Question

Please write three-page essay about mechanism of Creditor and Borrower Protection in INDIA

Please discuss

Laws that protect creditors and borrowers ,Authorized institutions responsible for the ensuring creditors' and borrowers' rights , Information transparency and disclosure requirements

Answer 1

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.

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.

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.

Below are few laws that protect interest of creditors:

1. Companies act 2013; i case of corporates

2. Reserve bank of india act, 1934

3. State bank of india act, 1959; in case where creditor or borrower is SBI

4. Provisional Insolvency Act, 1920; in case of individuals

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.