities) in ensuring stability and It goes unsaid that the outlook of the Indian Judicial system qua commercial uniformity with respect to referring the matters to pre-litigation mediation. matters has witnessed a seismic shift. With the sudden shift of attention on As discussed at length, mediation in insolvency, if implemented, can be yet another adopting alternative dispute resolution mechanisms, the courts are proactively milestone which is envisaged in the international insolvency regime. Assessment working towards reducing pendency. The recent amendment to commercial courts of international jurisprudence available on the concerned subject matter act so as to provide for mandatory mediation, and the courts exercising discretion demonstrates that mediation has been a successful exercise in finding a solution to in allowing parties to derive benefits from mediation in insolvency matters, so called 'terribly convoluted' matters. To bring India on a par with the global trend, sufficiently establishes the intention of not only the judiciary but also the it thus becomes imperative to adopt all such measures which not only safeguard the legislature to develop a robust apparatus to provide for non-litigative mechanisms interests of the parties, but also provide for an effective solution. of resolving disputes. Engaging in mediation at the earliest stage (even when the debtor is solvent) with less or no intervention of the courts would enable the parties to negotiate both rescue solutions and renegotiate the terms of the agreement / contract. Furthermore, attempts of codifying mediation are no new talk. Not mere conjecture but an assertion which can be strengthened by a notable measure undertaken by the top court. In January 2020, the Supreme Court constituted a committee to draft a legislation on meditation under the chairmanship of mediator Mr. Niranjan Bhat. Assigned with the task to draft a legislation on meditation, the Committee aims to legally sanctify the use of mediation in settling disputes by mulling over advantages attached to pre-litigation mediation.135 The

134 Samadhan, Notice-Delhi High Court Mediation and Conciliation Centre (2017), (last visited Aug 22, 2020), http://delhihighcourt.nic.in/writereaddata/Upload/PublicNotices/PublicNotice_RCPTNEDA.PDF. 134 Singh Ajmer, Supreme Court forms committee to draft mediation law, will send to government - The Economic Times, ECONOMIC TIMES (2020), https://economictimes.indiatimes.com/news/politics-and- nation/supreme-court-forms-committee-to-draft-mediation-law-will-send-to- government/articleshow/73394043.cms?from=mdr (last visited Aug 22, 2020) 136 Parvinder Singh, supra note lxxv.

134 135 2 2 Welcoming Seminal Shift from Acrimonious Disputes to Mediation : Journal of Corporate Affairs 2 Volume 1 | Issue 1 2 PAINTING THE INSOLVENCY CANVAS IN WHITE TEXTURE

Delhi High Court,134 an individual with prior knowledge and experience in recommendations made by the Committee would subsequently be sent to the commercial and insolvency laws, who undergoes such a training from an Government of India as a suggestion. Considering it as a progressive step, many authorised institution/entity recognised by the Government of India and/or legal experts welcomed the move as it adequately vouches for a comprehensive respective States/UT should be made eligible to become a mediator in matters scheme for dealing with all commercial qua mediation. pertaining to the I&B Code. Small yet remarkable initiatives like the one stated above potentially provide due This specialisation is to provide exclusivity to the matters being dealt by such credibility to the mediation process, thereby reducing the overall litigative burden concerned mediators who could effectively understand the nuances of the crisis, and increasing the efficiency of the courts. Additionally, Indian courts (and better than those mediators, who, with similar training, possesses knowledge and adjudicating authorities) have been both cautious and mindful in laying the 136 experience in other fields. Needless to say, sufficient reliance can be drawn from foundation for mediation. Parvinder Singh case is an exemplar of how the international standards for determining the eligibility criteria for the appointment NCLAT tactfully made ample space for reconciliation between the parties. of a mediator. However, it cannot be denied that the absence of statutory framework can invite constructive ambiguity. Hence, it is crucial to preserve the conceptual underpinnings by bringing in the law which can give mediation a status of decree CONCLUSION and guide the courts (and adjudicating authorities) in ensuring stability and It goes unsaid that the outlook of the Indian Judicial system qua commercial uniformity with respect to referring the matters to pre-litigation mediation. matters has witnessed a seismic shift. With the sudden shift of attention on As discussed at length, mediation in insolvency, if implemented, can be yet another adopting alternative dispute resolution mechanisms, the courts are proactively milestone which is envisaged in the international insolvency regime. Assessment working towards reducing pendency. The recent amendment to commercial courts of international jurisprudence available on the concerned subject matter act so as to provide for mandatory mediation, and the courts exercising discretion demonstrates that mediation has been a successful exercise in finding a solution to in allowing parties to derive benefits from mediation in insolvency matters, so called 'terribly convoluted' matters. To bring India on a par with the global trend, sufficiently establishes the intention of not only the judiciary but also the it thus becomes imperative to adopt all such measures which not only safeguard the legislature to develop a robust apparatus to provide for non-litigative mechanisms interests of the parties, but also provide for an effective solution. of resolving disputes. Engaging in mediation at the earliest stage (even when the debtor is solvent) with less or no intervention of the courts would enable the parties to negotiate both rescue solutions and renegotiate the terms of the agreement / contract. Furthermore, attempts of codifying mediation are no new talk. Not mere conjecture but an assertion which can be strengthened by a notable measure undertaken by the top court. In January 2020, the Supreme Court constituted a committee to draft a legislation on meditation under the chairmanship of mediator Mr. Niranjan Bhat. Assigned with the task to draft a legislation on meditation, the Committee aims to legally sanctify the use of mediation in settling disputes by mulling over advantages attached to pre-litigation mediation.135 The

134 Samadhan, Notice-Delhi High Court Mediation and Conciliation Centre (2017), (last visited Aug 22, 2020), http://delhihighcourt.nic.in/writereaddata/Upload/PublicNotices/PublicNotice_RCPTNEDA.PDF. 134 Singh Ajmer, Supreme Court forms committee to draft mediation law, will send to government - The Economic Times, ECONOMIC TIMES (2020), https://economictimes.indiatimes.com/news/politics-and- nation/supreme-court-forms-committee-to-draft-mediation-law-will-send-to- government/articleshow/73394043.cms?from=mdr (last visited Aug 22, 2020) 136 Parvinder Singh, supra note lxxv.

134 135 2 2 Green Bonds : An Instrument for Financing a sustainable Future

Dr. S.K. Gupta

1 Dr. S. K. Gupta is the Chief Executive Officer, IPA of Institute of Cost Accountants of India. Green Bonds : An Instrument for Financing a sustainable Future

Dr. S.K. Gupta

1 Dr. S. K. Gupta is the Chief Executive Officer, IPA of Institute of Cost Accountants of India. Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

Abstract: instrument with which an entity raises money from investors. Green bonds are like The green bond market is attracting new issuers and a more diversified base of any other debt instrument but the funds raised from such bond sale are used investors. However, the size of the green bond market remains small compared to exclusively for renewable energy projects. The general idea is that the proceeds the challenges it is meant to address and to the overall traditional bond market. from the issue of these types of debt instruments will be used either to fund projects This paper is based on an extensive literature review, market data analysis tostudy which have a clear, positive environmental impact, often in the renewable energy the concept, genesis, evolution, development and trends towards funds raised sector, or be used to invest in generally environmentally desirable business models through green bonds globally and study the potential of green bonds as a catalyst to or assets. enhancing India's capacity to cope with climate change in the country. This paper makes several recommendations to unlock and leverage the full potential of green OBJECTIVES OF THE STUDY bonds to finance efforts and initiatives towards sustainable development Goals. a) To study the concept, genesis, evolution and trends towards funds raised Keywords: Green bonds, climate change, low carbon transition, Green Bond, through green bonds globally Sustainable development b) To study the potential of green bonds as a catalyst to enhancing India's capacity to cope with climate change in the country. INTRODUCTION Despite the positive renewable energy investment trends over the past decade, RESEARCH METHODOLOGY annual investments in renewable energy power alone need to double until 2050 to The study uses secondary data sourced / sifted from Research reports, Research meet climate goals. To allocate enough capital to drive the world's transition to a articles, relevant information available of the internet to study the concept, low-carbon economy, a set of financial solutions need to be developed and taken genesis, evolution and trends towards funds raised through green bonds globally advantage of by policymakers, investors and financial institutions. The and to study the potential of green bonds as a catalyst to enhancing India's capacity International Renewable Energy Agency (IRENA) has recently published a series to cope with climate change in the country. The data has been purposely selected to of renewable energy finance briefs looking at tools to scale up renewables. summarize and highlight key data points to facilitate and support the objectives of Renewable energy finance: Green bonds highlights green bonds as an innovative the study. instrument that can help channel substantial global capital into renewable energy and other green assets. According to the Climate Bond Initiative (CBI), a non- CONCEPTUAL FRAMEWORK profit organization, “the green bonds era has begun—mobilizing bond markets as a 1. The essence of greenbonds. low-cost financing tool will be essential for the realization of a low-carbon and climate-resilient economy. In order to combat the threat of climate change, there is Like any other bond, a green bond is a fixed-income financial instrument for raising an urgent need to adopt mitigation and adaptation efforts at various levels and capital from investors through the debt capital market. Typically, the bond issuer finance such initiatives. Green bonds are a relatively new funding instrument for raises a fixed amount of capital from investors over a set period of time (the green projects that have been identified as the potential financial instrument for “maturity”), repaying the capital (the “principal”) when the bond matures and financing a sustainable future. India, in particular, has immense scope to diversify paying an agreed amount of interest (“coupons”) along the way. Green bonds are the green bond market beyond renewable energy. fixed-income instruments, the proceeds of which the issuer uses to finance specific projects that deliver environmental or climate benefits. They are particularly well Green bonds were created to fund projects that have positive environmental and/or suited to financing sustainable infrastructure investments. As financial climate benefits. The majority of the green bonds issued are green “use of instruments, they can offer investors stable long-term returns. Perhaps this is why proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for the appetite of institutional investors for green bonds has grown substantially in green projects but are backed by the issuer's entire balance sheet. A bond is a debt

138 139 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

Abstract: instrument with which an entity raises money from investors. Green bonds are like The green bond market is attracting new issuers and a more diversified base of any other debt instrument but the funds raised from such bond sale are used investors. However, the size of the green bond market remains small compared to exclusively for renewable energy projects. The general idea is that the proceeds the challenges it is meant to address and to the overall traditional bond market. from the issue of these types of debt instruments will be used either to fund projects This paper is based on an extensive literature review, market data analysis tostudy which have a clear, positive environmental impact, often in the renewable energy the concept, genesis, evolution, development and trends towards funds raised sector, or be used to invest in generally environmentally desirable business models through green bonds globally and study the potential of green bonds as a catalyst to or assets. enhancing India's capacity to cope with climate change in the country. This paper makes several recommendations to unlock and leverage the full potential of green OBJECTIVES OF THE STUDY bonds to finance efforts and initiatives towards sustainable development Goals. a) To study the concept, genesis, evolution and trends towards funds raised Keywords: Green bonds, climate change, low carbon transition, Green Bond, through green bonds globally Sustainable development b) To study the potential of green bonds as a catalyst to enhancing India's capacity to cope with climate change in the country. INTRODUCTION Despite the positive renewable energy investment trends over the past decade, RESEARCH METHODOLOGY annual investments in renewable energy power alone need to double until 2050 to The study uses secondary data sourced / sifted from Research reports, Research meet climate goals. To allocate enough capital to drive the world's transition to a articles, relevant information available of the internet to study the concept, low-carbon economy, a set of financial solutions need to be developed and taken genesis, evolution and trends towards funds raised through green bonds globally advantage of by policymakers, investors and financial institutions. The and to study the potential of green bonds as a catalyst to enhancing India's capacity International Renewable Energy Agency (IRENA) has recently published a series to cope with climate change in the country. The data has been purposely selected to of renewable energy finance briefs looking at tools to scale up renewables. summarize and highlight key data points to facilitate and support the objectives of Renewable energy finance: Green bonds highlights green bonds as an innovative the study. instrument that can help channel substantial global capital into renewable energy and other green assets. According to the Climate Bond Initiative (CBI), a non- CONCEPTUAL FRAMEWORK profit organization, “the green bonds era has begun—mobilizing bond markets as a 1. The essence of greenbonds. low-cost financing tool will be essential for the realization of a low-carbon and climate-resilient economy. In order to combat the threat of climate change, there is Like any other bond, a green bond is a fixed-income financial instrument for raising an urgent need to adopt mitigation and adaptation efforts at various levels and capital from investors through the debt capital market. Typically, the bond issuer finance such initiatives. Green bonds are a relatively new funding instrument for raises a fixed amount of capital from investors over a set period of time (the green projects that have been identified as the potential financial instrument for “maturity”), repaying the capital (the “principal”) when the bond matures and financing a sustainable future. India, in particular, has immense scope to diversify paying an agreed amount of interest (“coupons”) along the way. Green bonds are the green bond market beyond renewable energy. fixed-income instruments, the proceeds of which the issuer uses to finance specific projects that deliver environmental or climate benefits. They are particularly well Green bonds were created to fund projects that have positive environmental and/or suited to financing sustainable infrastructure investments. As financial climate benefits. The majority of the green bonds issued are green “use of instruments, they can offer investors stable long-term returns. Perhaps this is why proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for the appetite of institutional investors for green bonds has grown substantially in green projects but are backed by the issuer's entire balance sheet. A bond is a debt

