1. Impact of the Code on banks and financial institutions
113
Impact of the Code on banks and
financial institutions

2. 114
Impact of the Code 1/2
▫ BIFR and SICA go off completely; however, corporate resolutions
come under NCLT
▫ Tight timelines under the new law – entire process of resolution to be over in 6-9 months
May lead to greater financial discipline
▫ Creditors have an upper hand in resolution plans
▫ Moratorium is not indefinite – limited moratorium; if revival does not work out, entity to mandatorily go into liquidation
▫ Companies and guarantors can be both brought under a common
forum – NCLT
▫ While borrowers may file resolution applications seeking moratorium, but borrower will have to face the threat of liquidation
▫ Can debtors under banker-driven restructuring also go for NCLT resolution – yes. In view of mandatory timelines, the case may reach bankruptcy stage faster
Accelerating provisioning – faster transition into a case of loss assets

3. 115
Impact of the Code 2/2
▫ Parity between secured and unsecured creditors
In voting on resolution plans, unsecured financial creditors, working capital lenders, term lenders – all get parity
▫ Can a bank stay out of resolution?
Yes, Clearly provided for in case of non-corporate persons;
seems logical in case of corporate entities too
▫ Major change in priority of distribution on liquidation
State claims moved from first position to fifth position; utmost
priority for secured creditors
▫ Floating charges completely ignored by the law
▫ Major chances of delaying tactics in case of non- corporate borrowers
▫ Cult of bankruptcy may usher a new era of consumer
defaults

4. Structuring of loans Focus has to be on assets and cashflows
116
Structuring of loans
Focus has to be on assets and cashflows
▫ Guarantees help only if they are backed by assets and cashflows
▫ Letter of comfort not a guarantee, and hence, not sufficient to rope in the comfort-provider into insolvency
Lending against core assets vs peripheral assets
▫ As far as possible, recovery of loans against core assets should proceeded
against under the Code rather than SARFAESI Act
As far as possible, ascertainable security interests are better than unascertainable securities
Lending to operating entities versus lending to upstream entities
▫ Separation of legal entity may disentitle the bank from claiming assets of the
downstream entities
Loans against pledge of unlisted shares
▫ Shares are unlikely to have any value in bankruptcy
Financial leases may become interesting:
▫ Permitted by RBI long time back; however, not used by banks at all
▫ Has complete protection under the Code, as the leased assets do not form part
of the estate
Secured bonds versus loans:
▫ Secured bonds have the benefit of SARFAESI as well Companies Act

5. Restructuring under RBI guidelines vs resolution under the Code
117
Restructuring under RBI guidelines vs resolution under the Code
That an entity is undergoing restructuring under RBI
guidelines is no bar on other creditors petitioning resolution under the Code
▫ The Code treats secured and unsecured creditors at par
▫ Non-banking creditors have no say in bank-driven restructuring; all financial creditors at par in resolution under the Code