17 October, 2017
Notification of Reserve Bank Commercial Paper Guidelines, 2017
The RBI has by a notification dated August 10, 2017 issued the Reserve Bank Commercial Paper Directions, 2017 (‘New CP Directions ’) in supersession of the existing directions on the same, which inter alia specifies the following:
i. A commercial paper (‘CP ’) will be issued in the form of a promissory note, held in a dematerialized form with a denomination of . 5 lakhs (approx. US$ 7,600) or multiples thereof. The issuance must be at a discount to face value with no issuer having such issue underwritten or co-accepted. Optionality clauses, such as put and call options, are not permitted on a CP . The original tenor of a CP must be between seven days to one year.
ii. Companies, including non-banking financial companies and All India Financial Institutions will be eligible to issue CP s, with no minimum net worth requirement. Entities such as co-operative societies / unions, Government entities, trusts, LLP s and other bodies corporate can also issue CP s, provided that they have a presence in India and a minimum net worth of . 100 crores (approx. US$ 15.3 million).
iii. Eligible investors include all residents, non-residents who are permitted to invest in CP s under the exchange control regulations. However, no person is allowed to invest in CP s issued by related parties either in primary or secondary market. Additionally, investment by regulated financial sector entities will be subject to conditions imposed by the concerned regulator.
iv. Issuers, whose total CP issuance during a year is . 1,000 crores (approx. US$ 153 million) or more, should obtain credit rating of a minimum of ‘A3 ’ from at least two SEBI registered credit rating agencies.
v. No end-use restriction to a CP issuance has been prescribed but it should be disclosed in the offer document at the time of issuance.
vi. The buyback of a CP , in full or in part, must be at the prevailing market rate, which cannot be made before 30 days from the date of the issue.
vii. A CP will be a ‘stand-alone’ product, with banks and financial institutions optionally choosing to provide stand-by assistance / credit, back stop facility, etc. as a means of credit enhancement. Non-banking entities may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided the offer document for CP properly discloses the net worth of the guarantor company, among other details.
viii. In case of secondary market trading and settlement of CP , all over-the-counter trades in CP will be reported within 15 minutes of the trade to the Financial Market Trade Reporting and Confirmation Platform of Clearcorp Dealing System (India) Ltd.
Liability of Personal Guarantors of a Corporate Debtor during the Corporate Insolvency Resolution Process
State Bank of India (‘SBI ’) had sanctioned a loan to Lohia Machines Limited (‘LML ’) which was guaranteed by the directors of LML . Upon non repayment, SBI approached the Debt Recovery Tribunal, Allahabad (‘DRT ’). However, in parallel, LML also filed an application before the National Company Law Tribunal (‘NCLT ’), Allahabad Bench, to initiate a corporate insolvency resolution process (‘CIRP ’) in respect of itself. In response to the CIRP being admitted, although the DRT stayed the proceedings against LML , it continued to hear the matter in relation to the enforcement of personal guarantees given by the directors of LML . Aggrieved by DRT , the personal guarantors filed a writ petition before the Allahabad High Court. The Allahabad High Court passed an order4 dated September 6, 2017, staying the DRT proceedings against the personal guarantors and stated: (i) under Section 60(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC ’), NCLT is the adjudicating authority for resolution of insolvency and liquidation of a corporate person (including a personal guarantor); (ii) when liability is co-extensive and proceedings are still in a fluid stage, two split proceedings cannot go on simultaneously before the DRT and the NCLT for the same cause of action; and (iii) the scope of the CIRP order passed by NCLT imposing a moratorium on all legal proceedings, extends beyond the properties of the corporate debtor and suits/proceedings pertaining to the corporate debtor. Accordingly, the Allahabad High Court stayed the DRT proceedings against the personal guarantors till the finalisation of the CIRP or till approval of the resolution plan by NCLT or passing of an order for liquidation of LML by NCLT , as the case may be.
Ability of a Power of Attorney Holder to Initiate Insolvency Proceedings
ICICI Bank Limited (‘ICICI’) filed an application before the NCLT through a representative, holding a power of attorney (‘PoA’), on behalf of ICICI to commence CIRP for Palogix Infrastructure Private Limited (‘Palogix’). Under the PoA in question, ICICI gave a general authority to the representative to appoint pleaders, advocates and solicitors to appear and act on behalf of ICICI before any NCLT bench and/or before other forums and to attend meetings of creditors in insolvency or bankruptcy or winding up matters and to vote at such meetings and to accept composition and to take such proceedings as he may think proper. Palogix objected that the person authorised by ICICI did not have adequate authority under the PoA to initiate bankruptcy proceedings before the NCLT . The National Company Law Appellate Tribunal (‘NCLAT ’), in this case, took the view that IBC being a specialized law creating new rights and obligations,
requires that a PoA be interpreted strictly so that the powers given to the agents are not abused and the actions are restricted only to the extent the power is indicated or given. It further stated that an authorization, in case of a company, means a specific authorization by the board of directors of the company by way of passing a resolution. Any application under Section 7 of the IBC , if signed and filed by a ‘general PoA holder’ without specific authorization under the IBC , will not be maintainable.
Limitation Act does not apply to Proceedings under the IBC
By its order dated August 11, 2017,5 NCLAT held that the provisions of the Limitation Act, 1963 (‘Limitation Act ’) do not apply to the insolvency and bankruptcy process under the IBC . It stressed on the fact that the IBC was not enacted for the purpose of recovery of money claims, but rather for the initiation of CIRP . Accordingly, NCLAT allowed a debt that was time barred under the Limitation Act to form the basis of an application for the initiation of CIRP.
On August 23, 2017, the Supreme Court (‘SC ’) dismissed an appeal from the order of NCLAT and declined to interfere with it. However, it noted that the question of law, viz whether the Limitation Act applies to IBC proceedings, has been kept open.
IBC prevails over the Maharashtra Relief Undertakings (Special Provisions) Act, 1958
In its first extensive ruling on the operation and functioning of the IBC , the SC in its order dated August 31, 20176 held, inter alia, that the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, being a State legislation, cannot stand in the way of CIRP under the IBC , being a Central enactment, especially in view of the non-obstante clause contained in Section 238 of the IBC.
5 – Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Limited, Company Appeal (AT)
(Insolvency) No. 44 of 2017.
6 – M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., Civil Appeal Nos. 8337-8338 of 2017.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
