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INSOLVENCY AND BANKRUPTCY CODE, 2016

September 11, 2017
  • Corporate insolvency has been a vexed issue in India, as the legal mechanism to deal with it has been fragmented under multiple laws..

  • India ranks 136 in the World Bank's ranking for resolving insolvency. It takes over four years to resolve insolvency issues and the recovery rate is very low.
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  • A serious consequence of this has been a large amount of bad/restructured loans (worth about Rs 8 trillion) on bank books, over 40 per cent of which pertains to infrastructure and related sectors. Several schemes have been launched to address this issue - CDR, 5/25, SDR and S4A - all of which have met with limited success.

  • The newly introduced Insolvency and Bankruptcy Code (IBC), 2016 seeks to address this issue by bringing in a consolidated legal framework for resolving defaults by infrastructure companies and partnership firms in a time-bound manner. The code, in force since December 2016, supersedes all extant insolvency laws.

  • The criteria for cases to be referred under IBC 2016 are that the lenders' exposure must be at least Rs 50 billion, and that more than 60 per cent of this has been declared as an NPA (as of March 2016) by the lender.

  • Both the debtor and the creditor are permitted to trigger the insolvency procedure under the code. As of May 2017, 67 cases have been initiated under IBC 2016.

  • The enactment of IBC 2016 will shift the debtor-creditor dynamics from "debtor under possession" to "creditor in control". This has been further bolstered by the greater legislative powers given by the government to the Reserve Bank of India (RBI) through an ordinance to amend the Banking Regulation Act, 1949. The ordinance, introduced in May 2017, allows the central bank to issue directions to banks to initiate insolvency resolution procedures under the provisions of IBC 2016.

  • Consequently, in June 2017, RBI identified 12 default accounts with Rs 2 trillion worth of bad loans (25 per cent of the total bad loans in the system) to be resolved under this route.

  • While IBC 2016 is expected to play a key role in NPA resolution, much of its success would depend on its implementation, which seems challenging owing to a host of factors. For instance, a number of banks have reservations about IBC 2016, primarily on account of the requirement of accelerated provisioning and their belief that negotiations can best be carried out with the promoters. Some banks are looking at testing the code with small cases before bringing in large cases through this route.

  • The mission of this conference is to examine the impact of IBC, 2016 on resolving insolvency issues in India. The conference will highlight the key features and the various legal nuances of the code. It will also discuss the impact of the code on various infrastructure sectors, the execution challenges and the way forward for the enforcement of the code.

ARBITRATION IN INFRASTRUCTURE

September 12, 2017
  • Infrastructure projects are complex in nature. The capital investment is high. The gestation period is long. There are multiple stakeholders involved. Contracts often do not clearly define the role and responsibilities of the parties involved. These projects are thus quite prone to disputes and litigation.

  • Arbitration has long been a method of dispute resolution in India. However, it is often criticised for being costly, time consuming and ineffective. As per government estimates, around Rs 700 billion is tied up at various stages of arbitration across infrastructure sectors. More than 95 per cent of arbitration in India is in nature, as against institutional arbitration globally.
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  • So far, only a few cases have been handled by domestic institutions such as the Indian Council of Arbitration (ICA) and the International Centre for Alternative Dispute Resolution (ICADR).

  • As a result, many Indian companies approach foreign arbitration centres such as the Singapore International Arbitration Centre (SIAC) and the London Court of International Arbitration (LCIA), leading to the loss of arbitration business opportunity for India. At present, Indian parties account for around 30 per cent of the arbitration cases handled by SIAC and LCIA.

  • The situation is set to change, with several new policy measures announced in the past one to two years. In a major development, the Indian Arbitration and Conciliation (Amendments) Act, 2015 came into force from October 23, 2015, repealing the two decades old Arbitration and Conciliation Act, 1996.

  • The act provides for time-bound disposal of all arbitration matters. It also permits parties to opt for fasttrack arbitration, with the decision being granted within six months. Further, the scope of challenges to arbitral awards on public policy grounds has been reduced. The act also attempts to fix limits on the fee payable to the arbitrator. It, moreover, enables the parties to an international commercial arbitration with the seat of arbitration outside India to approach Indian courts and seek interim relief. The definition of has been amended to refer to only high courts in the case of international commercial arbitrations.

  • Subsequently, in September 2016, the government announced new measures for arbitration for the construction industry. Government agencies would have to pay 75 per cent of the arbitration award amount into an escrow account against a margin free bank guarantee, if the award is being challenged. The step is expected to significantly reduce the debt of construction/infrastructure firms (to the extent of 40-50 per cent), improve liquidity, and speed up infrastructure project execution.

  • Moreover, steps are being taken to promote India as a preferred destination for resolving international business disputes. The first international arbitration centre was opened in Mumbai in October 2016. SIAC has signed an agreement to establish a representative office at GIFT City, Gujarat to resolve international commercial disputes.

  • The goods and services tax (GST) could mean a significant lowering of total tax costs, and thus reduce tax disputes and litigation.

  • The Indian industry has, for the most part, responded positively to the new policy measures. However, there is still much ground to cover. Adherence to timelines, minimisation of judicial interference and promotion of institutional arbitration will play a key role in making the arbitration process user friendly and cost effective in India.

  • The mission of this conference is to analyse the recent trends and developments in arbitration rules and regulations, discuss their impact, highlight the key unresolved issues and examine the way forward. The conference will also offer a platform for different stakeholders to share their experiences and exchange views and opinions.
 
       
 
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