In August 2016, the chief executive officer (CEO) of a large bank celebrated the arrival of Insolvency and Bankruptcy Code (IBC), the new bankruptcy law of India. The jubilant boss of the bank, laden with a mound of bad assets, asked one of his colleagues how many days it would take to settle a bad loan under the new law. The banker’s response was 1,800 days,10 times the law actually stipulated! Needless to say that this cynicism was not appreciated.
By now, looking at the progress of the single-window insolvency and bankruptcy resolution process which is expected to minimise the cost and time for liquidation and resolution of bad assets, the (now retired) CEO must have changed his opinion and renamed his colleague `Cassandra’.
Under the new law, ICICI Bank Ltd filed the first case against a steel products maker which had Rs 955 crore debt in September 2016. Since then, at least 10,000 cases have been filed but there are just 13 benches of the National Company Law Tribunal (NCLT) that hear such cases. Any default above Rs1,00,000 can be dragged into NCLT by financial creditors, operational creditors and even the corporate borrowers.
Woefully inadequate infrastructure is just one of the many reasons why a case is not settled within 180 days and even 270 days as envisaged by the law.
Meanwhile, 28 defaulters against which bankers moved the insolvency court in December at the instance of the Reserve Bank of India (RBI) have been celebrating the first anniversary. Forget settlement, not all the cases have even been admitted at the NCLT.
The RBI in June 2017 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 account for around 50 per cent of the Rs10 trillion bad debt in the Indian banking system.
Recently, during a court hearing, an interesting observation was made in relation to a case where the defaulter moved the court. “When do we give capital punishment to someone? For a premeditated murder – a heinous crime. Often a contract killer does this just for money. If the person is hanged what happens to his family – his innocent wife and school-going children who are not even aware of the crime? Should we treat them as outcast or rehabilitate them? Can business failure be treated as more heinous than a murder?” These cases will continue to be heard at the courts but such an observation gives a new dimension to the law which, through an amendment, prohibits relations of a bank defaulter from bidding for such assets. We can expect the process of fine-tuning the law to continue for the time being.
Once a defaulter is identified, a committee of the creditors (CoC) appoints one resolution professional (RP) to supervise the case. In the next stage, the information memorandum is prepared and the so-called expression of interest is sought from the prospective bidders. After checking the eligibility of the bidders and evaluating the bids, the CoC goes to NCLT.
Typically, the CoC always gives priority to the interest of the lenders over the operational creditors, such as suppliers of capital goods, original equipment manufacturers, maintenance vendors and others. A company going for liquidation is fine but when the plan is to sell it as a going concern with resources to continue operations, the interest of the operational creditors has to be taken care of. Otherwise, the assets will become junk – and that’s what has been happening in many cases.
Last week, the Supreme Court reserved its judgment in petitions moved by operational creditors challenging the validity of the IBC, and alleging that discriminatory treatment was given to a certain class of operational creditors and the law was protecting the rights of only financial creditors.
For a power plant, the moment the liquidation process is invoked, the power purchase agreement and fuel supply pact lose their validity and in their absence no bidder will come forward.
While Indian insolvency law is more aggressive than most developed markets, unlike in the US and some other countries, here the law does not have any scope for preservation of the assets. This means once the bankers move against, say, a steel-maker defaulter, the machinery of the factory may disappear with no security guard in sight.
Besides, the RP enjoys no immunity. Recently, the police filed an FIR against an RP who was overseeing the insolvency proceedings of a company in West Bengal which had not deposited the provident fund of its employees with the authorities.
Finally, no one knows when the bidding process for an asset up for sale ends as even the losers can make fresh bids and new bidders can join the fray. Allowing new bids after sealing the process helps the price discovery but it leads to inordinate delays and kills the sanctity of the process. The judiciary seems to be in favour of value maximisation than early resolution.
Also, at least one successful bidder for more than one asset, has not been able to put money on the table!
The `Cassandra’ recently told me IBC is just marginally better that DRTs (Debt Recovery Tribunals) set up after the passing of Recovery of Debts due to the Banks and Financial Institutions Act (RDBBFI) 1993 which miserably failed to resolve the bad disputes. Around 1,00,000 cases have been pending at three-dozens-odd DRTs across India. A World Bank estimate says the old law used to take average 4.3 years to resolve insolvency and recovery was 25.7 cents for every dollar. The first instance of a defaulter being dragged to a DRT — Mardia Chemicals Ltd – is a classic case study illustrating how helpless the lenders are.
IBC is emerging as an ideal tool to threaten the defaulters and bring them to the discussion table. If the lenders want to use it, the wait could only get longer unless the loopholes are plugged and the defaulters denied the normal legal course. Of course, if the defaulters are not allowed to move courts, the IBC runs the risk of being dubbed as draconian.