Illustration: Binay Sinha
Last week, the Supreme Court observed that the role of adjudicating authorities came only after a resolution plan is finalised and said that they were not a supervisory authority to see what is happening, who was invited and who is not.
The court’s observations came during the course of hearing of an application by ArcelorMittal challenging an order passed by the National Company Law Appellate Tribunal (NCLAT) directing it to pay dues on account of defaulting firms — Uttam Galva Steels and KSS Petron — to become eligible to bid for Essar Steel.
The SC’s observations came within days of former RBI governor Raghuram Rajan’s letter on non-performing assets (NPAs) to the Parliamentary Estimates Committee, which, among other things, mentioned higher courts must resist the temptation to intervene routinely, and appeals must be limited once points of law are settled.
Litigations have been a drag on the 270-day deadline for resolution under the Insolvency and Bankruptcy Code (IBC) whose preamble is based on the principles of value maximisation in a time-bound manner. As N G Khaitan, senior partner, Khaitan & Co, puts it: “Early disposal of a resolution plan is the heart of IBC. It was an observation by the SC but a welcome one.”
Among the RBI’s first list of NPAs mandated for resolution under the IBC, two big-ticket cases are mired in litigation: Bhushan Power & Steel and Essar Steel on the principles of process versus value maximisation and eligibility under Section 29A.
In both cases, the committee of creditors has been unable to formalise the highest qualified bidder on account of litigation. So far, the status of the first list of 12 cases is somewhat like this: four have been resolved; liquidation has been ordered in one. In almost all cases, the 270-day deadline is over. The 270-day period is for resolution professionals (RPs) to file a plan.
“As per the Bankruptcy Law Reforms Committee (BLRC) report, which is the foundation document for the IBC, the role of the adjudicator should focus on matters of procedure. The BLRC recommended that the role needs to be carefully laid out so as to minimise undue burden on the judiciary and ensuring fairness and efficiency of the resolution,” said Sumit Binani, an RP. It was done through two sets of recommendations from BLRC, Binani said. “It recommended the adjudicator will focus on ensuring that all parties adhere to the process of the code. For matters of business, it recommended that the adjudicator will delegate the task of viability to a regulated insolvency professional,” he said.
But a bidder pointed out that in many cases the tribunal modified a resolution plan after it was filed. “The process in India is driven by financial creditors but IBC talks about maximisation of value to all stakeholders. So, tribunals are trying to make other stakeholders equitable, which is a problem area because often the amount recovered is insufficient to cover even the secured creditors,” the bidder said.
Binani said according to the BLRC, the adjudicator will be directly involved in the resolution process once it is determined that the debt is unviable and that the entity or individual is bankrupt.
Sumant Batra, managing partner of Kesar Dass B & Associates, however, does not subscribe to the view that the adjudicating authority should not interfere at all in the resolution process. “The role of the adjudicating authority is to provide non-intrusive oversight of the resolution process and discourage adversarial litigation, but I do not subscribe to the view that they should not interfere at all and that their power is limited to approval of plans. Such an extreme view would take away the sanctity of IBC proceedings, as aggrieved persons would be left without remedy. The reality is that IBC allows, and rightly so, the adjudicating authority to resolve disputes in claims, priorities and other areas resulting from decisions of RPs.” “Court supervision is a fundamental tenet of insolvency law. It will be unfortunate if the Supreme Court dilutes it by taking any extreme position,” he added.
Kumar Saurabh Singh, partner, Khaitan & Co, also said that the right to challenge is there in the code. The root cause for most litigations, he said, was Section 29A. Most of the cases like Bhushan Steel, Electrosteel Steels, Essar Steel, Binani have been or are still being tried under Section 29A.
The government amended the IBC last November and inserted Section 29A, largely with the objective of debarring defaulting promoters from submitting a resolution plan, but there are other clauses under Section 29A that may prevent a person from bidding.
Having said that, Singh also clarified that the IBC hasn't fared that badly in terms of timeline if compared to the Sick Industrial Companies Act or the Debt Recovery Tribunal. But a beef-up in infrastructure might also go a long way in adhering to the timeline.