Kashish Khattar is a 4th year student at Amity Law School, Delhi. This article is a discussion regarding the protection of various interests the creditors in a company. 

Introduction

In recent times, it has been seen that creditors can pose stiff opposition to M&A deals if their concerns are not addressed. They do this by seeking criminal action and some kind of government intervention when the firm has failed to pay their dues.

I would like to talk about the impact it has on the interest of the creditors and how they can be protected in this article. Firstly, it would be done by invoking Section 230 of the Companies Act, 2013 which talks about the power to compromise or make arrangements with creditors and members. Further, Section 230 as a whole gives out a mechanism for an institutional dispute settlement between the creditors and the company.

How do creditors make money

Creditors make money on the interest generated on the credit that they have extended to you. The creditor accepts a degree of risk that the borrower may not be able to repay the loan.

Creditors mostly consist of banks, bondholders, and various suppliers.They lend monies to the companies for an exchange for a fixed return on their debt capital, usually in the form of interest payments. Companies, in principle, agree to pay back the principal amount also. The interest is typically higher than other sources of capital for the company as companies have a higher risk of defaulting on their interest payments and principal as compared to others.

Further, lenders typically require which is in consonance with the risks associated taken with the individual company by lending them money. Hence, a steady company will borrow money cheaply which means that they will have lower interest payments every month, however, a risky business will have to shell out more money for higher interest payments.

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How to protect these interests

Companies after the amendment of the IBC can issue their shares at a discount to its creditors when their debts have been converted into equity in the pursuance of a resolution plan given under the IBC. Further, the companies who have defaulted in the payments of dues to any bank or an NBFC or any of the secured creditors will now have to take the prior approval of such lender before giving out managerial remuneration. There can be a cash flow monitoring by the creditors also.

Creditors meeting

Meeting of creditors is used to define a meeting which has been set up by the company to formulate a scheme for an arrangement with the creditors. The Companies Act, 2013 gives out the power of the company to negotiate with the creditors and the mechanism by which it can be done.

The creditors and the company can both approach the NCLT, with different propositions in mind. The company would approach the bankruptcy court for any kind of relief in which they can settle dues with the creditors. However, the creditors approach the NCLT under the Insolvency and Bankruptcy Code, 2016. This is when the creditors take the defaulting company to court under the IBC, 2016, a committee of creditors take over the management of the company and a resolution professional is appointed.

Furthermore, a resolution professional comes up with a resolution plan in the case of IBC. In the case of the company approaching the NCLT, the management comes up with a plan to settle with the creditors. An informed decision would be when a company can predict that the creditors will approach the NCLT and the company approaches the NCLT under section 230 whereby the management can retain control on the company.

Tribunal can also dispense with the meeting of creditors or a class of creditors under Section 230(9) which states that such creditors or class of creditors, having at least 90% value and have agreed by the way of an affidavit, to the scheme of compromise or arrangement.

Corporate Debt Restructuring (“CDR”)

CDR is a mechanism where the lenders to the concerned corporate can come together and form a forum to restructure the debt. The lenders see the company’s business model and try to see if the problem being faced by them is temporary or permanent. Further, the banks take the help of specialists to help them assess the market and how that particular company is positioned. Post these forensic audits and analysis, they restructure the corporate debt lent to the company by rescheduling the payments so that the company gets a breathing space to sort matters out or give a top or an additional loan for stabilizing the operations of the company. All these activities form part of CDR.

Any scheme of corporate debt restructuring has to be consented by more than 75% of the secured creditors in value. Further, the plan has to be given with the safeguards for the protection of other secured and unsecured creditors. Report by the auditor that the fund requirements of the company after the said restructuring shall conform to the liquidity test based upon the estimates provided by the board.  Companies also have to give a statement to the effect, if they are proposing to adopt the corporate debt restructuring plan specified by the RBI.

Furthermore, as seen in the case of Jet Airways, SBI who is the leader of the consortium of banks whose loan the airways have recently defaulted upon. They have agreed to give an additional Rs. 1500 crore loan to the airways even after having a risk exposure of Rs. 1600 crores, already. This was done after they had ‘satisfactorily’ completed a forensic audit of the books and accounts of the airlines. The bankers are also expected to reassure the creditors where it will be shown that the airways have a repayment plan which they will share with the creditors and are working towards secure funding

Conclusion

Recently, the Reserve Bank of India’s latest Financial Stability Report makes the important point that creditors as a whole, have been empowered by the bankruptcy code to recover the debt. The report highlights the power given to operational creditors which comes from the enactment of the IBC. These kinds of creditors were never served by the previous restructuring mechanisms.

It is seen that pay up or we go to NCLT is proving to be a very credible threat even in the case of the M&A world.