Lenders likely to opt for IBC for debt resolution of big accounts

Lenders are likely to opt for the Insolvency and Bankruptcy Code (IBC) for debt resolution of big accounts, but may choose debt recovery tribunals or the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act for smaller ones.

In the three years since the IBC came into existence, much of the legal wrangle around various points of the law — Section 29A, supremacy of financial creditors over operational creditors, the timeline and so on — has been put to rest via court rulings.

And the latest Supreme Court ruling, making way for ArcelorMittal’s takeover of Essar Steel, has brought significant clarity to the entire process. 

“There are no issues with the IBC as a framework. The issue was with various stakeholders challenging its legal provisions in courts. The Essar judgment will lay to rest several such issues and will lead to faster resolution of stressed assets,” a senior official at State Bank of India said. Ashok Kumar Pradhan, managing director and chief executive officer of United Bank of India (UBI), too, asserted that the Essar judgment had brought clarity to the Code. He pointed out, moreover, that what might work in favour of the IBC is that resolution under the inter-creditor agreement (ICA) had not proceeded at the desired pace.

“In the case of the ICA, banks were required to make an extra 20 per cent provision post-180 days. Now a lot of foreign players will be interested in asset reconstruction companies (ARCs), which is good for the sector,” he said.

However, for smaller accounts — Rs 15-20 crore — banks are more inclined to opt for debt recovery tribunals as the IBC can prove to be a long, winding and expensive route.

As Pradhan elucidates, while the IBC might be viable for big accounts because of the huge cost involved in appointing resolution professionals and the overall cost of CIRP (corporate insolvency resolution process), “for smaller accounts, banks will stick to options like debt recovery tribunals and the SARFAESI Act.

A K Goel, managing director and CEO at UCO Bank, said that for smaller accounts, the National Company Law Tribunal (NCLT) should be the last resort. “If we can support a small company by way of restructuring, then that should be the aim. After that, the option of invoking the SARFAESI Act should be explored. However, the problem with SARFAESI is that in a large number of cases, the borrowers get stay orders from DRTs, which again derails the process,” said Goel.

Mrutyunjay Mahapatra, managing director and CEO of Syndicate Bank, said, “There is a consensus among bankers that the NCLT is not suitable for smaller accounts. Also, the way the NCLT is unfolding, a lot of cases in DRTs are expected to get expeditiously settled. This is because the DRTs are getting declogged as bigger cases are being referred to NCLT.” 

IBC cases have tripped on deadlines largely on account of legal tangles, with a significant number having breached the stipulated deadline of 270 days and even the revised timeline of 330 days.

Experts agree, however, that the Supreme Court ruling in the Essar Steel case has cleared many contentious issues around the IBC — from a test of eligibility under Section 29A to the supremacy of financial creditors. 

Kumar Saurabh Singh, partner, Khaitan & Co, said, “First, the RBI direction to banks on using the Code for resolution of debt was challenged in Gujarat High Court. But the court said that the NCLT had jurisdiction over these cases. That was the first positive.” 

Singh also said that the three IBC cases of Essar, Electrosteel and Bhushan Steel had settled several thorny issues in Section 29A of the Code. The Essar Steel case tested the eligibility of the resolution applicant under Section 29A on whether a defaulting promoter could bid; in Electrosteel and Bhushan Steel, resolution applicants were tried under clause (d) of the Section.

The provisions of Section 29A state that a person will not be eligible to submit a resolution plan if such a person, or any other person acting jointly or in concert with such person, has been convicted of any offence punishable with imprisonment of up to two years or more.

“That was an inter-bidder fight. Then post-resolution, the hierarchy of distribution of proceeds came up. Now that has been put to rest with the role of the Committee of Creditors (CoC) having been defined. This should help in expediting the process of resolution under IBC,” said Singh.

In the Essar Steel case, the NCLT had put various classes of creditors — financial, operational, secured and unsecured financial creditors — on a par. This was set aside by the Supreme Court, putting the apprehensions of secured financial creditors to rest.

Vidisha Krishan, partner, M V Kini & Co, pointed out that operational creditors were not part of the CoC. “Nowhere in the Act is there any stipulation that there needs to be parity in the payout,” she said.

Sudipta Routh, partner, IndusLaw, added that the most important course correction is in the re-establishment of the straight and narrow path that the tribunals must now tread.

“The noise-to-signal ratio after the last NCLT order could have made the Code incomprehensible to investors in this market,” he said.

One issue that is awaiting clarity, however, is the overriding clauses between the IBC and the Prevention of Money Laundering Act (PMLA). A decision in the JSW-Bhushan Power deal is likely to settle the matter.

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