138 139 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

recent years.The green bond market, as it stands today, is a “self-labeled” market l Green project bond: This is a project bond for a single or multiple green with voluntary issuer disclosure standards that vary in scope and quality. Unlike project(s) for which the investor has direct exposure to the risk of the plain vanilla corporate bonds, which generally provide a company's management project(s) with or without potential recourse to the issuer. the flexibility to decide how to use bond proceeds, green bonds are required to l Green securitized bond: This is a bond collateralized by one or more direct their proceeds only into projects that generate environmental benefits specific projects, including but not limited to covered bonds, asset-backed In a world where there is ever-increasing awareness on climate concerns, the Green securities and other structures. The first source of repayment is generally Bond is a tool that raises industry engagement by encouraging investments in the cash flows of the assets securing the bonds. sustainable projects, processes and technologies with a transparency that allows Green bonds can also be categorized as: investors to understand the challenges and thus diversify risk. At the same time, the l Green Bond provides issuers with an opportunity to have a closer dialogue with Asset Backed Securities (ABS): Asset Backed Securities (ABS) are a investors and adapt issuance. Capital market investors are increasingly integrating help to benefit related or unrelated green projects which are fuelled by the environmental, social and governance criteria in their investment decisions, and proceeds of these bonds as also the profit earned out of these bonds is used looking for ways to make a positive impact. Green bonds often serve as an entry as issuer debt obligation. It is so because the credit flows of the revenue point for issuers and investors interested in using their investments to overcome streams, fees, taxes, etc. in the bond is pledged to the credit exposure of the global challenges as highlighted by the 17 UN Sustainable Development Goals. bond. As established in a case study of Toyota (March 2014), it is not Over the past decade, green finance has moved from a niche market to one that is essential that the related investment need may not necessarily be 'green'. increasingly mainstream. Investment in green bonds is at record highs as investors As for example green bonds which have a direct or indirect relation with align their strategies with environmental considerations. auto loans would mean allocating the proceeds for the development of environmentally-friendly automobiles (IREDA, 2016). 2. Types of green bonds l High-Yield Green Bonds: These robust reporting non-investment grade Green Bonds are standard bonds with a green as a bonus feature. The green bonds were first issued by 'NRG Yield' in August 2014 for $500 million. credentials of green bonds can be broadly structured and categorized as follows: l Corporate Green Bonds: Corporate “earmarked” bonds, which hold a l Green use of proceed bonds: This is a standard recourse to the issuer debt relatively smaller market share between $1 and $3 billion, helped in obligation for which the proceeds shall be held in a sub-portfolio or creation of a vast and strong green market. otherwise tracked by the issuer and attested to by a formal internal process l The US initiated the Municipal Green Bonds in 2014. These were that will be linked to the issuer's lending and investment operations for earmarked to promote green properties and finance sustainable hydro projects. projects for the universities. Subsequently, European cities and l Green use of proceeds revenue bonds: This is a non-recourse-to-the- municipalities followed suit which led to setting of an enhanced trend issuer debt obligation in which the credit exposure in the bond is to the wherein several more joining the stream with numerous green bonds pledged cash flows of the revenue streams, fees, taxes, etc., and the use of (Climate Bonds Initiative, 2014). proceeds of the bond goes to related or unrelated green projects. Notably, l Commercial Bank Green Bonds: Help to financially support a variety of the underlying collateral need not always be “green” as demonstrated by projects covering renewable energy. Some of these are related to wind, the green bonds issued by Toyota in March 2014. The structure involved water and solar energies which are turned highly efficient in their the securitization of auto loans to collateralize its green bonds, the respective fields of contribution to environment issuance proceeds of which were allocated to fund the development of environmentally-friendly automobiles. The specific structure for a green bond can be determined based on the circumstances of the issuer and the applicable green projects.

140 141 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

recent years.The green bond market, as it stands today, is a “self-labeled” market l Green project bond: This is a project bond for a single or multiple green with voluntary issuer disclosure standards that vary in scope and quality. Unlike project(s) for which the investor has direct exposure to the risk of the plain vanilla corporate bonds, which generally provide a company's management project(s) with or without potential recourse to the issuer. the flexibility to decide how to use bond proceeds, green bonds are required to l Green securitized bond: This is a bond collateralized by one or more direct their proceeds only into projects that generate environmental benefits specific projects, including but not limited to covered bonds, asset-backed In a world where there is ever-increasing awareness on climate concerns, the Green securities and other structures. The first source of repayment is generally Bond is a tool that raises industry engagement by encouraging investments in the cash flows of the assets securing the bonds. sustainable projects, processes and technologies with a transparency that allows Green bonds can also be categorized as: investors to understand the challenges and thus diversify risk. At the same time, the l Green Bond provides issuers with an opportunity to have a closer dialogue with Asset Backed Securities (ABS): Asset Backed Securities (ABS) are a investors and adapt issuance. Capital market investors are increasingly integrating help to benefit related or unrelated green projects which are fuelled by the environmental, social and governance criteria in their investment decisions, and proceeds of these bonds as also the profit earned out of these bonds is used looking for ways to make a positive impact. Green bonds often serve as an entry as issuer debt obligation. It is so because the credit flows of the revenue point for issuers and investors interested in using their investments to overcome streams, fees, taxes, etc. in the bond is pledged to the credit exposure of the global challenges as highlighted by the 17 UN Sustainable Development Goals. bond. As established in a case study of Toyota (March 2014), it is not Over the past decade, green finance has moved from a niche market to one that is essential that the related investment need may not necessarily be 'green'. increasingly mainstream. Investment in green bonds is at record highs as investors As for example green bonds which have a direct or indirect relation with align their strategies with environmental considerations. auto loans would mean allocating the proceeds for the development of environmentally-friendly automobiles (IREDA, 2016). 2. Types of green bonds l High-Yield Green Bonds: These robust reporting non-investment grade Green Bonds are standard bonds with a green as a bonus feature. The green bonds were first issued by 'NRG Yield' in August 2014 for $500 million. credentials of green bonds can be broadly structured and categorized as follows: l Corporate Green Bonds: Corporate “earmarked” bonds, which hold a l Green use of proceed bonds: This is a standard recourse to the issuer debt relatively smaller market share between $1 and $3 billion, helped in obligation for which the proceeds shall be held in a sub-portfolio or creation of a vast and strong green market. otherwise tracked by the issuer and attested to by a formal internal process l The US initiated the Municipal Green Bonds in 2014. These were that will be linked to the issuer's lending and investment operations for earmarked to promote green properties and finance sustainable hydro projects. projects for the universities. Subsequently, European cities and l Green use of proceeds revenue bonds: This is a non-recourse-to-the- municipalities followed suit which led to setting of an enhanced trend issuer debt obligation in which the credit exposure in the bond is to the wherein several more joining the stream with numerous green bonds pledged cash flows of the revenue streams, fees, taxes, etc., and the use of (Climate Bonds Initiative, 2014). proceeds of the bond goes to related or unrelated green projects. Notably, l Commercial Bank Green Bonds: Help to financially support a variety of the underlying collateral need not always be “green” as demonstrated by projects covering renewable energy. Some of these are related to wind, the green bonds issued by Toyota in March 2014. The structure involved water and solar energies which are turned highly efficient in their the securitization of auto loans to collateralize its green bonds, the respective fields of contribution to environment issuance proceeds of which were allocated to fund the development of environmentally-friendly automobiles. The specific structure for a green bond can be determined based on the circumstances of the issuer and the applicable green projects.

140 141 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

3. Stakeholders l Creating internal synergies between financial and sustainability l Green Bonds issuer(s): Any company, government agency or financial departments. institution that develops, registers and sells a bond. l Improving diversification of bond issuer investor base, potentially l Green Bonds investor(s): Individuals, companies or institutional reducing exposure to bond demand fluctuations. investors who buy green bonds with the expectation of a financial return. l Reputational benefits (e.g. marketing can highlight issuer's green They include individuals, companies and institutional investors (e.g. credentials and support for green investment). endowment funds, hedge funds, insurance companies, asset managers, l Tracking of proceeds use and reporting leads to improved internal investment companies, investment trusts, mutual funds, pension funds, governance structures and communication. sovereign wealth funds, etc.). l Green Bonds partner(s): A broad spectrum of organizations interested in 4.2 Benefits to investors developing a commercially viable green bonds' market, including • Helping investors to develop better-informed investment strategies through financial institutions, development banks, NGOs, credit rating agencies, improved risk assessment in an otherwise opaque fixed income market through use etc. of proceeds reporting. l Credit rating agencies and auditors: institutions responsible for • Facilitating the smooth implementation of long-term climate strategies. verifying compliance with the standards for green bonds or established • Helping responsible investors broaden their restricted investment portfolios. credit standards. l Regulators: Financial authorities responsible for regulating capital 4.3Benefits to Policymakers markets; they examine the qualifications of underwriters as well as the Indirectly supporting the implementation of sustainable development strategies by securitization of credit assets and bonds' custodial arrangements; and better matching of green issuers and investor regulate the issuance, clearing and settlement provisions. Regulators include securities commissions and other regulatory bodies, including LITERATURE REVIEW stock exchanges and central banks. Green bonds are an important development because they are a financial innovation 4. Benefits of Green Bonds designed to facilitate sustainable investing for institutional investors such a pension funds, insurance companies, mutual funds, and sovereign wealth funds. 'Green bonds' are an attractive mechanism for organizations to raise capital for For example, green bonds are sometimes highlighted as an innovation that can help sustainable projects. These bonds can be raised by not only financial institutions, increase sustainable infrastructure investments from institutional investors by but also by any private sector or public sector organization. The global green bond improving the liquidity of infrastructure assets (Merk et al. 2012; Della Croce and market is growing rapidly which is a result of the interest from varied debt Yermo 2013; Bhattacharya, Oppenheim, and Stern 2015; OECD 2016). investors. With the exceptions of green bonds issued in China and India, what makes a bond 4.1 Benefits to Issuers green has to date not tended to be regulated. Instead, a common practice for l Helping issuers to articulate and communicate the sustainability strategy. establishing the 'greenness' of a bond has been alignment of the bond's use of proceeds clause with the Green Bond Principles (GBPs), or other similar voluntary l Improving relationships with debt providers and broadening the 'investor standards. The GBPs have been developed and endorsed by financial actors base'. through the International Capital Markets Association (ICMA). The GBPs list renewable energy, energy and resource efficiency, pollution reduction, water and

142 143 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

3. Stakeholders l Creating internal synergies between financial and sustainability l Green Bonds issuer(s): Any company, government agency or financial departments. institution that develops, registers and sells a bond. l Improving diversification of bond issuer investor base, potentially l Green Bonds investor(s): Individuals, companies or institutional reducing exposure to bond demand fluctuations. investors who buy green bonds with the expectation of a financial return. l Reputational benefits (e.g. marketing can highlight issuer's green They include individuals, companies and institutional investors (e.g. credentials and support for green investment). endowment funds, hedge funds, insurance companies, asset managers, l Tracking of proceeds use and reporting leads to improved internal investment companies, investment trusts, mutual funds, pension funds, governance structures and communication. sovereign wealth funds, etc.). l Green Bonds partner(s): A broad spectrum of organizations interested in 4.2 Benefits to investors developing a commercially viable green bonds' market, including • Helping investors to develop better-informed investment strategies through financial institutions, development banks, NGOs, credit rating agencies, improved risk assessment in an otherwise opaque fixed income market through use etc. of proceeds reporting. l Credit rating agencies and auditors: institutions responsible for • Facilitating the smooth implementation of long-term climate strategies. verifying compliance with the standards for green bonds or established • Helping responsible investors broaden their restricted investment portfolios. credit standards. l Regulators: Financial authorities responsible for regulating capital 4.3Benefits to Policymakers markets; they examine the qualifications of underwriters as well as the Indirectly supporting the implementation of sustainable development strategies by securitization of credit assets and bonds' custodial arrangements; and better matching of green issuers and investor regulate the issuance, clearing and settlement provisions. Regulators include securities commissions and other regulatory bodies, including LITERATURE REVIEW stock exchanges and central banks. Green bonds are an important development because they are a financial innovation 4. Benefits of Green Bonds designed to facilitate sustainable investing for institutional investors such a pension funds, insurance companies, mutual funds, and sovereign wealth funds. 'Green bonds' are an attractive mechanism for organizations to raise capital for For example, green bonds are sometimes highlighted as an innovation that can help sustainable projects. These bonds can be raised by not only financial institutions, increase sustainable infrastructure investments from institutional investors by but also by any private sector or public sector organization. The global green bond improving the liquidity of infrastructure assets (Merk et al. 2012; Della Croce and market is growing rapidly which is a result of the interest from varied debt Yermo 2013; Bhattacharya, Oppenheim, and Stern 2015; OECD 2016). investors. With the exceptions of green bonds issued in China and India, what makes a bond 4.1 Benefits to Issuers green has to date not tended to be regulated. Instead, a common practice for l Helping issuers to articulate and communicate the sustainability strategy. establishing the 'greenness' of a bond has been alignment of the bond's use of proceeds clause with the Green Bond Principles (GBPs), or other similar voluntary l Improving relationships with debt providers and broadening the 'investor standards. The GBPs have been developed and endorsed by financial actors base'. through the International Capital Markets Association (ICMA). The GBPs list renewable energy, energy and resource efficiency, pollution reduction, water and

142 143 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

waste management, conservation, and climate adaptation as the types of projects BUSINESS CASE FOR GREEN BONDS that can be financed with a green bond (ICMA 2018). The business case for investing or issuing green bonds refers to incentives related Over 90% of green bonds are investment grade issuances (Tiftik, Mahmood, and to the economic performance of the investor or issuer that is not directly related to Nozema 2019), meaning that they have high to medium credit quality ratings (i.e. the financial performance of the green bond for the respective parties. Hockerts AAA & AA or A & BBB ratings). A recent study of green bonds issued between (2015) highlighted four types of non-financial business case incentives; branding, 2013 and 2017 finds that the yields of green bonds are on average two basis points operational efficiency, creating new markets, and reducing risk. (bps) lower than those of comparable conventional bonds (Zerbib 2019). One The business case for the branding benefits of engaging in sustainable finance common explanation for this yield difference is the high demand for and limited could be to attract and retain customers and clients or to charge premium prices for supply of green bonds. However, the presence of any pricing difference and its products and services (Menon and Menon 1997; Du, Bhattacharya, and Sen 2007; level is still debated in empirical studies (e.g. Larcker and Watts 2019).Irrespective Belz and Schmidt-Riediger 2010; Dangelico and Vocalelli 2017). Operational of this debate, what is clear is that the vast majority of green bonds could have been efficiency may be enhanced by, for example, attracting high quality employees, issued as conventional bonds with little difference to the issuers' ability to raise impacting the productivity of employees motivated by sustainability commitments capital at favorable rates. of the organisation, or identifying new operational efficiency gains (Branco and The surge in interest in green bonds also reflects a revolution in socially Rodrigues 2006; Morsing 2006; Sen, Bhattacharya, and Korschun 2006; Grolleau, responsible approaches to investment and finance [Chesney et al., 2016; Dziawgo, Mzoughi, and Thomas 2007; Henriques and Sadorsky 2007; Ali et al. 2010). 2010]. Issuers may be governments (including municipal, state and national Creating new markets could entail developing new investment products for governments and export-import banks), intergovernmental organizations (e.g. customers interested in sustainable investing and/or attracting new classes of World Bank or regional development banks), financial institutions, and other customers to existing and new product offerings (Renneboog, Horst, and Zhang corporations. Market actors are increasingly enthusiastic about green bonds 2011; Jansson and Biel 2014; Riedl and Smeets 2017). There could also be [Shishlov et al., 2018, p. 8].Since green bonds are an instrument to shift capital for incentives associate with reducing risk that are not directly related to financial green investments, the question is whether green bonds really can increase and risks. For example, reputational risks and risks associate with potential future accelerate green investments. And what does “green” really mean? The problem is regulation related to sustainability (Davis 1973; Banerjee 2008; Barnett and that many market participants have their own definitions of “being green” or Hoffman 2008; Gond and Piani 2013; Haufler 2013). “environmentally beneficial”, which may or may not overlap. The structure of the green bond market today raises several questions. If green EMERGENCE OF GREEN BONDS bonds are nearly identical to regular investment grade bonds in terms of financial In order to protect the environment, the first green bond was issued in 2007 and was performance why are issuers making the extra effort to go through the green bond initially1characterized as a niche product pioneered by a handful of development labelling, verification, and reporting process? Similarly, if the financial banks. The “Climate Awareness Bond” was issued by the European Investment characteristics of green bonds do not differ significantly from conventional bonds, Bank (EIB) in 2007, followed by the World Bank issuing a “Green Bond” in 2008. what explains the high demand for green bonds among investors? What value are Between 2007 and 2012, governments began to join international organizations green bonds delivering to issuers and investors, and what difference do they make and issue their own green bonds. Although several factors are driving rapid growth to the way issuers and investors interact with each other? Understanding the in demand for green bonds today, the initial rise of the market is often attributed to motivations of actors participating in the green bond market is central to the work carried out by the United Nations (UN) since the 1990s to combat the understanding what role green bonds can play in directing investment towards climate-change problem. The market began to gain traction by 2013, when sustainable development and how we should understand green bonds as a new corporate green bonds were issued by Electricité de France and Bank of America. financial innovation. Later in 2015 the Paris Climate Change Conference was able to bring close around

144 145 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

waste management, conservation, and climate adaptation as the types of projects BUSINESS CASE FOR GREEN BONDS that can be financed with a green bond (ICMA 2018). The business case for investing or issuing green bonds refers to incentives related Over 90% of green bonds are investment grade issuances (Tiftik, Mahmood, and to the economic performance of the investor or issuer that is not directly related to Nozema 2019), meaning that they have high to medium credit quality ratings (i.e. the financial performance of the green bond for the respective parties. Hockerts AAA & AA or A & BBB ratings). A recent study of green bonds issued between (2015) highlighted four types of non-financial business case incentives; branding, 2013 and 2017 finds that the yields of green bonds are on average two basis points operational efficiency, creating new markets, and reducing risk. (bps) lower than those of comparable conventional bonds (Zerbib 2019). One The business case for the branding benefits of engaging in sustainable finance common explanation for this yield difference is the high demand for and limited could be to attract and retain customers and clients or to charge premium prices for supply of green bonds. However, the presence of any pricing difference and its products and services (Menon and Menon 1997; Du, Bhattacharya, and Sen 2007; level is still debated in empirical studies (e.g. Larcker and Watts 2019).Irrespective Belz and Schmidt-Riediger 2010; Dangelico and Vocalelli 2017). Operational of this debate, what is clear is that the vast majority of green bonds could have been efficiency may be enhanced by, for example, attracting high quality employees, issued as conventional bonds with little difference to the issuers' ability to raise impacting the productivity of employees motivated by sustainability commitments capital at favorable rates. of the organisation, or identifying new operational efficiency gains (Branco and The surge in interest in green bonds also reflects a revolution in socially Rodrigues 2006; Morsing 2006; Sen, Bhattacharya, and Korschun 2006; Grolleau, responsible approaches to investment and finance [Chesney et al., 2016; Dziawgo, Mzoughi, and Thomas 2007; Henriques and Sadorsky 2007; Ali et al. 2010). 2010]. Issuers may be governments (including municipal, state and national Creating new markets could entail developing new investment products for governments and export-import banks), intergovernmental organizations (e.g. customers interested in sustainable investing and/or attracting new classes of World Bank or regional development banks), financial institutions, and other customers to existing and new product offerings (Renneboog, Horst, and Zhang corporations. Market actors are increasingly enthusiastic about green bonds 2011; Jansson and Biel 2014; Riedl and Smeets 2017). There could also be [Shishlov et al., 2018, p. 8].Since green bonds are an instrument to shift capital for incentives associate with reducing risk that are not directly related to financial green investments, the question is whether green bonds really can increase and risks. For example, reputational risks and risks associate with potential future accelerate green investments. And what does “green” really mean? The problem is regulation related to sustainability (Davis 1973; Banerjee 2008; Barnett and that many market participants have their own definitions of “being green” or Hoffman 2008; Gond and Piani 2013; Haufler 2013). “environmentally beneficial”, which may or may not overlap. The structure of the green bond market today raises several questions. If green EMERGENCE OF GREEN BONDS bonds are nearly identical to regular investment grade bonds in terms of financial In order to protect the environment, the first green bond was issued in 2007 and was performance why are issuers making the extra effort to go through the green bond initially1characterized as a niche product pioneered by a handful of development labelling, verification, and reporting process? Similarly, if the financial banks. The “Climate Awareness Bond” was issued by the European Investment characteristics of green bonds do not differ significantly from conventional bonds, Bank (EIB) in 2007, followed by the World Bank issuing a “Green Bond” in 2008. what explains the high demand for green bonds among investors? What value are Between 2007 and 2012, governments began to join international organizations green bonds delivering to issuers and investors, and what difference do they make and issue their own green bonds. Although several factors are driving rapid growth to the way issuers and investors interact with each other? Understanding the in demand for green bonds today, the initial rise of the market is often attributed to motivations of actors participating in the green bond market is central to the work carried out by the United Nations (UN) since the 1990s to combat the understanding what role green bonds can play in directing investment towards climate-change problem. The market began to gain traction by 2013, when sustainable development and how we should understand green bonds as a new corporate green bonds were issued by Electricité de France and Bank of America. financial innovation. Later in 2015 the Paris Climate Change Conference was able to bring close around

144 145 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

200 countries who all agreed to work together to arrest global warming issue to less helped create more transparency for investors and clarified requirements for that 2° Celsius. It is assumed that to achieve the agreed targets on environment issuers. This gave a strong impulse to both the volume and diversity of issuers. issues an amount of more that 100 trillion dollars would be required in the next 14 The green bond market experienced rapid growth between 2015 and 2017, with a years. That is the reason that green bonds now are looked upon as one of the most tilt towards specific segments. Institutions such as the EIB, IBRD and KfW, which fruitful instruments to raise funds (Gupta and Aggarwal, 2019). by that stage had become relatively established green bond names, expanded The Paris Agreement, clearly defines that all the governments should take steps to issuance, but a substantial part of the growth – particularly in 2016 and early 2017 – avoid environment pollution. The pace must be accelerated which is further came from Chinese names, such as the Shanghai Pudong Development Bank and boasted by the technology innovation in the country. The Green bonds are issued to ICBC. US issuers took over the lead in 2017, with sizeable green bond issuance by achieve the objectives of the Paris climate change accord(Lisa, 2017). The Paris US municipalities to finance local transportation and water projects, and by Fannie agreement made it mandatory for the government to submit “Intended Nationally Mae to finance sustainable housing. Determined Contributions” (INDCs) towards this social cause. It wanted the The significant growth of the Green Bond markets over the last few years can partly countries to make commitment towards submitting their reports on the amount of be attributed to an overarching trend towards including environmental, social and emission and their progress reports towards executing and achieving their governance (ESG) issues into the decision process for investments by institutional Intended Nationally Determined Contributions (INDC). investors. The lively primary market in green bonds – which has seen strong The Paris Climate Change Conference resulted in nearly 200 countries coming growth particularly in recent years – now has issuance from a diversified set of together in an attempt to limit global warming to less than 2° Celsius—was institutions, across the corporate, government, government-related and multi- effectively a culmination of the UN's work, and is now providing fresh impetus for lateral sectors. The secondary market has been functioning well, with green bonds the world to explore the possible financial solutions available. Some now estimate priced close to their non-green peers. Globally, Momentum is rapidly building for that upwards of $100 trillion of investment will be required over the next 14 years if the global green bond market. The green bond market outperformed expectations the agreement's targets are to be met. With substantially more investment funds in 2019, with record issuance of $240 billion with a growth of over 51% over 2018. required to be generated, therefore, green bonds are now increasingly considered to be among the most useful instruments to help countries achieve those target. 2019 green bond market highlights: This market is a crucial source of financing for projects, with positive l USD258.9bn in issuance (2018: USD171.2bn) environmental impacts in both developed and emerging countries. Investor l 1,802 deals (2018: 1,591) appetite for green bonds continues to grow, and emerging market issuers are likely l to benefit from increasing demand. This second edition of the “Emerging Market 506 issuers (2018: 347) Green Bonds Report” highlights where there has been growth and where there is l 291 new issuers: (2018: 204) potential. l 8 new countries: Russia, Saudi Arabia, Ukraine, Ecuador, Greece, Kenya, Panama, Barbados DATA ANALYSIS : THE DEVELOPMENT AND TRENDS OF THE l MARKET FOR GREEN BONDS USA top with USD51.3bn, followed by China (USD31.3bn) and France (USD30.1bn) The origins of green bonds date back to 2007 when the EIB launched its first l Climate Awareness Bond. The World Bank issued its inaugural green bond in 2008. Certified Climate Bonds passed the USD100bn milestone These were followed by a small but growing stream of issues from government- related entities and local authorities. The market really started in earnest after the launch of the Green Bond Principles in 2014. The establishment of these principles

146 147 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

200 countries who all agreed to work together to arrest global warming issue to less helped create more transparency for investors and clarified requirements for that 2° Celsius. It is assumed that to achieve the agreed targets on environment issuers. This gave a strong impulse to both the volume and diversity of issuers. issues an amount of more that 100 trillion dollars would be required in the next 14 The green bond market experienced rapid growth between 2015 and 2017, with a years. That is the reason that green bonds now are looked upon as one of the most tilt towards specific segments. Institutions such as the EIB, IBRD and KfW, which fruitful instruments to raise funds (Gupta and Aggarwal, 2019). by that stage had become relatively established green bond names, expanded The Paris Agreement, clearly defines that all the governments should take steps to issuance, but a substantial part of the growth – particularly in 2016 and early 2017 – avoid environment pollution. The pace must be accelerated which is further came from Chinese names, such as the Shanghai Pudong Development Bank and boasted by the technology innovation in the country. The Green bonds are issued to ICBC. US issuers took over the lead in 2017, with sizeable green bond issuance by achieve the objectives of the Paris climate change accord(Lisa, 2017). The Paris US municipalities to finance local transportation and water projects, and by Fannie agreement made it mandatory for the government to submit “Intended Nationally Mae to finance sustainable housing. Determined Contributions” (INDCs) towards this social cause. It wanted the The significant growth of the Green Bond markets over the last few years can partly countries to make commitment towards submitting their reports on the amount of be attributed to an overarching trend towards including environmental, social and emission and their progress reports towards executing and achieving their governance (ESG) issues into the decision process for investments by institutional Intended Nationally Determined Contributions (INDC). investors. The lively primary market in green bonds – which has seen strong The Paris Climate Change Conference resulted in nearly 200 countries coming growth particularly in recent years – now has issuance from a diversified set of together in an attempt to limit global warming to less than 2° Celsius—was institutions, across the corporate, government, government-related and multi- effectively a culmination of the UN's work, and is now providing fresh impetus for lateral sectors. The secondary market has been functioning well, with green bonds the world to explore the possible financial solutions available. Some now estimate priced close to their non-green peers. Globally, Momentum is rapidly building for that upwards of $100 trillion of investment will be required over the next 14 years if the global green bond market. The green bond market outperformed expectations the agreement's targets are to be met. With substantially more investment funds in 2019, with record issuance of $240 billion with a growth of over 51% over 2018. required to be generated, therefore, green bonds are now increasingly considered to be among the most useful instruments to help countries achieve those target. 2019 green bond market highlights: This market is a crucial source of financing for projects, with positive l USD258.9bn in issuance (2018: USD171.2bn) environmental impacts in both developed and emerging countries. Investor l 1,802 deals (2018: 1,591) appetite for green bonds continues to grow, and emerging market issuers are likely l to benefit from increasing demand. This second edition of the “Emerging Market 506 issuers (2018: 347) Green Bonds Report” highlights where there has been growth and where there is l 291 new issuers: (2018: 204) potential. l 8 new countries: Russia, Saudi Arabia, Ukraine, Ecuador, Greece, Kenya, Panama, Barbados DATA ANALYSIS : THE DEVELOPMENT AND TRENDS OF THE l MARKET FOR GREEN BONDS USA top with USD51.3bn, followed by China (USD31.3bn) and France (USD30.1bn) The origins of green bonds date back to 2007 when the EIB launched its first l Climate Awareness Bond. The World Bank issued its inaugural green bond in 2008. Certified Climate Bonds passed the USD100bn milestone These were followed by a small but growing stream of issues from government- related entities and local authorities. The market really started in earnest after the launch of the Green Bond Principles in 2014. The establishment of these principles

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Figure 1 -Green Bond Issuance: The Hot Streak Globally, Momentum is rapidly building for the global green bond market. The green bond market outperformed expectations in 2019, with record issuance of 375 350 $240 billion with a growth of over 51% over 2018. In the first four months of 2020, 325 green bond issuance increased compared with 2019, and the market is expected to 300 grow further after the COVID-19 pandemic. The fact that green bond issuance 275 250 increased when most countries around the world were already in lockdown due to 225 the COVID-19 crisis implies that we can expect to see continued growth over time. 200 Estimates for 2020 forecast point to a healthy year ahead, of USD300bn to 175 150 USD350bn. 125 Green bonds are issued to finance environmentally friendly projects but are Annual Issued ($ billions) 100 75 generally backed by the full balance sheet of the issuer and rank pari-passu with 50 25 other debt of the same seniority. In terms of the types of projects financed by green 0 bonds issued in 2019, renewable energy and green buildings continued to have the 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (est.) largest share of total issuance, at 31% and 29%, respectively. Clean transport projects have steadily increased over the years as a percentage of issuance, and that Source : Climate Bonds Initiative trend continued in 2019. Adaptation projects still represent only a very small portion of overall projects at 1% of total issuance, as do projects related to land use at 4%. Figure 2 -Green Bond Issued by Use of Proceeds

