Analysis of the Extension of Moratorium Period under IBC
Year 2016 marked the inception of The Insolvency and Bankruptcy Code, 2016 (‘Code’) of India. The Regulation coming into existence with an aim to revitalise and resolve the sick companies and bring it back to a better financial condition, has gained a lot of recognition in the present market condition. Among other features, one of the important feature of the Code is its time bound resolution process whereby it focuses on resurrecting the sick companies within a period of 180 days and a one-time extended period of 90 days to avoid the upheaval of a never-ending litigation. This article tries to bring out the reasons for which the resolution professionals seek extension of the resolution process from the Hon’ble Tribunal (‘Tribunal’).
Apart from the major roles of the resolution professionals appointed by the Tribunal to look after the business of the debtor company until the company is under moratorium, one of the other aspect that the RP has to keep in mind always is to take into consideration the time factor. The RP necessarily needs to submit the resolution plan to the Tribunal within the period until when the company is in moratorium. However, taking into consideration such short time period that the RP gets to bring back the debtor to a stable position- it becomes necessary for the RP to seek extension of time to be able to submit the resolution plan.
Section 12 of the Code enshrines the time limit for the completion of insolvency and resolution process of a corporate debtor, which states as follows:
- (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.
- (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent. of the voting shares.
- (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days:
Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once.
RP shall before seeking an extension from the Tribunal, shall seek the permission of the Committee of Creditors (‘CoC’) by way of a resolution passed at a meeting of the CoC whereby members holding voting shares of 75% gives their consent.
Since the inception of the Code, there has been humongous number of cases filed before the National Company Law Tribunal (‘NCLT’) with respect to insolvency. In respect of the cases filed with the NCLT, there can be following possible outcomes in the case:
- The Debtor agrees to settle the claim with the Creditor
- The resolution plan is finalised and submitted before the court, within the resolution period and the Tribunal accepts such resolution plan.
- The RP fails to submit the resolution plan within the prescribed time and the NCLT orders for the liquidation of the debtor.
Liquidation is certainly something that every debtor and lender would be willing to avoid under any circumstance. Therefore, it is necessary for the RP to formulate a resolution plan whereby it gets accepted by the Tribunal and helps the debtor to recover from financial difficulties.
As one of the fundamental principle of the Code is its time bound process therefore in certain situations extensions becomes mandatory for the RP to carry out its duties for which he was appointed. Taking into consideration the time when the Code came into existence, majority of the cases filed during the inception days of the Code, with the Tribunal are:
- Either settled between the debtor and the lender
- Or at the final stage of finalisation of the resolution plan
- Or the RP has asked for the extension of time
Having said so, it becomes pertinent to analyse the reasons for which such extension have been asked for by the Resolution Professional and on what grounds either the extension was granted by the Tribunal or the plea was rejected.
Cases where extension was granted/ not granted
Below mentioned are the cases where the Tribunal granted extension of time of the moratorium and analysis of the Orders:
- Srei Equipment Finance Limited Vs. Sree Metaliks Limited (C.P No. 16 of 2017), NCLT – Kolkata Bench
The matter was admitted before the Hon’ble Tribunal on 30.01.2017 and accordingly the Corporate Insolvency Resolution Process (‘CIRP’) was initiated. The Company was under moratorium which was coming to an end after 180 days, as per section 14 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), i.e., on 29.07.2017. However, the Resolution Professional made an application before the Hon’ble Tribunal for extension of CIRP from 30.07.2017.
The Resolution Professional kept forward the following points before the Tribunal to get approval for extension of time:
- The CoC, unanimously passed a resolution to move an application before the NCLT to seek extension of the CIRP from 30.07.2017 to 29.10.2017.
- The RP also mentioned that the CoC passed the aforementioned resolution keeping in mind that more time is required to arrive at consensus for Resolution Plan.
The NCLT accordingly, keeping in view, the unanimous resolution passed at the meeting of CoC passed an Order extending the time upto 29.10.2017.
- M/s Kamineni Steel & Power India Private Limited (C.A No. 139 of 2017 and C.P No. 11/10/2017)
In this matter, the Resolution Professional of the Corporate Debtor asked for an extension of moratorium, which was ending on 09.08.2017, on the following grounds:
- The CoC had unanimously passed the resolution whereby it asked for an extension of time in the CIRP for at least 90 days.
- The extension was asked in order to finalise the Resolution Plan, as the Total Enterprise Value (TEV) was required to be submitted by SBI Capital Markets Limited after which the members would go to their respective boards to obtain necessary instructions.
In the instant case, the Bench Member agreed that the CIRP cannot be completed within the stipulated time of 180 days and therefore an extension of 90 days was granted in the aforesaid matter. However, considering the fact that the Code provides for one time extension, the Bench Member directed that no further extension shall be granted.
- M/s Nicco Corporation Limited (C.P No 03/2017, CA No. 203/2017 and C.A No. 311/2017)
The Hon’ble Tribunal admitted the matter on 18.01.2017 and accordingly 180 days of the moratorium was ending on 17.07.2017. However, the Resolution Professional made an application for extending the moratorium on the ground that the CoC had passed the resolution for extending the moratorium period, unanimously. As the extension was required to accommodate the fresh suggestions received by the Resolution Professional of the Corporate Debtor which required reworking of the resolution plan,
Accordingly, the extension was granted considering the aforementioned grounds as presented by the resolution professional before the Hon’ble Bench.
It is therefore very pertinent to note that the very first requirement of making an application before the Tribunal for extension of the CIRP is to obtain consensus of atleast 75% of the members of the CoC. The fundamental principle to initiate the Insolvency proceeding is either to turn a sick company into a healthy one or to bring it to liquidation. However, the primary reason is to revitalise the Company and the latter being the least option. Therefore, it is supposed that it is the creditors who will/might be most affected if an extension is granted by the Tribunal, so the resolution of the CoC becomes the most important step to make an extension application before the Tribunal.
Notably, it is not only on the basis of the resolution passed in the CoC meeting that convinces the Bench Member to extend the moratorium, the progress of the resolution process is reviewed and evaluated in depth and if there is any probability that the sick company might resurrect, the Tribunal extends the moratorium.
There has also been cases where the Tribunal has denied extension of time and subsequently leading the Corporate Debtor to liquidation.
- Surendra Kumar Joshi Vs. Rei Agro Limited (C.P No 73/2017)
The Application in the matter was admitted by the Tribunal on 27.02.2017 and accordingly the Company was under moratorium which was ending on 26.08.2017. The Resolution Professional made an application before the Hon’ble Tribunal for extension of time of the moratorium period. However, the Tribunal was of the view that the total outstanding due as submitted by the Resolution Professional is Rs. 8593.96 crore, however not even a single resolution plan has been submitted to the Tribunal till date. Therefore, the Tribunal was of the view that even if the moratorium was extended the ultimate outcome would be liquidation only. So, the Tribunal denied extension and subsequently passed an order for liquidation of the Company.
It is evident that the creditors are not wrong in having faith until the last moment that the Company will recoup from sickness and therefore, the CoC in its meeting may pass a resolution empowering the resolution professional to make an extension application before the Tribunal. But the progress of the resolution process is of utter importance to the Bench Members in deciding whether the extension can be granted or not. Considering the ambiguities in the Regulation, role of the Tribunal is very much important in clearing all the ambivalences.Rohit Sharma is at Executive Resolution Division in Vinod Kothari and Company.
[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same].