Why ignoring the Bankruptcy Code will be a BIG mistake

The initiation of IBC proceedings in respect of a debtor has certain drastic consequences on both day-to-day running of the business of a debtor and on all creditors generally.

The Insolvency and Bankruptcy Code (IBC), together with its implementing regulations, introduced in December 2016 is a uniform, comprehensive code dealing with financial failure, debt restructurings and insolvencies.

It represents a game-changing shift towards a creditor-friendly and timeline-driven regime with limited scope for judicial discretion.

The IBC empowers certain creditors with a very powerful tool - the ability to initiate a debt restructuring process in respect of a debtor who has failed to pay an outstanding amount as low as Rs 100,000.

The initiation of IBC proceedings in respect of a debtor has certain drastic consequences on both day-to-day running of the business of a debtor and on all creditors generally.

The primary jurisdiction under the IBC lies with specialist tribunals and in contrast to the regular litigation process in India, creditors have obtained rulings from such tribunals within a matter of weeks.

It is estimated that there have been over a thousand applications for initiation of IBC process, with 75 per cent of cases filed by operational creditors holding a relatively small amount of debt.

While there are some exceptions, tribunals have implemented the IBC’s creditor-friendly letter and spirit and effectively allowed operational creditors to use the IBC to force a debtor to the negotiating table for relatively minor contractual disputes.

Why foreign businesses need to pay attention?

The tribunals have passed a liquidation order in respect of a solvent company solely on grounds of the failure of financial creditors to agree to a debt resolution plan within the mandated six-month period under the IBC.

The tribunals have by and large prevented creditors from using the IBC merely as a tool of recovery, but there are multiple cases where operational creditors are doing just that.

Critically, even the application for initiation of an IBC process by a creditor could effectively be a point-of-no-return as tribunals have on occasion disallowed withdrawal of applications disregarding bilateral settlements reached between the creditor and the debtor after the filing and prior to the commencement of the IBC process.

Key risk scenarios and risk mitigation strategies

Risk Scenario 1: If you’re an Indian-incorporated entity purchasing goods and services in India, an Indian counterparty may be able to put you into an IBC process on the basis of even small outstanding contractual dues.

You need to actively monitor the performance of these contracts and in particular, promptly comply with your contractual payment obligations.

If you’re disputing any aspect of your payment obligation, you should:

a) Document the contractual or other basis for this in writing as extensively and as promptly as possible; and

b) Where practicable, ensure you receive an acknowledgement of the receipt of such documentation from the counterparty.

If you intend to initiate any contractual or other remedies in respect of the disputed payment obligation, you should do so as soon as possible.

Risk Scenario 2: If you’re an Indian-incorporated entity pursuing a litigation or arbitration proceeding in India, an Indian counterparty may be able to put you into an IBC Process on the basis of even small amounts outstanding under a judgment debt or arbitral award.

The order is final, make prompt payment of outstanding amounts.

If you intend to appeal against an existing order (before it has become final), initiate appeal proceedings as soon as possible and pay the outstanding amount in the interim.

Risk Scenario 3: If you are a creditor of an Indian company, other creditors with unpaid dues have the ability to put the debtor company into an IBC process fairly easily which could significantly affect your own contractual rights, including your ability to recover full payment if the debtor company eventually goes into liquidation.

Actively monitor debtor companies (especially the ones in distress) to check if an IBC process has been initiated.

If an IBC process has been initiated, ensure you monitor communication from the resolution professional and the financial creditors and comply with the procedure and timelines for filing of proof of debt, etc.

If you’re an operational creditor with outstanding dues, try and engage with the financial creditors, as they make the key decisions on day-to-day running of the company during an IBC process and also approve the debt restructuring plan.

Foreign businesses should carefully evaluate all the contractual or other business dealings in India to avoid and/or mitigate the risks of being subject to an IBC process either as a debtor or as a creditor.

Pooja Sinha is partner, GLS Law, Singapore; Satyajit Gupta is principal, Advaita Legal

Photograph: Joshua Lott/Reuters