4% 3% Figure 3 - Green Bond supply - Geographic overview 3% Historical trends to continue 31% 10% Energy 2014 2015 2016 2017 2018 2019 2020 Buildings 140

120 Transport 100

Water 80

Waste 60

40 20% Land Use Amount issued in USD bin 20 Other 0 North America Europe Asia-Pacific Supranationals Africa Latin America

29%

Source : Climate Bonds Initiative

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Figure 1 -Green Bond Issuance: The Hot Streak Globally, Momentum is rapidly building for the global green bond market. The green bond market outperformed expectations in 2019, with record issuance of 375 350 $240 billion with a growth of over 51% over 2018. In the first four months of 2020, 325 green bond issuance increased compared with 2019, and the market is expected to 300 grow further after the COVID-19 pandemic. The fact that green bond issuance 275 250 increased when most countries around the world were already in lockdown due to 225 the COVID-19 crisis implies that we can expect to see continued growth over time. 200 Estimates for 2020 forecast point to a healthy year ahead, of USD300bn to 175 150 USD350bn. 125 Green bonds are issued to finance environmentally friendly projects but are Annual Issued ($ billions) 100 75 generally backed by the full balance sheet of the issuer and rank pari-passu with 50 25 other debt of the same seniority. In terms of the types of projects financed by green 0 bonds issued in 2019, renewable energy and green buildings continued to have the 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (est.) largest share of total issuance, at 31% and 29%, respectively. Clean transport projects have steadily increased over the years as a percentage of issuance, and that Source : Climate Bonds Initiative trend continued in 2019. Adaptation projects still represent only a very small portion of overall projects at 1% of total issuance, as do projects related to land use at 4%. Figure 2 -Green Bond Issued by Use of Proceeds

4% 3% Figure 3 - Green Bond supply - Geographic overview 3% Historical trends to continue 31% 10% Energy 2014 2015 2016 2017 2018 2019 2020 Buildings 140

120 Transport 100

Water 80

Waste 60

40 20% Land Use Amount issued in USD bin 20 Other 0 North America Europe Asia-Pacific Supranationals Africa Latin America

29%

Source : Climate Bonds Initiative

148 149 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

Figure 4 - Emerging Market Green Bond Issurance, 2019 l Increased focus on transitioning “brown” sectors, such as aviation, steel, and cement ($ trillion) % l Harmonization of taxonomies (esp. EU Taxonomy), green bond 1.4 China all bonds, $tn 4.5 guidelines and disclosure EMs ex-China all bonds, $tn 4.0 1.2 China % green 3.5 1.0 Over the past few years the green bond market has grown from a small niche EMs ex-China, % green 3.0 0.8 2.5 market to a liquid and diversified market. Although many buy-and-hold investors

0.6 2.0 are active in the green bond market, the secondary market has been functioning 1.5 0.4 well, with green bonds priced close to their non-green peers. The increase in 1.0 0.2 0.5 issuance volumes has made it possible to build sizeable portfolios in this market. 0.0 0.0 With many new green initiatives on the agenda and a growing environmental 2012 2013 2014 2012 2016 2017 2018 awareness within society, we expect continued strong growth for the green bond market in the years to come.

Source : Climate Bonds Initiative- UniCredit Research GREENING INDIA'S FINANCIAL MARKET India's Nationally Determined Contribution (NDC) includes pledges to reduce the Although the market is still dominated by few countries, predominantly by the emissions intensity of GDP by 33 percent – 35 percent by 2030 below 2005 levels USA, there is fast increase in geographic diversity. Green bonds have been issued and to increase the share of non-fossil-based energy resources to 40 percent of in 23 jurisdictions, including 14 markets of the G20, and in 23 currencies. installed electric power capacity by 2030, with help of transfer of technology and Emerging markets are the most vulnerable countries to climate change-related low-cost international finance. These are ambitious promises and are recognized impacts. This has placed a high demand on these countries to urgently scale up by commentators as being broadly consistent with the sustainable development climate change adaptation and resilience measures. The green bond market is goals. In order to achieve them, India is setting out on a huge program of investing nascent in emerging countries, with the potential for promising growth. Emerging in solar PV and wind with targets to have 175 GW of installed Renewable Energy markets have been issuing green bonds since 2012, when South Africa made two (RE) capacity by 2022; this represents a 50-percent increase in India's current debut issuances, followed by issuances from Brazil, China, and Peru in 2014. After electricity generation capacity of 345 GW. India is also seeking to electrify its mass the People's Bank of China announced guidelines for green bond issuances in late transportation system through completing the electrification of its broad gauge rail 2015, China's green bond market quickly grew to $108.6 billion in cumulative (16,500 km), electrifying its vehicle stock. The Government of India has estimated issuances between 2012 and 2019. that US$ 4.5 trillion is needed to meet India's ambitious targets for renewable energy and urban sustainability over the next ten years – around US$ 450 million Outlook for 2020 – 2021 per year. l Green bond growth expected from financial institutions, sovereigns, This ambitious target needs ambitious investments. It is estimated that this leap Certified Climate Bonds, and climate aligned issuers towards renewable energy will require funding of US$200 billionAssuming a l Greater use of other labels (e.g. sustainability and social bonds), especially debt-equity ratio of 3:1, the sector will require close to US$150 billion by way of in light of COVID-19, as well as performance-linked instruments (e.g. debt. Some studies indicate that paucity of funds for the sector and the consequent KPI-linked credit facilities) to facilitate transition higher interest rates in India drive up the cost of RE by 24 – 32% in the country as compared to costs in US and Europe. Similarly, the overall size of the EE market in India is estimated to be around US$ 11 billion. Green bond funding is crucial for

150 151 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

Figure 4 - Emerging Market Green Bond Issurance, 2019 l Increased focus on transitioning “brown” sectors, such as aviation, steel, and cement ($ trillion) % l Harmonization of taxonomies (esp. EU Taxonomy), green bond 1.4 China all bonds, $tn 4.5 guidelines and disclosure EMs ex-China all bonds, $tn 4.0 1.2 China % green 3.5 1.0 Over the past few years the green bond market has grown from a small niche EMs ex-China, % green 3.0 0.8 2.5 market to a liquid and diversified market. Although many buy-and-hold investors

0.6 2.0 are active in the green bond market, the secondary market has been functioning 1.5 0.4 well, with green bonds priced close to their non-green peers. The increase in 1.0 0.2 0.5 issuance volumes has made it possible to build sizeable portfolios in this market. 0.0 0.0 With many new green initiatives on the agenda and a growing environmental 2012 2013 2014 2012 2016 2017 2018 awareness within society, we expect continued strong growth for the green bond market in the years to come.

Source : Climate Bonds Initiative- UniCredit Research GREENING INDIA'S FINANCIAL MARKET India's Nationally Determined Contribution (NDC) includes pledges to reduce the Although the market is still dominated by few countries, predominantly by the emissions intensity of GDP by 33 percent – 35 percent by 2030 below 2005 levels USA, there is fast increase in geographic diversity. Green bonds have been issued and to increase the share of non-fossil-based energy resources to 40 percent of in 23 jurisdictions, including 14 markets of the G20, and in 23 currencies. installed electric power capacity by 2030, with help of transfer of technology and Emerging markets are the most vulnerable countries to climate change-related low-cost international finance. These are ambitious promises and are recognized impacts. This has placed a high demand on these countries to urgently scale up by commentators as being broadly consistent with the sustainable development climate change adaptation and resilience measures. The green bond market is goals. In order to achieve them, India is setting out on a huge program of investing nascent in emerging countries, with the potential for promising growth. Emerging in solar PV and wind with targets to have 175 GW of installed Renewable Energy markets have been issuing green bonds since 2012, when South Africa made two (RE) capacity by 2022; this represents a 50-percent increase in India's current debut issuances, followed by issuances from Brazil, China, and Peru in 2014. After electricity generation capacity of 345 GW. India is also seeking to electrify its mass the People's Bank of China announced guidelines for green bond issuances in late transportation system through completing the electrification of its broad gauge rail 2015, China's green bond market quickly grew to $108.6 billion in cumulative (16,500 km), electrifying its vehicle stock. The Government of India has estimated issuances between 2012 and 2019. that US$ 4.5 trillion is needed to meet India's ambitious targets for renewable energy and urban sustainability over the next ten years – around US$ 450 million Outlook for 2020 – 2021 per year. l Green bond growth expected from financial institutions, sovereigns, This ambitious target needs ambitious investments. It is estimated that this leap Certified Climate Bonds, and climate aligned issuers towards renewable energy will require funding of US$200 billionAssuming a l Greater use of other labels (e.g. sustainability and social bonds), especially debt-equity ratio of 3:1, the sector will require close to US$150 billion by way of in light of COVID-19, as well as performance-linked instruments (e.g. debt. Some studies indicate that paucity of funds for the sector and the consequent KPI-linked credit facilities) to facilitate transition higher interest rates in India drive up the cost of RE by 24 – 32% in the country as compared to costs in US and Europe. Similarly, the overall size of the EE market in India is estimated to be around US$ 11 billion. Green bond funding is crucial for

150 151 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

India to achieve its green goals. Green bonds are becoming an increasingly Exhibit : Financing Conveyer Belt – Access to Capital and various attractive mechanism for both private and public sector organizations to raise development stages. capital for projects, assets or other activities that benefit the economy, environment

and society. With the Indian government and private sector increasingly focusing Post Asset Deployment Construction Public Markets on renewable energy projects, the demand for such funds is expected to rise over Construction Aggregation time. Current option - Bank Finance No exits, sector limits, NPAs, ALM Currently, most renewable projects are financed by bank commercial loans. The Promoter’s funds + limited private equity; Indian banking sector is currently going through a tough phase and carrying out NBFCs; few exits yet, hence the finance Green Bonds - allow exits balance sheet adjustment; banks are unlikely to be able to expand their balance belt seems to be stalling sheets to be able to finance the additional requirements of the renewable sector. Green bonds may be able to fill this gap. Current funding mechanisms for RE and Promoters OEMs Banks Banks Share Listing Private Equity Supplier’s Green Bonds Green Bonds Listed Debt EE projects include equity, government subsidy/incentive schemes, specific funds NBFCs Exim Finance or Equivalent Pvt Equity- Trusts NBFCs instruments large wealth Mutual set up by government agencies or donors, trade credit, and commercial finance. Private Equity NBFCs funds, funds Private Equity pension However, there are some critical factors inhibiting the flow of credit from financial funds, hedge funds institutions. There is a limited understanding of the different kinds of risks affecting RE and EE projects. Loans in this sector often have to be custom designed, owing to considerable differences in business models and heterogeneity Source: Issue Paper Green Bonds in India in project design. This increases the transaction costs for financial institutions. Further, there is the issue of asset-liability mismatch for commercial banks, since RE and EE projects typically have longer gestation periods. S TAT E O F T H E I N D I A N G R E E N B O N D S M A R K E T A N D OPPORTUNITIES TO SCALE UP The green bonds appeal to regular investors as well as other investors such as bilateral or multilateral agencies, other institutional agencies, high net worth The Indian green bond market had its first green issuance three and a half years ago. individual (HNI) investors etc. who focus on use of proceeds and their friendliness Issuing institutions have included non-financial corporates like Greenko, private to the environment, in addition to the yield offered. Green bonds, therefore, have banks like Yes Bank and also public sector backed entities like IREDA, and the considerable potential to provide large quantum of long-term debt capital for RE Indian Railway Finance Corporation. All green bonds have been oversubscribed and EE projects. and have attracted a wider pool of investors than vanilla equivalents by the same issuer. Additionally, greater investor diversification has also led to a pricing advantage - albeit a mathematically conclusive result establishing this assessment is not available mainly due to limited availability of data. However, anecdotal estimates suggest that pricing advantage for Indian issuers has been between 7 to 14 basis points. The experience of the first issuer of Green Bonds, the European Investment Bank shows that its green bonds trade much tighter than an equivalent non-green bond, giving support to the argument about a pricing advantage on green bonds. Activating the drivers for scaling up green issuances in India Green Bonds are fundamentally oriented towards large volume deals (greater than US$ 100 million

152 153 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

India to achieve its green goals. Green bonds are becoming an increasingly Exhibit : Financing Conveyer Belt – Access to Capital and various attractive mechanism for both private and public sector organizations to raise development stages. capital for projects, assets or other activities that benefit the economy, environment and society. With the Indian government and private sector increasingly focusing Post Asset Deployment Construction Public Markets on renewable energy projects, the demand for such funds is expected to rise over Construction Aggregation time. Current option - Bank Finance No exits, sector limits, NPAs, ALM Currently, most renewable projects are financed by bank commercial loans. The Promoter’s funds + limited private equity; Indian banking sector is currently going through a tough phase and carrying out NBFCs; few exits yet, hence the finance Green Bonds - allow exits balance sheet adjustment; banks are unlikely to be able to expand their balance belt seems to be stalling sheets to be able to finance the additional requirements of the renewable sector. Green bonds may be able to fill this gap. Current funding mechanisms for RE and Promoters OEMs Banks Banks Share Listing Private Equity Supplier’s Green Bonds Green Bonds Listed Debt EE projects include equity, government subsidy/incentive schemes, specific funds NBFCs Exim Finance or Equivalent Pvt Equity- Trusts NBFCs instruments large wealth Mutual set up by government agencies or donors, trade credit, and commercial finance. Private Equity NBFCs funds, funds Private Equity pension However, there are some critical factors inhibiting the flow of credit from financial funds, hedge funds institutions. There is a limited understanding of the different kinds of risks affecting RE and EE projects. Loans in this sector often have to be custom designed, owing to considerable differences in business models and heterogeneity Source: Issue Paper Green Bonds in India in project design. This increases the transaction costs for financial institutions. Further, there is the issue of asset-liability mismatch for commercial banks, since RE and EE projects typically have longer gestation periods. S TAT E O F T H E I N D I A N G R E E N B O N D S M A R K E T A N D OPPORTUNITIES TO SCALE UP The green bonds appeal to regular investors as well as other investors such as bilateral or multilateral agencies, other institutional agencies, high net worth The Indian green bond market had its first green issuance three and a half years ago. individual (HNI) investors etc. who focus on use of proceeds and their friendliness Issuing institutions have included non-financial corporates like Greenko, private to the environment, in addition to the yield offered. Green bonds, therefore, have banks like Yes Bank and also public sector backed entities like IREDA, and the considerable potential to provide large quantum of long-term debt capital for RE Indian Railway Finance Corporation. All green bonds have been oversubscribed and EE projects. and have attracted a wider pool of investors than vanilla equivalents by the same issuer. Additionally, greater investor diversification has also led to a pricing advantage - albeit a mathematically conclusive result establishing this assessment is not available mainly due to limited availability of data. However, anecdotal estimates suggest that pricing advantage for Indian issuers has been between 7 to 14 basis points. The experience of the first issuer of Green Bonds, the European Investment Bank shows that its green bonds trade much tighter than an equivalent non-green bond, giving support to the argument about a pricing advantage on green bonds. Activating the drivers for scaling up green issuances in India Green Bonds are fundamentally oriented towards large volume deals (greater than US$ 100 million

