IBC resolution: Towards the inevitable

Three years ago, I wrote the first of nine articles on the new bankruptcy code. That piece was titled Bankruptcy Law: State – 1; Market – 0. My contention, which sounded cynical at the start of a new process under a supposedly determined government, was that the new Act would unleash more of what has not worked so far — deeper involvement of the state. The successful implementation of the Insolvency and Bankruptcy Code (IBC) depended on a much bigger involvement of the state through a huge new superstructure of registration, certification and supervision. 

The process, I suspected, would quickly degenerate into a huge mess no different from what we already had in place. Pre-IBC bankers, borrowers and asset reconstruction agencies functioned within a tangled legal system created by three decades of patchwork solutions, involving debt recovery tribunals and courts. It was a cesspit of seedy deal making, long inaction, stymied resolutions, and tens of thousands of unresolved cases. Everybody felt that a time-bound IBC-supervised resolution pushed through a shiny new legal system — the National Company Law Tribunal — would fetch a radically different outcome. 

Well, three years later, my worst fears are turning out to be true. The enthusiasm about the IBC delivering quick resolution is waning. Only 79 cases have been closed through resolution as against 898 ongoing cases. Under the Act, an insolvency case must be resolved in 270 days. If there are no buyers for the asset by then, the resolution professional should simply liquidate the company. However, some 275 cases are dragging on for more than 270 days. The most prominent one, Essar Steel, involving over Rs 50,000 crore, has been tediously winding its way through multiple courts for over 600 days. 

Meanwhile, the nexus among bankers, promoters and RPs remains intact in most cases referred for resolution. Then there are decisions by the NCLT that have confused everyone. If nothing else, frequent amendments to the law, arbitrary actions by banks and courts, protracted litigation, and corruption will kill the IBC. Consider these issues that I have chosen at random: 
  • Why is the spectacular crash-landing of Jet Airways out of the IBC process when public sector banks, which are, as usual, deeply in the dock, ought to have reported it four months ago?
  • The National Companies Law Appellate Tribunal (NCLAT) recently passed an order that will allow promoters to settle with creditors even after the company has gone into liquidation under the insolvency law. Where does this leave the famous amendment to Section 29A, which was designed to prevent defaulters from getting back control of their companies? Will the government challenge this decision?
  • Six months ago, the IBC was amended to include Section 12A, which allows withdrawing insolvency proceedings against a corporate debtor if 90 per cent of the committee of creditors agrees. Since then as many as 80 cases have been withdrawn using this provision, almost double the figure of the past two years. Unaccountable public sector bankers and promoters can continue to have fun. These companies will probably now get fresh loans, which will go bad again. In the Swiss Ribbon insolvency case, the Supreme Court has said insolvency proceedings can be withdrawn before the constitution of the CoC, even after the case has been admitted in the NCLT.
  • The data available till September last year shows that financial creditors could get back only 25 per cent of their claims, no better than under the pre-IBC system. I fear this figure will decline further if the data for withdrawn cases (under Section 12A) is counted and their promoters will be the winners. 
  • After the Supreme Court struck down the Reserve Bank of India’s February 12, 2018, circular asking banks to classify a loan as stressed even if there was one day of delay, the pressure on companies to pay and banks to recover has drastically reduced. 
  • In an extraordinary example of the brazen nexus between banks and promoters, Andhra Bank and other lenders attempted to push through a sharp haircut and one-time settlement with the fugitive defaulters of the Sandesara group of Sterling Biotech, while in Sterling SEZ, where a similar deal was proposed, the NCLT not only sent the company into liquidation but also directed the government to take punitive action against senior bankers for misleading the tribunal with a withdrawal plea.
  • According to the IBC, applications have to be admitted within 14 days. The legal infrastructure is so poor that courts have decided that 14 days is not mandatory and so, many cases have reportedly not been admitted for more than a year.
  • Liberty House emerged as the successful bidder for Amtek Auto and Adhunik Metals, but has not paid up, undermining the resolution process. 
  • The government had planned 27 bankruptcy courts, of which only half are functioning.
Meanwhile, more impractical quick fixes are on their way, such as the mediation mechanism. I had me­n­tioned two years ago that the basic flaw of the IBC ar­chitecture was that it did not take into account the very Indian possibility that promoters, lawyers and po­liticians will try to game the system in many obvious ways. I forgot about confusing court judgments. The go­vernment’s best response to such situations is to co­ntinuously try to fix things and end up making a bigger mess. This is exactly what happened to earlier four acts to handle bad loans. It will happen to the IBC too.
The writer is the editor of www.moneylife.in
Twitter: @Moneylifers

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel