“O Government, that madest this hugely useful insolvency law, when will it be ready to clear our case fast? How long, O Supreme Court, how long?”
It won’t be a surprise if the Vedanta group says this, rephrasing a sentence from George Bernard Shaw’s play, Saint Joan.
The provocation for this prayer?
The inordinate delay in the insolvency proceedings.
The insolvency proceedings against Venugopal Dhoot’s Videocon group kicked off in August 2019 when the National Company Law Tribunal (NCLT) allowed for the consolidation of the corporate debtors.
In October 2019, an expression of interest (EoI) was invited from prospective bidders. A month later, Vedanta Ltd submitted its EoI and, a year later, in November 2020, a Vedanta group company, Twin Star Technologies Ltd (TSTL), submitted the final resolution plan. It was a Rs 2,962 crore bid, including non-convertible debentures.
In December 2020, TSTL was identified as the successful bidder; the committee of creditors approved the resolution plan with 95.09 per cent favouring it. The NCLT gave its okay in June 2021, but the National Company Law Appellate Tribunal (NCLAT) reversed the NCLT judgment in January 2022. TSTL immediately moved the Supreme Court with its appeal. Over two years later, nothing has happened.
The last we heard about this case was in April 2023 when TSTL urged the Supreme Court to dismiss an appeal filed by former Videocon Industries Ltd Chairman Venugopal Dhoot against its bankruptcy court-approved bid to acquire Videocon along with its 12 group companies. Dhoot had challenged the TSTL bid in the apex court and sought a direction to banks to accept his Rs 31,789 crore resolution plan. Going by TSTL’s argument, Dhoot had always tried to “disrupt and derail” the insolvency proceedings through “vexatious and frivolous” legal proceedings.
This is not a unique case. There have been many such instances. They illustrate what ails the insolvency process in India.
In August 2016, the Insolvency and Bankruptcy Code (IBC) made its appearance. The single-window insolvency and bankruptcy resolution process was expected to minimise the cost and time for the liquidation and resolution of bad assets that saddled the banking system.
It was indeed a new beginning. Till that time, the bankruptcy turf was fragmented with a plethora of legislations and multiple platforms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, Debt Recovery Tribunals, Lok Adalat, the Reserve Bank of India’s (RBI’s) scheme for corporate debt restructuring besides the Sick Industrial Companies Act.
Under the new law, in September 2016, ICICI Bank Ltd filed the first case against a steel products maker, which had Rs 955 crore debt. By June 2017, the RBI listed 12 defaulters against whom it had wanted immediate bankruptcy proceedings to be invoked. This was followed up by another list of 28 defaulters in August 2017. Together, the two sets accounted for around 50 per cent of the Rs 10 trillion bad debt in the Indian banking system then.
In the initial days, the going was great. But over the last few years, the process has slowed dramatically. Woefully inadequate infrastructure is just one of the many reasons why the time taken for settling cases is increasing and the value of recovery is dropping.
Let’s first look at the process. Once a defaulter is identified, a committee of creditors (CoC) appoints one resolution professional (RP) to supervise the case. In the next stage, the information memorandum is prepared and an EoI is sought from prospective bidders. After assessing the eligibility of the bidders, evaluating the bids and choosing the most suitable resolution plan, the CoC goes to NCLT for its approval.
Although the CoC gives priority to the interest of lenders over operational creditors (OCs), such as suppliers of capital goods, raw materials and consumables, original equipment manufacturers, maintenance vendors and others, the OCs too recover money. Section 20 of IBC requires the RPs to make every endeavour to protect and preserve the value of the assets and manage the operations of the debtors as a going concern. It also allows the RPs to raise interim finance during the insolvency process. Such financiers are paid on a priority basis once the resolution is in place.
A November 2023 report of rater Crisil Ltd pointed out that the recovery rates (as a percentage of admitted claims) have fallen from 43 per cent to 32 per cent between March 2019 and September 2023 even as the average resolution time has more than doubled, from 324 to 653 days. Realisation by financial creditors, as a percentage of liquidation value, has also dropped from 194 per cent to 168.5 per cent during this period.
The timeline for the completion of the resolution at the IBC is 270 days. Of course, it can be extended, subject to certain conditions.
In February 2024, the 67th report of the Standing Committee on Finance called for a review of the IBC’s design. It talked about instances of frivolous appeals and the time taken by many cases for admission to NCLT. The committee has found that the actual recoveries on the ground are roughly between 25 and 30 per cent, and some cases take as long as two years for resolution, far beyond the timeframe envisaged.
Since the IBC’s inception, 6,815 cases have been admitted to the NCLT, and 2,827 of these cases, that’s 41 per cent, are still undergoing the resolution process. The average resolution time has been rising and is now at a three-year high.
Till December 2023, of the 6,815 cases, 891 had been resolved (against financial creditors’ claims of Rs 9.09 trillion, the realisation is Rs 3.1 trillion); 2,376 ended in liquidation (1,789 received no resolution plans and 587 got at best a couple of plans); and 721 in voluntary liquidation.
An expert panel set up by bankruptcy rule maker, the Insolvency and Bankruptcy Board of India (IBBI), has recommended voluntary mediation as a way of settling disputes that arise when creditors take over sinking businesses. Headed by former law secretary TK Viswanathan, the panel, in its 129-page report submitted in January, has suggested that mediation could be a complementary mechanism for settling disputes relating to bankruptcy resolution
Mediation is the use of a neutral third party to facilitate the negotiated settlement of a dispute and resolve conflicts between two or more parties. In consonance with the Mediation Act, 2023, the committee has recommended a “voluntary” mediation framework under the IBC. Many developed markets have been following this.
Meanwhile, the fifth report of the Insolvency Law Committee (reconstituted in March 2019 as a standing committee), submitted in May 2022, has also been pending. It has made quite a few interesting recommendations to improve the efficiency of the resolution and liquidation process in a time-bound manner and maximise the value of the assets.
Another committee in January 2021 recommended pre-packaged insolvency or “pre-pack” – a kind of bankruptcy procedure where a restructuring plan is agreed upon in advance before a company declares its insolvency. In the US, pre-packs are often used in a Chapter-11 filing. Currently, the pre-pack mechanism is being restricted to the MSME sector alone.
Yet another key proposal under a discussion paper, released by the Ministry of Corporate Affairs in January 2023, is to allow project wise insolvency resolution processes for real estate firms.
It seems that once the new government is in place, all these recommendations will be taken up in Parliament in July. Along with the introduction of pre-pack (beyond the MSME sector), we may see the government redefining and strengthening the out-of-court processes for bankruptcy resolution, before introducing newer rules such as cross-border insolvency norms. At the moment, making the processes more efficient and robust and reducing the involvement of courts to the extent possible is on the government’s priority list.
To a large extent, the IBC has served the purpose by creating the fear of god among rogue promoters. The lenders have been using it as a threat, forcing many loan defaulters to come to the discussion table. However, over a period of time, the smart promoters have learnt how to use the law to stymie the process. It’s time to plug the loopholes in the law and make the defaulters understand that the IBC isn’t just all bark and no bite.
This column first appeared in Business Standard
The columnist writes Banker’s Trust every Monday in Business Standard.
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