152 153 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

in international issuance and US$ 50 million in domestic issuance). The greening Indian corporate (non-bank) issuer of green bonds in September 2015. of India's economy, however, needs to be assessed through both high-volume CLP Wind Farms raised Rs.6 billion. individual deals (utility scale RE, Rail or metro transport etc) as well as l Re New Power Ventures, a leading Indian clean energy company, issued aggregating large number of smaller assets and making them attractive for market the second corporate green bond in the country in September 2015.The investments. In combination with other sources of capital like lending by banks proceeds of the Rs.4.51 billion green bond is intended to refinance bank and Financial institutions green bonds can provide the much needed access to long loans for the company's 85 megawatts (MW) wind power plant in term cheap capital for green projects. The issuance size in India varies from small Maharashtra. size bonds of below $100 Million to large sized going upto $1billion. Of all the l green bonds issues, 40% were of amount less than $100 Million, 56% were of Hero Future Energies, the green energy arm of the Hero Group, one of amount between $100 Million to $500 Million and 4% were of size more than $500 India's leading industrial conglomerates, issued the country's first certified Million. Energy research firm Bridge to India noted that with the combined climate bond in February 2016. Hero Future Energies raised Rs.3 billion issuance of $4 billion, India has put itself among the top ten green bond markets in ($44 million) by issuing nonconvertible debentures – certified by the the world. The listing of Green Bonds issued in India is as under: Climate Bonds Standard – to finance the development of wind energy projects in the states of Madhya Pradesh, Telangana, and Andhra Pradesh l In 2015, YES Bank, India's Private Sector Bank successfully issued India's l first ever green infrastructure bonds raising an amount of INR 1,000 India's state-owned energy major NTPC has become first Indian corporate crores. The amount raised is being used by YES Bank to finance green to raise $300 million through Green Masala Bond listed at the London infrastructure projects in renewable energy including solar power, wind Stock Exchange (LSE) as part of its efforts to promote renewable energy power, biomass, and small hydropower projects. projects in the country. l l Another leading banking institution, the Exim Bank of India, in March In July, 2017, L&T issued country's first SEBI approved green bond. IFC 2015, issued a five-year $500 million green bond, which is India's first Bought $103 Million of L&T Green Bonds. dollar-denominated green bond to fund eligible green projects in countries l In Sep, 2017 IREDA issued first Green Masala Bond and In Dec 2017, including Bangladesh and Sri Lanka. IRFC issued India's first listed Green Bond on INX l Axis Bank has launched India's first internationally-listed and certified l green bond and raised $500 million to finance climate change projects and India's biggest lender State Bank of India (SBI) listed Green Bonds of solutions around the world. The bond certified by the Climate Bonds $100 million under its $10 billion Global Medium Term Note Programme Standards Board (CBSB) has been listed in London Stock Exchange on India INX's Global Securities Market Green Platform (GSM) (LSE).The Axis Bank will utilise the bond proceeds to promote green l Adani Green and Azure Power raised $362 million and $350 million energy in urban and rural areas, transportation and what is called 'green- respectively, while ReNew Power has picked up $90 million in 2019 blue infrastructure' projects in India and abroad. l IDBI Bank raised $350 million in BBB-rated 5-year green bonds for SEBI GUIDELINES ON ISSUANCE OF GREEN BOND renewable energy projects in November 2015. In January 2016, the Securities and Exchange Board of India published its official l In January 2016, IREDA issued a tax-free Rs.10 billion green bond green bonds requirements for Indian issuers making India the second country (after l CLP Wind Farms, the largest wind power developer in India with 1,000 China) to provide national level guidelines. As per the guidelines of the Securities MW of wind energy assets in the pipeline across 6 states, became the first and Exchange Board of India (SEBI), a debt security shall be considered as 'Green' or 'Green Debt Securities', if the funds raised through issuance of the debt

154 155 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

in international issuance and US$ 50 million in domestic issuance). The greening Indian corporate (non-bank) issuer of green bonds in September 2015. of India's economy, however, needs to be assessed through both high-volume CLP Wind Farms raised Rs.6 billion. individual deals (utility scale RE, Rail or metro transport etc) as well as l Re New Power Ventures, a leading Indian clean energy company, issued aggregating large number of smaller assets and making them attractive for market the second corporate green bond in the country in September 2015.The investments. In combination with other sources of capital like lending by banks proceeds of the Rs.4.51 billion green bond is intended to refinance bank and Financial institutions green bonds can provide the much needed access to long loans for the company's 85 megawatts (MW) wind power plant in term cheap capital for green projects. The issuance size in India varies from small Maharashtra. size bonds of below $100 Million to large sized going upto $1billion. Of all the l green bonds issues, 40% were of amount less than $100 Million, 56% were of Hero Future Energies, the green energy arm of the Hero Group, one of amount between $100 Million to $500 Million and 4% were of size more than $500 India's leading industrial conglomerates, issued the country's first certified Million. Energy research firm Bridge to India noted that with the combined climate bond in February 2016. Hero Future Energies raised Rs.3 billion issuance of $4 billion, India has put itself among the top ten green bond markets in ($44 million) by issuing nonconvertible debentures – certified by the the world. The listing of Green Bonds issued in India is as under: Climate Bonds Standard – to finance the development of wind energy projects in the states of Madhya Pradesh, Telangana, and Andhra Pradesh l In 2015, YES Bank, India's Private Sector Bank successfully issued India's l first ever green infrastructure bonds raising an amount of INR 1,000 India's state-owned energy major NTPC has become first Indian corporate crores. The amount raised is being used by YES Bank to finance green to raise $300 million through Green Masala Bond listed at the London infrastructure projects in renewable energy including solar power, wind Stock Exchange (LSE) as part of its efforts to promote renewable energy power, biomass, and small hydropower projects. projects in the country. l l Another leading banking institution, the Exim Bank of India, in March In July, 2017, L&T issued country's first SEBI approved green bond. IFC 2015, issued a five-year $500 million green bond, which is India's first Bought $103 Million of L&T Green Bonds. dollar-denominated green bond to fund eligible green projects in countries l In Sep, 2017 IREDA issued first Green Masala Bond and In Dec 2017, including Bangladesh and Sri Lanka. IRFC issued India's first listed Green Bond on INX l Axis Bank has launched India's first internationally-listed and certified l green bond and raised $500 million to finance climate change projects and India's biggest lender State Bank of India (SBI) listed Green Bonds of solutions around the world. The bond certified by the Climate Bonds $100 million under its $10 billion Global Medium Term Note Programme Standards Board (CBSB) has been listed in London Stock Exchange on India INX's Global Securities Market Green Platform (GSM) (LSE).The Axis Bank will utilise the bond proceeds to promote green l Adani Green and Azure Power raised $362 million and $350 million energy in urban and rural areas, transportation and what is called 'green- respectively, while ReNew Power has picked up $90 million in 2019 blue infrastructure' projects in India and abroad. l IDBI Bank raised $350 million in BBB-rated 5-year green bonds for SEBI GUIDELINES ON ISSUANCE OF GREEN BOND renewable energy projects in November 2015. In January 2016, the Securities and Exchange Board of India published its official l In January 2016, IREDA issued a tax-free Rs.10 billion green bond green bonds requirements for Indian issuers making India the second country (after l CLP Wind Farms, the largest wind power developer in India with 1,000 China) to provide national level guidelines. As per the guidelines of the Securities MW of wind energy assets in the pipeline across 6 states, became the first and Exchange Board of India (SEBI), a debt security shall be considered as 'Green' or 'Green Debt Securities', if the funds raised through issuance of the debt

154 155 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

securities are to be utilized for project(s) and/or asset(s) falling under any of the a) It raised the ceiling limit for partial credit enhancement to 50% of issue size from following broad categories: the earlier limit of 20% 1. Renewable and sustainable energy including wind, solar, bio-energy, other b) It allowed banks to issue rupee denominated bonds overseas under the extant sources of energy which use clean technology, etc. framework of incentivizing issuance of long-term bonds by banks for financing 2. Clean transportation including mass/public transportation, etc. infrastructure and affordable housing 3. Sustainable water management including clean and/or drinking water, water c) In order to encourage activity in the corporate bond market, the RBI allowed recycling, etc. There are different brokers to participate in corporate bond repo market types of definitions and indexes that can be leveraged: d) To facilitate direct trading in corporate bonds, RBI in consultation with SEBI, decided to allow foreign portfolio investments (FPIs) to transact in corporate 4. Climate change adaptation bonds directly without involving brokers. 5. Energy efficiency including efficient and green buildings, etc. 6. Sustainable waste management including recycling, waste-to-energy, efficient BARRIERS TO GREEN BOND MARKET GROWTH MAY INCLUDE: disposal of wastage, etc. Market participants the world over are excited and encouraged by signs of future 7. Sustainable land use including sustainable forestry and agriculture, potential of green bonds as a means of financing a sustainable future. It is expected afforestation, etc. that a greater diversity of issuers will come to market as understanding grows that green bonds can help to meet funding needs for sustainable development. 8. Biodiversity conservation The following key challenges need to be addressed to enable more rapid expansion SEBI issued circular on disclosure norms in May 2017 of the market In addition to the above, SEBI issued a circular on May 30, 2017, setting out l Lack of commonly accepted green definitions; disclosure norms which would govern the issuance and listing of 'green bonds' in l Quality and availability of information to identify, measure, and track India (Green Bond Guidelines), in addition to the existing SEBI (Issue and Listing green investment of Debt Securities) Regulations, 2008 (ILDS Regulations). Within the guidelines, l the scope of definition of green bonds has been kept wide to include most types of Supply constraints, including the limited availability of labeled green green projects and SEBI has been empowered to include any other category of assets and a pipeline of green projects projects from time to time. As part of the guidelines, the issuer would have to make l Lack of awareness and know-how about issuing and investing in green disclosures including use of proceeds, list of projects to which green bond proceeds products have been allocated in the annual report, and periodic filings made to the stock l Overall macroeconomic and policy instability as well as challenges exchanges. related to regulatory frameworks, including harmonized standards, green definitions, and green taxonomies THE RESERVE BANK OF INDIA (RBI) INTRODUCED CORPORATE l BOND MEASURES Underdeveloped capital markets with insufficient liquidity and high transaction costs In this context, the Reserve Bank of India has also introduced a number of l measures in August 2016 to develop the corporate bond market in India: Investors with limited capacity to analyze green investments; l Scale and mismatch among projects, bonds and institutional investors;

156 157 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

securities are to be utilized for project(s) and/or asset(s) falling under any of the a) It raised the ceiling limit for partial credit enhancement to 50% of issue size from following broad categories: the earlier limit of 20% 1. Renewable and sustainable energy including wind, solar, bio-energy, other b) It allowed banks to issue rupee denominated bonds overseas under the extant sources of energy which use clean technology, etc. framework of incentivizing issuance of long-term bonds by banks for financing 2. Clean transportation including mass/public transportation, etc. infrastructure and affordable housing 3. Sustainable water management including clean and/or drinking water, water c) In order to encourage activity in the corporate bond market, the RBI allowed recycling, etc. There are different brokers to participate in corporate bond repo market types of definitions and indexes that can be leveraged: d) To facilitate direct trading in corporate bonds, RBI in consultation with SEBI, decided to allow foreign portfolio investments (FPIs) to transact in corporate 4. Climate change adaptation bonds directly without involving brokers. 5. Energy efficiency including efficient and green buildings, etc. 6. Sustainable waste management including recycling, waste-to-energy, efficient BARRIERS TO GREEN BOND MARKET GROWTH MAY INCLUDE: disposal of wastage, etc. Market participants the world over are excited and encouraged by signs of future 7. Sustainable land use including sustainable forestry and agriculture, potential of green bonds as a means of financing a sustainable future. It is expected afforestation, etc. that a greater diversity of issuers will come to market as understanding grows that green bonds can help to meet funding needs for sustainable development. 8. Biodiversity conservation The following key challenges need to be addressed to enable more rapid expansion SEBI issued circular on disclosure norms in May 2017 of the market In addition to the above, SEBI issued a circular on May 30, 2017, setting out l Lack of commonly accepted green definitions; disclosure norms which would govern the issuance and listing of 'green bonds' in l Quality and availability of information to identify, measure, and track India (Green Bond Guidelines), in addition to the existing SEBI (Issue and Listing green investment of Debt Securities) Regulations, 2008 (ILDS Regulations). Within the guidelines, l the scope of definition of green bonds has been kept wide to include most types of Supply constraints, including the limited availability of labeled green green projects and SEBI has been empowered to include any other category of assets and a pipeline of green projects projects from time to time. As part of the guidelines, the issuer would have to make l Lack of awareness and know-how about issuing and investing in green disclosures including use of proceeds, list of projects to which green bond proceeds products have been allocated in the annual report, and periodic filings made to the stock l Overall macroeconomic and policy instability as well as challenges exchanges. related to regulatory frameworks, including harmonized standards, green definitions, and green taxonomies THE RESERVE BANK OF INDIA (RBI) INTRODUCED CORPORATE l BOND MEASURES Underdeveloped capital markets with insufficient liquidity and high transaction costs In this context, the Reserve Bank of India has also introduced a number of l measures in August 2016 to develop the corporate bond market in India: Investors with limited capacity to analyze green investments; l Scale and mismatch among projects, bonds and institutional investors;

156 157 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

l A lack of suitable aggregation mechanisms; non standardized projects and with the latter making up nearly 60% alone. China makes up just 5%. Currency- cash flow instability; wise, 95% of these bonds are denominated in either USD or EUR. At a sector level, l Low credit ratings for potential green bond issuers and green projects, utilities (39%) and banking (33%) dominate. The variety of purposes funded by especially in emerging economies. green bonds has expanded beyond alternative energy to green building and sustainable-transport projects. The unprecedented coronavirus pandemic and its Guarding against the risk of 'green washing’ consequent economic repercussions may be occupying a great deal of investor The lack of standard definition for a 'green bond' has led to avoidable confusion and attention at the moment, but climate change and sustainability remain high on uncertainty over whether all green bonds really are 'green'. Issuers face many investors' – and companies' – agendas. Green bonds and their offshoots could reputational risk and potential accusations of 'green wash'. Green washing occurs potentially open up new opportunities to help make the pandemic recovery greener when a bond's proceeds are used to fund projects with little or no positive as well. environmental impact. To prevent the risk of green washing, companies are Green bonds are increasingly being applied to finance emissions reductions, advised to be guided by the two sets of currently available standards which define sustainable development, and other cleaner production investments conducive to and regulate green bonds (1) The Green Bond Principles are voluntary guidelines reaching the 2 °C temperature target of the Paris Agreement. As their markets are issued by the International Capital Market Association which states the procedure relatively nascent, there is a gap in the empirical literature on the drivers of green for certifying a green bond, which have been adopted by 50 large issuers, bond market growth. The scalability of the green bond market depends on a underwriters and investors. They set disclosure criteria and where the money can paradigm shift. Stakeholders today perceive the green bond market mostly as a go. An external consultant can provide a second opinion and assurance on the bond communication tool, with a relatively limited or unclear economic benefit. structure and on the projects financed (2) The Climate Bond Standards have been However with a clear focus and sustained efforts the green bond market can acquire put forward by the Climate Bond Standards Board, an organization of funds that a data-driven legitimacy both in terms of sustainability and financial returns. That have among them around $35 trillion. shift will reduce transaction costs and crowd in more issuers, especially smaller ones, and give comfort to a wider investor base, expanding the scope of green FINDINGS AND RECOMMENDATIONS FOR FURTHERING USE OF bonds to more corporate sectors and geographies. GREEN BONDS AS A SUSTAINABLE DEVELOPMENT FINANCING Green bonds are an attractive mechanism for organizations to raise capital for INSTRUMENT sustainable projects. These bonds can be raised by not only financial institutions, Green bonds raise money for climate and environmental projects, and are issued by but also by any private sector or public sector organizations. Indian companies are governments, corporations, and financial institutions. The green bond market is beginning to embrace green finance to fund environmentally friendly projects, as now, even though it's a decade or so old, the market is still very much in its infancy they heed calls from Prime Minister Narendra Modi to boost renewable energy in but Green bonds are grabbing headlines given the solid growth of that bond market one of the world's worst polluting nations and tap rising investor demand. A healthy over the past few years. The green bond market is likely to continue to grow over capital market will be critical to achieving India's ambitious climate mitigation the next decade. It promises to be an important source of capital for much-needed targets, and green bonds can act as an effective instrument in channelizing the climate initiatives and a source of investment opportunities for SRI investors and much-needed private capital. This paper argues that India could effectively funds. As the green-bond market matures, it is developing offshoots. In the last five leverage the potential of green bonds as a financing instrument to solve its carbon years, we have seen shifts in the types of projects financed, as well as the emissions, and climate impacts challenges. It is important to make policy changes emergence of innovative types of bonds and loans linked to environmental, social to incentivize investment in green technologies. and governance (ESG) targets. The growth of the green corporate bond market is impressive, more than three-quarters of the market comes from the US or Europe,

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l A lack of suitable aggregation mechanisms; non standardized projects and with the latter making up nearly 60% alone. China makes up just 5%. Currency- cash flow instability; wise, 95% of these bonds are denominated in either USD or EUR. At a sector level, l Low credit ratings for potential green bond issuers and green projects, utilities (39%) and banking (33%) dominate. The variety of purposes funded by especially in emerging economies. green bonds has expanded beyond alternative energy to green building and sustainable-transport projects. The unprecedented coronavirus pandemic and its Guarding against the risk of 'green washing’ consequent economic repercussions may be occupying a great deal of investor The lack of standard definition for a 'green bond' has led to avoidable confusion and attention at the moment, but climate change and sustainability remain high on uncertainty over whether all green bonds really are 'green'. Issuers face many investors' – and companies' – agendas. Green bonds and their offshoots could reputational risk and potential accusations of 'green wash'. Green washing occurs potentially open up new opportunities to help make the pandemic recovery greener when a bond's proceeds are used to fund projects with little or no positive as well. environmental impact. To prevent the risk of green washing, companies are Green bonds are increasingly being applied to finance emissions reductions, advised to be guided by the two sets of currently available standards which define sustainable development, and other cleaner production investments conducive to and regulate green bonds (1) The Green Bond Principles are voluntary guidelines reaching the 2 °C temperature target of the Paris Agreement. As their markets are issued by the International Capital Market Association which states the procedure relatively nascent, there is a gap in the empirical literature on the drivers of green for certifying a green bond, which have been adopted by 50 large issuers, bond market growth. The scalability of the green bond market depends on a underwriters and investors. They set disclosure criteria and where the money can paradigm shift. Stakeholders today perceive the green bond market mostly as a go. An external consultant can provide a second opinion and assurance on the bond communication tool, with a relatively limited or unclear economic benefit. structure and on the projects financed (2) The Climate Bond Standards have been However with a clear focus and sustained efforts the green bond market can acquire put forward by the Climate Bond Standards Board, an organization of funds that a data-driven legitimacy both in terms of sustainability and financial returns. That have among them around $35 trillion. shift will reduce transaction costs and crowd in more issuers, especially smaller ones, and give comfort to a wider investor base, expanding the scope of green FINDINGS AND RECOMMENDATIONS FOR FURTHERING USE OF bonds to more corporate sectors and geographies. GREEN BONDS AS A SUSTAINABLE DEVELOPMENT FINANCING Green bonds are an attractive mechanism for organizations to raise capital for INSTRUMENT sustainable projects. These bonds can be raised by not only financial institutions, Green bonds raise money for climate and environmental projects, and are issued by but also by any private sector or public sector organizations. Indian companies are governments, corporations, and financial institutions. The green bond market is beginning to embrace green finance to fund environmentally friendly projects, as now, even though it's a decade or so old, the market is still very much in its infancy they heed calls from Prime Minister Narendra Modi to boost renewable energy in but Green bonds are grabbing headlines given the solid growth of that bond market one of the world's worst polluting nations and tap rising investor demand. A healthy over the past few years. The green bond market is likely to continue to grow over capital market will be critical to achieving India's ambitious climate mitigation the next decade. It promises to be an important source of capital for much-needed targets, and green bonds can act as an effective instrument in channelizing the climate initiatives and a source of investment opportunities for SRI investors and much-needed private capital. This paper argues that India could effectively funds. As the green-bond market matures, it is developing offshoots. In the last five leverage the potential of green bonds as a financing instrument to solve its carbon years, we have seen shifts in the types of projects financed, as well as the emissions, and climate impacts challenges. It is important to make policy changes emergence of innovative types of bonds and loans linked to environmental, social to incentivize investment in green technologies. and governance (ESG) targets. The growth of the green corporate bond market is impressive, more than three-quarters of the market comes from the US or Europe,

158 159 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

The recommendations below should set the direction. of proceeds of all green bonds issued. In terms of increasing the credibility · Policy makers can help increase both the supply of green bonds (through the and validity of reporting, external entities should be involved in the adoption of leading climate-aligned green bond standards) and the provision of disclosure verification process. enabling policies that grow the renewable energy sector. l Regulators must get actively involved in supervising environmental l Public capital providers can do their part to help de-risk renewable assets aspects of green financial products. Regulations focus exclusively on and can support green bonds through provision of the seed capital, financial risks and disclosure. It is recommended that regulators should demonstration issuances and capacity building. engage in supervising the environmental performance of green financial products. l Institutional investors can assist by aligning their internal capacities and l investment targets with long-term sustainability mandates. Broader dialogue between policymakers and market stakeholders: Such dialogue should aim to strengthen the green bond market by aligning it l Other stakeholders, such as rating agencies, financial institutions and with long-term sustainable development priorities and unlocking its full retail investors, also play a role in strengthening the green bond market and potential to deliver tangible impact. advancing the global energy transformation. l Establish a “green” taxonomy: The SEBI disclosure requirements for REFERENCES green bonds and securities is a valuable first step in helping India define l Belz, Frank-Martin, and Birte Schmidt-Riediger. 2010. “Marketing long-term sustainable investments and mobilizing green finance, but it Strategies in the Age of Sustainable Development: Evidence from the does not go far enough. The next step must be to establish a comprehensive Food Industry.” Business Strategy and the Environment 19 (7): 401–416 set of criteria for defining “green” assets in sync with international l frameworks Bhattacharya, Amar, Jeremy Oppenheim, and Nicholas Stern. 2015. “Driving Sustainable Development through Better Infrastructure: Key l Formulate a national green investment strategy: The government should Elements of a Transformation Program.” Brookings Global Working set out a “green” investment program in consultation with the states and Paper Series. the private sector defining its vision, direction and priorities for l investment in both mitigation and adaptation efforts. Barnett, Michael L., and Andrew J. Hoffman. 2008. “Beyond Corporate Reputation: Managing Reputational Interdependence.” Corporate l Review and redesign Priority Sector Lending to introduce green sub Reputation Review 11 (1): 1–9. sectors with targets: Banks have a special role to play in primary lending to l households and businesses. Priority Sector Lending sub-targets should be Branco, Manuel Castelo, and Lúcia Lima Rodrigues. 2006. “Corporate set on the basis of green taxonomy. Social Responsibility and Resource-Based Perspectives.” Journal of Business Ethics 69 (2): 111–132 l Use the Assets Backed Securities to broaden the green bond market: Green l bonds have typically been used to fund large companies, backed by the Bultheel, C., R. Morel, H. Hainaut, M. Deheza, I. Shishlov, V. Depoues, companies' balance sheets. Asset Backed Securitization allows funding and B. Leguet. 2015. “COP21 – a Successful 'end of the Beginning.'” for assets secured on the strength of the cash flows earned by the assets Climate Brief #38. themselves, and independent of the credit scores of the borrower l Chasan, Emily. 2019. “Bonds to Save the Planet - Bloomberg.” April 23, l Adopt High Standards of Disclosure and Reporting : Policymakers must 2019. facilitate how companies disclose and report information on which part of l Climate Bonds Initiative (2014). 2013 Overview: the Dawn of an Age of their revenue comes from green activities and green assets, and on the use Green Bonds?

160 161 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

The recommendations below should set the direction. of proceeds of all green bonds issued. In terms of increasing the credibility · Policy makers can help increase both the supply of green bonds (through the and validity of reporting, external entities should be involved in the adoption of leading climate-aligned green bond standards) and the provision of disclosure verification process. enabling policies that grow the renewable energy sector. l Regulators must get actively involved in supervising environmental l Public capital providers can do their part to help de-risk renewable assets aspects of green financial products. Regulations focus exclusively on and can support green bonds through provision of the seed capital, financial risks and disclosure. It is recommended that regulators should demonstration issuances and capacity building. engage in supervising the environmental performance of green financial products. l Institutional investors can assist by aligning their internal capacities and l investment targets with long-term sustainability mandates. Broader dialogue between policymakers and market stakeholders: Such dialogue should aim to strengthen the green bond market by aligning it l Other stakeholders, such as rating agencies, financial institutions and with long-term sustainable development priorities and unlocking its full retail investors, also play a role in strengthening the green bond market and potential to deliver tangible impact. advancing the global energy transformation. l Establish a “green” taxonomy: The SEBI disclosure requirements for REFERENCES green bonds and securities is a valuable first step in helping India define l Belz, Frank-Martin, and Birte Schmidt-Riediger. 2010. “Marketing long-term sustainable investments and mobilizing green finance, but it Strategies in the Age of Sustainable Development: Evidence from the does not go far enough. The next step must be to establish a comprehensive Food Industry.” Business Strategy and the Environment 19 (7): 401–416 set of criteria for defining “green” assets in sync with international l frameworks Bhattacharya, Amar, Jeremy Oppenheim, and Nicholas Stern. 2015. “Driving Sustainable Development through Better Infrastructure: Key l Formulate a national green investment strategy: The government should Elements of a Transformation Program.” Brookings Global Working set out a “green” investment program in consultation with the states and Paper Series. the private sector defining its vision, direction and priorities for l investment in both mitigation and adaptation efforts. Barnett, Michael L., and Andrew J. Hoffman. 2008. “Beyond Corporate Reputation: Managing Reputational Interdependence.” Corporate l Review and redesign Priority Sector Lending to introduce green sub Reputation Review 11 (1): 1–9. sectors with targets: Banks have a special role to play in primary lending to l households and businesses. Priority Sector Lending sub-targets should be Branco, Manuel Castelo, and Lúcia Lima Rodrigues. 2006. “Corporate set on the basis of green taxonomy. Social Responsibility and Resource-Based Perspectives.” Journal of Business Ethics 69 (2): 111–132 l Use the Assets Backed Securities to broaden the green bond market: Green l bonds have typically been used to fund large companies, backed by the Bultheel, C., R. Morel, H. Hainaut, M. Deheza, I. Shishlov, V. Depoues, companies' balance sheets. Asset Backed Securitization allows funding and B. Leguet. 2015. “COP21 – a Successful 'end of the Beginning.'” for assets secured on the strength of the cash flows earned by the assets Climate Brief #38. themselves, and independent of the credit scores of the borrower l Chasan, Emily. 2019. “Bonds to Save the Planet - Bloomberg.” April 23, l Adopt High Standards of Disclosure and Reporting : Policymakers must 2019. facilitate how companies disclose and report information on which part of l Climate Bonds Initiative (2014). 2013 Overview: the Dawn of an Age of their revenue comes from green activities and green assets, and on the use Green Bonds?

160 161 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

l Climate Bonds Initiative (2015). Year 2014 Green Bonds Final Report. l Grolleau, Gilles, Naoufel Mzoughi, and Alban Thomas. 2007. “What l Claquin, T. 2015. “Green Bonds - a Promising Tool for Climate Finance.” Drives Agrifood Firms to Register for an Environmental Management Private Sector & Development, Proparco Magazine, no. 22: 6–9. Cripps, System?” European Review of Agricultural Economics 34 (2): 233–255. P. 2016. l Haufler, Virginia. 2013. A Public Role for the Private Sector: Industry l Corfee-Morlot, J. et al. (2012), “Towards a Green Investment Policy Self-Regulation in a Global Economy. Washington, DC: Carnegie Framework: The Case of Low-Carbon, Climate-Resilient Infrastructure”, Endowment for International Peace. OECD Environment Working Papers, No. 48, OECD Publishing, Paris. l Henriques, Irene, and Perry Sadorsky. 2007. “Environmental l Dangelico, Rosa Maria, and Daniele Vocalelli. 2017. “'Green Marketing': Management Systems and Practices: An International Perspective.” In An Analysis of Definitions, Strategy Steps, and Tools through a Corporate Behaviour and Environmental Policy, edited by Nick Systematic Review of the Literature.” Journal of Cleaner Production 165: Johnstone, 34–70. Cheltenham: Edward Elgar in association with OECD 1263–1279. l Hockerts, Kai. 2015. “A Cognitive Perspective on the Business Case for l Davis, Keith. 1973. “The Case for and against Business Assumption of Corporate Sustainability.” Business Strategy and the Environment 24 (2): Social Responsibilities.” Academy of Management Journal 16 (2): 102–122. doi: 10.1002/bse.1813 312–322. l “India - Current Policy Projections”, Climate Action Tracker l Della Croce, Raffaele, and Juan Yermo. 2013. “Institutional Investors and l India Brand Equity Foundation, “Power Sector Growth”, October 2018 Infrastructure Financing l Inderst, G. et al. (2012), “Defining and Measuring Green Investments: l Gond, Jean-Pascal, and Valeria Piani. 2013. “Enabling Institutional Implications for Institutional Investors' Asset Allocations”, OECD Investors' Collective Action: The Role of the Principles for Responsible Working Papers on Finance, Insurance and Private Pensions, No.24, Investment Initiative.” Business & Society 52 (1): 64–104 OECD Publishing, Paris. l Green bond market ends 2015 on a high as it breaks records, l Jansson, Magnus, and Anders Biel. 2014. “Investment Institutions' Beliefs Environmental Finance, Jan. 6,2016, https://www.environmental- about and Attitudes toward Socially Responsible Investment (SRI): A finance.com/content/news/green-bond-market-ends-2015-on-ahigh- as- Comparison between SRI and Non-SRI Management.” Sustainable it-breaks-records.html Development 22 (1): 33–41. l Global/en/IssuesandInsights/ArticlesPublications/sustainableinsight/ l Kaminker, C. et al. (2013), “Institutional Investors and Green Documents/gearing-up-forgreen-bonds-v2.pdf (Accessed on June 21, Infrastructure Investments: Selected Case Studies”, OECD Working 2017) Papers on Finance, Insurance and Private Pensions, No. 35, OECD l G r e e n B o n d s – R i s k , R e w a r d s a n d O p p o r t u n i t y , Publishing, Paris. http://www.asyousow.org/wp-content/uploads/ 2014/reports/green- l Kaminker, C. and F. Stewart (2012), “The Role of Institutional Investors in bonds-in-brief.pdf (Accessed on June 23, 2107) Financing Clean Energy”, OECD Working Papers on Finance, Insurance l Green bond market ends 2015 on a high as it breaks records, and Private Pensions, No. 23, OECD Publishing, Paris. Environmental Finance, Jan. 6, 2016, https://www.environmental- l Kennedy, C. and J. Corfee-Morlot (2012), “Mobilising Investment in finance.com/content/news/green-bond-market-ends-2015-on-ahigh-as- Low-carbon, Climate Resilient Infrastructure”, OECD Environment it-breaks-records.html) Working Papers, No. 46, OECD Publishing, Paris.

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l Climate Bonds Initiative (2015). Year 2014 Green Bonds Final Report. l Grolleau, Gilles, Naoufel Mzoughi, and Alban Thomas. 2007. “What l Claquin, T. 2015. “Green Bonds - a Promising Tool for Climate Finance.” Drives Agrifood Firms to Register for an Environmental Management Private Sector & Development, Proparco Magazine, no. 22: 6–9. Cripps, System?” European Review of Agricultural Economics 34 (2): 233–255. P. 2016. l Haufler, Virginia. 2013. A Public Role for the Private Sector: Industry l Corfee-Morlot, J. et al. (2012), “Towards a Green Investment Policy Self-Regulation in a Global Economy. Washington, DC: Carnegie Framework: The Case of Low-Carbon, Climate-Resilient Infrastructure”, Endowment for International Peace. OECD Environment Working Papers, No. 48, OECD Publishing, Paris. l Henriques, Irene, and Perry Sadorsky. 2007. “Environmental l Dangelico, Rosa Maria, and Daniele Vocalelli. 2017. “'Green Marketing': Management Systems and Practices: An International Perspective.” In An Analysis of Definitions, Strategy Steps, and Tools through a Corporate Behaviour and Environmental Policy, edited by Nick Systematic Review of the Literature.” Journal of Cleaner Production 165: Johnstone, 34–70. Cheltenham: Edward Elgar in association with OECD 1263–1279. l Hockerts, Kai. 2015. “A Cognitive Perspective on the Business Case for l Davis, Keith. 1973. “The Case for and against Business Assumption of Corporate Sustainability.” Business Strategy and the Environment 24 (2): Social Responsibilities.” Academy of Management Journal 16 (2): 102–122. doi: 10.1002/bse.1813 312–322. l “India - Current Policy Projections”, Climate Action Tracker l Della Croce, Raffaele, and Juan Yermo. 2013. “Institutional Investors and l India Brand Equity Foundation, “Power Sector Growth”, October 2018 Infrastructure Financing l Inderst, G. et al. (2012), “Defining and Measuring Green Investments: l Gond, Jean-Pascal, and Valeria Piani. 2013. “Enabling Institutional Implications for Institutional Investors' Asset Allocations”, OECD Investors' Collective Action: The Role of the Principles for Responsible Working Papers on Finance, Insurance and Private Pensions, No.24, Investment Initiative.” Business & Society 52 (1): 64–104 OECD Publishing, Paris. l Green bond market ends 2015 on a high as it breaks records, l Jansson, Magnus, and Anders Biel. 2014. “Investment Institutions' Beliefs Environmental Finance, Jan. 6,2016, https://www.environmental- about and Attitudes toward Socially Responsible Investment (SRI): A finance.com/content/news/green-bond-market-ends-2015-on-ahigh- as- Comparison between SRI and Non-SRI Management.” Sustainable it-breaks-records.html Development 22 (1): 33–41. l Global/en/IssuesandInsights/ArticlesPublications/sustainableinsight/ l Kaminker, C. et al. (2013), “Institutional Investors and Green Documents/gearing-up-forgreen-bonds-v2.pdf (Accessed on June 21, Infrastructure Investments: Selected Case Studies”, OECD Working 2017) Papers on Finance, Insurance and Private Pensions, No. 35, OECD l G r e e n B o n d s – R i s k , R e w a r d s a n d O p p o r t u n i t y , Publishing, Paris. http://www.asyousow.org/wp-content/uploads/ 2014/reports/green- l Kaminker, C. and F. Stewart (2012), “The Role of Institutional Investors in bonds-in-brief.pdf (Accessed on June 23, 2107) Financing Clean Energy”, OECD Working Papers on Finance, Insurance l Green bond market ends 2015 on a high as it breaks records, and Private Pensions, No. 23, OECD Publishing, Paris. Environmental Finance, Jan. 6, 2016, https://www.environmental- l Kennedy, C. and J. Corfee-Morlot (2012), “Mobilising Investment in finance.com/content/news/green-bond-market-ends-2015-on-ahigh-as- Low-carbon, Climate Resilient Infrastructure”, OECD Environment it-breaks-records.html) Working Papers, No. 46, OECD Publishing, Paris.

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l Kidney, S. (2015), “Switzerland joins as Climate Bonds Partner”, 15 July, l Renneboog, Luc, JenkeTer Horst, and Chendi Zhang. 2011. “Is Ethical Blog Entry, Climate Bonds Initiative. Money Financially Smart? Nonfinancial Attributes and Money Flows of l KPMG (2015), gearing up for green bonds: key considerations for bond Socially Responsible Investment Funds.” Journal of Financial issuers. Intermediation 20 (4): 562–588. l l Larcker, David F., and Edward M. Watts. 2019. “Where's the Greenium?” Riedl, Arno, and Paul Smeets. 2017. “Why Do Investors Hold Socially ID 3333847. Stanford: Rock Center for Corporate Governance at Stanford Responsible Mutual Funds?” The Journal of Finance 72 (6): 2505–2550. University l Sen, Sankar, ChitraBhanu Bhattacharya, and Daniel Korschun. 2006. l McKinsey (2013a), “Between deluge and drought: The future of US bank “The Role of Corporate Social Responsibility in Strengthening Multiple liquidity and funding”, McKinsey Working Papers on Risk, No 48. Stakeholder Relationships: A Field Experiment.” Journal of the Academy of Marketing Science 34 (2): 158–166. l McKinsey (2013b), “Between deluge and drought: Liquidity and funding l for Asian banks”, McKinsey Working Papers on Risk, No. 45. Shishlov, Igor, Romain Morel, and Ian Cochran. 2016. Beyond Transparency: Unlocking the Full Potential of Green Bonds.” Institute for l McKinsey (2013c), “Between deluge and drought: The divided future of Climate Economics Report, European bank-funding markets”, McKinsey Working Papers on Risk, l No. 41. Standard & Poor's Ratings Services (2014), Global Infrastructure: How To Fill A $500 Billion Hole, January. l Menon, Ajay, and Anil Menon. 1997. “Enviropreneurial Marketing l Strategy: The Emergence of Corporate Environmentalism as Market Sustainable Insight: Gearing up the Green Bonds, KPMG International Strategy.” Journal of Marketing 61 (1): 51–67. https://www.kpmg.com/ l l Merk, Olaf, Stéphane Saussier, Carine Staropoli, Enid Slack, and Jay- WEF (2013), Reducing the cost of capital for green projects. Hyung Kim. 2012. “Financing Green Urban Infrastructure.”. l www.sebi.in (Accessed on 14th January, 2019) l Mohan, Vishwa, “Climate Change Costs India $10 Billion Every Year: l TERI: Unlocking Green Bond Potential in India report Government - Times of India”, The Times of India, August 18, 2017 l Tiftik, Emre, Khadija Mahmood, and Celso Nozema. 2019. Sustainable l Morsing, Mette. 2006. “Corporate Moral Branding: Limits to Aligning Finance in Focus: Green Bonds Take Root. Institute of International Employees.” Corporate Communications: An International Journal 11 Finance (2): 97–108. l Zerbib, Olivier David. 2019. “The Effect of Pro-Environmental l Neha Kumar, Prashant Vaze, ,Sean Kidney - Moving from Growth to Preferences on Bond Prices: Evidence from Green Bonds.” Journal of Development – Financing green investment in India Banking & Finance 98: 39–60. doi: 10.1016/j.jbankfin.2018.10.012 l OECD (2016), Mobilizing the Debt Capital Markets for a Low Carbon Transition, OECD Publishing, Paris. l OECD (2015a), “Towards Green Growth? Tracking Progress”, OECD Green Growth Studies, OECD Publishing, Paris. l OECD (2015d), Business and Finance Outlook, OECD Publishing, Paris.

164 165 2 2 Journal of Corporate Affairs 2 Volume 1 | Issue 1 Green Bonds : AN INSTRUMENT2 FOR FINANCING A SUSTAINABLE FUTURE

l Kidney, S. (2015), “Switzerland joins as Climate Bonds Partner”, 15 July, l Renneboog, Luc, JenkeTer Horst, and Chendi Zhang. 2011. “Is Ethical Blog Entry, Climate Bonds Initiative. Money Financially Smart? Nonfinancial Attributes and Money Flows of l KPMG (2015), gearing up for green bonds: key considerations for bond Socially Responsible Investment Funds.” Journal of Financial issuers. Intermediation 20 (4): 562–588. l l Larcker, David F., and Edward M. Watts. 2019. “Where's the Greenium?” Riedl, Arno, and Paul Smeets. 2017. “Why Do Investors Hold Socially ID 3333847. Stanford: Rock Center for Corporate Governance at Stanford Responsible Mutual Funds?” The Journal of Finance 72 (6): 2505–2550. University l Sen, Sankar, ChitraBhanu Bhattacharya, and Daniel Korschun. 2006. l McKinsey (2013a), “Between deluge and drought: The future of US bank “The Role of Corporate Social Responsibility in Strengthening Multiple liquidity and funding”, McKinsey Working Papers on Risk, No 48. Stakeholder Relationships: A Field Experiment.” Journal of the Academy of Marketing Science 34 (2): 158–166. l McKinsey (2013b), “Between deluge and drought: Liquidity and funding l for Asian banks”, McKinsey Working Papers on Risk, No. 45. Shishlov, Igor, Romain Morel, and Ian Cochran. 2016. Beyond Transparency: Unlocking the Full Potential of Green Bonds.” Institute for l McKinsey (2013c), “Between deluge and drought: The divided future of Climate Economics Report, European bank-funding markets”, McKinsey Working Papers on Risk, l No. 41. Standard & Poor's Ratings Services (2014), Global Infrastructure: How To Fill A $500 Billion Hole, January. l Menon, Ajay, and Anil Menon. 1997. “Enviropreneurial Marketing l Strategy: The Emergence of Corporate Environmentalism as Market Sustainable Insight: Gearing up the Green Bonds, KPMG International Strategy.” Journal of Marketing 61 (1): 51–67. https://www.kpmg.com/ l l Merk, Olaf, Stéphane Saussier, Carine Staropoli, Enid Slack, and Jay- WEF (2013), Reducing the cost of capital for green projects. Hyung Kim. 2012. “Financing Green Urban Infrastructure.”. l www.sebi.in (Accessed on 14th January, 2019) l Mohan, Vishwa, “Climate Change Costs India $10 Billion Every Year: l TERI: Unlocking Green Bond Potential in India report Government - Times of India”, The Times of India, August 18, 2017 l Tiftik, Emre, Khadija Mahmood, and Celso Nozema. 2019. Sustainable l Morsing, Mette. 2006. “Corporate Moral Branding: Limits to Aligning Finance in Focus: Green Bonds Take Root. Institute of International Employees.” Corporate Communications: An International Journal 11 Finance (2): 97–108. l Zerbib, Olivier David. 2019. “The Effect of Pro-Environmental l Neha Kumar, Prashant Vaze, ,Sean Kidney - Moving from Growth to Preferences on Bond Prices: Evidence from Green Bonds.” Journal of Development – Financing green investment in India Banking & Finance 98: 39–60. doi: 10.1016/j.jbankfin.2018.10.012 l OECD (2016), Mobilizing the Debt Capital Markets for a Low Carbon Transition, OECD Publishing, Paris. l OECD (2015a), “Towards Green Growth? Tracking Progress”, OECD Green Growth Studies, OECD Publishing, Paris. l OECD (2015d), Business and Finance Outlook, OECD Publishing, Paris.

164 165 2 2 Dr. Sameer Sharma's lead supplier of raw materials and a market for finished machine goods produced in Text Book on Urban Planning and Geography” Britain. The author succulently brings out how tariff system led to decline of India's indigenous goods and led to decline of trade of indigenous product and also BOOK REVIEW led to ruralisation. Some other questions explored in the chapter are how did Dr.Neeti Shikha colonialism shape the economies, roles and distribution of cities in the developing countries?The strength of the book lies in the way western illustrations have been weaved into the theory for exploring Indian perspectives. Thischapter Urban Planning and Geography offers an Indian perspective to urban planning and alsodiscusses the key factors that contributed to the evolution of the spatial its theory. The book uses the frameworks and experience of the west as a lens to structure of Indian cities. It offers the economic logic of colonialism and its impact better understand the Indian urban landscape. The western philosophy discussed in on the Indian urban hierarchy. the book blends into Indian situations to offer a new theory to the Indian Urban Chapter 2 kindles a very important debate on influence of Five-year Plans planning and its challenges. Interestingly, the book offers no solution, rather forces urbanization in the post-Independence era. It discusses the strength and readers to explore and apply the appropriate solutions to various urban planning weaknesses of such planning activity. While many authors have discussed five- challenges. year central planning in India,its impact on urbanisation has been first time Author notes that last two decades has witnessed a tremendous change in the formalised in this book. This chapter explores impact of each of central planning Indian urban sector and practice. These changes have forced practitioners to on cities and its urban population and also offers how the Urbantrends developed. reimagine and recreate newer solutions that may be inspired from history (both For instance, land prices continued to rise etc. Indian as well as western philosophy) but is suited in current time and age. Setting up of Housing and Urban Development Corporation (HUDCO) was set up The best feature of the book is the way it describes the way a theory including in 1970 to provide loans for water supply and sanitation and housing and offered frameworks, ideas, practices, paradigms and blends its way through in the West. loans to new state capitals like Chandigarh, Bhubaneswar, Gandhinagar and Inquiries into questions like what causes what to happen, and why (if-then Bhopal. While discussing the impact of five-year plan on cities, the chapter also on statements) need to be paired with the circumstances prevailing in India. This the sides lines weaves into how international deliberations such as the United makes reader visualise the situation and delve into deeper enquiry to find Nations Water Conference held at Mar del Plata affected India's urban planning. solution.Throughout the book, there are upteem examples from cities through Author makes a powerful argument on Spatial planning be integrated with multi-focal lens of urban planning and practice. economic and social planning and become a major instrument of agricultural and rural development, including anti-poverty programmes. The rest of the chapter The Book rarely provides direct answers. What it does is to allow practitioners to explores questions on how do you analyse the transformation run questions through a theory in their minds; so that they know what the theory says is likely to be the result of one course of action, compared to another. As a Chapter 3 discussesthe changes contributed by globalization to urbanization in result, visualization is enabled and learners get to know what to think and how to India. It also offers an insight into how 1991 reforms left go liberalisation of urban think in the Indian context. policies aswell. Other questions it explored is the role of globalization in the evolution of modern IT urban centres. It notes that while Gurugram developed akin Chapter one of the book discusses how different is the evolution of urbanization in to a charter city, Bengaluru was the first city in India to use boosterism to attract IT India from the west and what was the influence of colonization on it.It traces India's industries. In both the case of Gurugram and Bengaluru, entrepreneurial state urban system, which was well developed and centres of imperial control. governments were at the forefront to make their IT clusters more competitive. Colonisation of India in the early eighteenth century led the country emerge as a

166 167 2 2 Dr. Sameer Sharma's lead supplier of raw materials and a market for finished machine goods produced in Text Book on Urban Planning and Geography” Britain. The author succulently brings out how tariff system led to decline of India's indigenous goods and led to decline of trade of indigenous product and also BOOK REVIEW led to ruralisation. Some other questions explored in the chapter are how did Dr.Neeti Shikha colonialism shape the economies, roles and distribution of cities in the developing countries?The strength of the book lies in the way western illustrations have been weaved into the theory for exploring Indian perspectives. Thischapter Urban Planning and Geography offers an Indian perspective to urban planning and alsodiscusses the key factors that contributed to the evolution of the spatial its theory. The book uses the frameworks and experience of the west as a lens to structure of Indian cities. It offers the economic logic of colonialism and its impact better understand the Indian urban landscape. The western philosophy discussed in on the Indian urban hierarchy. the book blends into Indian situations to offer a new theory to the Indian Urban Chapter 2 kindles a very important debate on influence of Five-year Plans planning and its challenges. Interestingly, the book offers no solution, rather forces urbanization in the post-Independence era. It discusses the strength and readers to explore and apply the appropriate solutions to various urban planning weaknesses of such planning activity. While many authors have discussed five- challenges. year central planning in India,its impact on urbanisation has been first time Author notes that last two decades has witnessed a tremendous change in the formalised in this book. This chapter explores impact of each of central planning Indian urban sector and practice. These changes have forced practitioners to on cities and its urban population and also offers how the Urbantrends developed. reimagine and recreate newer solutions that may be inspired from history (both For instance, land prices continued to rise etc. Indian as well as western philosophy) but is suited in current time and age. Setting up of Housing and Urban Development Corporation (HUDCO) was set up The best feature of the book is the way it describes the way a theory including in 1970 to provide loans for water supply and sanitation and housing and offered frameworks, ideas, practices, paradigms and blends its way through in the West. loans to new state capitals like Chandigarh, Bhubaneswar, Gandhinagar and Inquiries into questions like what causes what to happen, and why (if-then Bhopal. While discussing the impact of five-year plan on cities, the chapter also on statements) need to be paired with the circumstances prevailing in India. This the sides lines weaves into how international deliberations such as the United makes reader visualise the situation and delve into deeper enquiry to find Nations Water Conference held at Mar del Plata affected India's urban planning. solution.Throughout the book, there are upteem examples from cities through Author makes a powerful argument on Spatial planning be integrated with multi-focal lens of urban planning and practice. economic and social planning and become a major instrument of agricultural and rural development, including anti-poverty programmes. The rest of the chapter The Book rarely provides direct answers. What it does is to allow practitioners to explores questions on how do you analyse the transformation run questions through a theory in their minds; so that they know what the theory says is likely to be the result of one course of action, compared to another. As a Chapter 3 discussesthe changes contributed by globalization to urbanization in result, visualization is enabled and learners get to know what to think and how to India. It also offers an insight into how 1991 reforms left go liberalisation of urban think in the Indian context. policies aswell. Other questions it explored is the role of globalization in the evolution of modern IT urban centres. It notes that while Gurugram developed akin Chapter one of the book discusses how different is the evolution of urbanization in to a charter city, Bengaluru was the first city in India to use boosterism to attract IT India from the west and what was the influence of colonization on it.It traces India's industries. In both the case of Gurugram and Bengaluru, entrepreneurial state urban system, which was well developed and centres of imperial control. governments were at the forefront to make their IT clusters more competitive. Colonisation of India in the early eighteenth century led the country emerge as a

166 167 2 2 The chapter compares emerging spatial forms in India and their similarity with the Chapter 7 discusses role of various national programs in the eradication of poverty west. It discusses how the Indian urban system developed from the monocentric- in India. Poverty alleviation programme found centre stage in India's development polycentric framework to the market centre the British added exclusive residential strategy during the Fifth Five-Year Plan. The chapter also compares the difference areas for civilians and the military (e.g., Civil Lines, Cantonments). After between urban poverty in India and the USA. Independence, State Housing Boards and Urban Development Authorities, to The book is product of his years of experience in this field and I must complement accomplish certain explicit and defined goals, added contrived centres to Indian that it is a very valuable contribution in the field of urban planning. Urban planning cities. The chapter offers insight on dual cities, keno capitalism and urban renewal has posed tremendous challenge on planning of cities. Cities come with gamut of concepts in details. opportunities, but also a multiple issue such as environmental collapse, income Chapter 4 explores the relationship between regional planning in India, the United inequality, personal isolation. States, and France. The chapter explores commonality of France and India. The book is very timely as urban planning is one of the key challenges that India as Alongside, the chapter draws parallel inferences from The New York region which a country of growing population and city is grappling with. Large contingency of is complex mix urban milieu containing various schools, district centres etc.The people gets affected by these challenges associated with urban planning if it is not later part of the chapter then explains purpose of establishing MPCs. The theories addressed. But in order to address them, one needs to go to the crux of the problem of cities is very relevant in understanding post globalized Urban India which is and students must be trained accordingly to understand these challenges from well explained in this chapter. the author throws light on various industrial corridor Indian context. projects contributed to regional development in the country. There are many textbooks that uses western ideas to offer simple answers to India's Chapter 5 assesses the role of Master Plans in the evolution of modern Indian urban problems. Solutions that the western experience offer maybe useful but Cities, the key challenges and lessons. It discusses Form-Based codes.The chapter there is certainly a need to contextualize the solution to suit Indian urban also discusses works of Patrick Geddes and the concept of Tactical Urbanism, ecosystem. In other words, there needs to be a home- grown solution, as some has which marked a big shift from a sectoral to a locality-based approach. said- think global and act local. This book filled this vital gap that exists in Chapter 6 compares the governance systems prevailing in India and the United academia by offering an Indian understanding to urban planning issues. Though States and what are the lessons you would like to share. Drawing inferences from primarily designed for learners of urban planning and policy design students, the the United States where there are three forms of city governments - mayor-council book is useful for practitioners as well as any other interested reader who would (with its weak-mayor and strong-mayor variants), council-manager (which places like to learn about how urban planning policies have developed in India. executive authority in the hands of a professional city manager, not an elected mayor), and the commission arrangement (a form that is no longer widely used), the chapter offers food for thought for Indian planners in assessing application of this concept in India, specifically in North – Delhi model. The author explores how the National Commission on Urbanisation and the involvement of citizens in decision-making which was almost zero and their interaction with civic officials was largely restricted to pushing their individual cases or meeting officials to resolve their individual problems. The system was not truly representative or democratic for projecting the needs of the people. In the United States, there is a power of recall and referendum. The excruciating challenge of Smart cities has been well explained in the chapter.

168 169 2 2 The chapter compares emerging spatial forms in India and their similarity with the Chapter 7 discusses role of various national programs in the eradication of poverty west. It discusses how the Indian urban system developed from the monocentric- in India. Poverty alleviation programme found centre stage in India's development polycentric framework to the market centre the British added exclusive residential strategy during the Fifth Five-Year Plan. The chapter also compares the difference areas for civilians and the military (e.g., Civil Lines, Cantonments). After between urban poverty in India and the USA. Independence, State Housing Boards and Urban Development Authorities, to The book is product of his years of experience in this field and I must complement accomplish certain explicit and defined goals, added contrived centres to Indian that it is a very valuable contribution in the field of urban planning. Urban planning cities. The chapter offers insight on dual cities, keno capitalism and urban renewal has posed tremendous challenge on planning of cities. Cities come with gamut of concepts in details. opportunities, but also a multiple issue such as environmental collapse, income Chapter 4 explores the relationship between regional planning in India, the United inequality, personal isolation. States, and France. The chapter explores commonality of France and India. The book is very timely as urban planning is one of the key challenges that India as Alongside, the chapter draws parallel inferences from The New York region which a country of growing population and city is grappling with. Large contingency of is complex mix urban milieu containing various schools, district centres etc.The people gets affected by these challenges associated with urban planning if it is not later part of the chapter then explains purpose of establishing MPCs. The theories addressed. But in order to address them, one needs to go to the crux of the problem of cities is very relevant in understanding post globalized Urban India which is and students must be trained accordingly to understand these challenges from well explained in this chapter. the author throws light on various industrial corridor Indian context. projects contributed to regional development in the country. There are many textbooks that uses western ideas to offer simple answers to India's Chapter 5 assesses the role of Master Plans in the evolution of modern Indian urban problems. Solutions that the western experience offer maybe useful but Cities, the key challenges and lessons. It discusses Form-Based codes.The chapter there is certainly a need to contextualize the solution to suit Indian urban also discusses works of Patrick Geddes and the concept of Tactical Urbanism, ecosystem. In other words, there needs to be a home- grown solution, as some has which marked a big shift from a sectoral to a locality-based approach. said- think global and act local. This book filled this vital gap that exists in Chapter 6 compares the governance systems prevailing in India and the United academia by offering an Indian understanding to urban planning issues. Though States and what are the lessons you would like to share. Drawing inferences from primarily designed for learners of urban planning and policy design students, the the United States where there are three forms of city governments - mayor-council book is useful for practitioners as well as any other interested reader who would (with its weak-mayor and strong-mayor variants), council-manager (which places like to learn about how urban planning policies have developed in India. executive authority in the hands of a professional city manager, not an elected mayor), and the commission arrangement (a form that is no longer widely used), the chapter offers food for thought for Indian planners in assessing application of this concept in India, specifically in North – Delhi model. The author explores how the National Commission on Urbanisation and the involvement of citizens in decision-making which was almost zero and their interaction with civic officials was largely restricted to pushing their individual cases or meeting officials to resolve their individual problems. The system was not truly representative or democratic for projecting the needs of the people. In the United States, there is a power of recall and referendum. The excruciating challenge of Smart cities has been well explained in the chapter.

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