For years, India operated under an archaic insolvency regime, which allowed opposing parties to initiate competing claims before different courts and tribunals, resulting into a never ending process of debt recovery proceedings. This led to a steady increase in bad loans, making the country ranked fifth among the countries with Non-Performing Assets (“NPAs”).
The situation was so grave that the Government was left with no option but to bring a drastic change to the landscape of insolvency regime in India. This resulted in to the passage of Insolvency & Bankruptcy Code 2016 (“IBC”), often touted as a panacea to cure the rapid spreading epidemic of NPA. More than one year has been passed after IBC came into operation and it is a right time to look into the impact and effectiveness of this legislation.
What is new?
This is not the first time insolvency and debt recovery laws are enacted in India. There were various laws; some of them are specifically enacted for debt recovery and insolvency. However, none of them resulted into the haste created by this law. IBC is a special legislation on various aspects: firstly, it shifted the control of the corporate debtor from the promoters to the Resolution Professional (“RP”) and the Committee of Creditors (“CoC”) when a default occurs in terms of the IBC; secondly, it provided a time bound period for Corporate Insolvency Resolution Process (“CIRP”) of the corporate debtor; thirdly, it shifted the entire process of CIRP into a single tribunal, National Company Law Tribunal (“NCLT”) and provided a moratorium on all other legal proceeding against the corporate debtor in other courts and tribunals till completion of the CIRP; lastly but not the least, it created regulatory framework such as Insolvency and Bankruptcy Board of India (IBBI) and key constituents such as CoC , IPs etc to oversee the proceedings. All these are unprecedented, because previously the defaulters were able to prolong the proceedings for years without losing control over the corporate debtor and its assets.
Evolution of IBC
IBC has been evolving at a revolutionary pace. Within one and half years of its enactment, IBC had gone through two major amendments and number of judicial pronouncements.
One of the major reasons for this dynamic evolution can be attributed to the Reserve Bank of India (“RBI”), which identified 12 larger NPA accounts and directed the lenders of these accounts to refer them to NCLTs. These 12 accounts estimated to account for nearly 25% of the NPA in India. With this move, RBI set the battleground ready and what followed was an open battle among promoters, RPs, corporate debtor, financial creditors, operational creditors, bidders and every other person who has any kind of stake in the corporate debtor. The result exposed certain lacuna in the law, which is quite natural in the evolution of law. However, the real damage was caused due to the inadequate infrastructure and lack of preparedness and expertise among the key players. RBI cannot be blamed for this result because the NPA situation of the country demanded some swift action. But the boat was already pushed into the high sea even before testing the water.
The sudden influx of cases crumbled NCLTs, which are not at all equipped to handle matters at this volume. The order of the Supreme Court that certain time periods prescribed under the IBC, such as 14 days provided for admission or rejection of an application, are not mandatory worsened the situation. Currently, many NCLTs are taking 3-6 months for admission. Such delay leads into erosion of asset and value of the corporate debtor making the whole process often meaningless.
IBC envisages handling of resolution process with minimum Court involvement but it is easier said than done due to conflicting interest among stakeholders. IP is entrusted with the task of balancing such conflicts and conduct the process in an independent and impartial manner. CoC is also expected to function with the objective of maximising the value of the debtor. Participation in CoC is limited to financial creditor due to the expectation that banks will be more interested to revive the debtor considering the overall advantage of revival than an operational creditor, who will be merely interested to recover his money. However, the independence, impartiality and maturity of these institutions came under severe Court criticism in many of these 12 accounts. Process is challenged in most of the cases due to arbitrariness. For instance, in Binani Cements resolution more than 12 applications have been filed by various stakeholders challenging the process and NCLT itself admitted that these applications were genuine. Role of CoC also came under severe criticism in many matters. Due to the supremacy of financial creditors in CoC, the claims of operational creditors are often completely ignored or neglected. Such approach seriously impaired main objective of the IBC, which is speedy of disposal of resolution process in a time bound manner with the objective maximizing the value and assets of the debtor. Most of the resolution processes are stuck in the Court at various stages and resolution process are from over in many of them.
Conclusion
Rising NPA is one of the major problems facing the Indian economy. A revolutionary legal regime like IBC is necessary tackle the menace. However, law alone can’t solve any problem, howsoever effective it is. It is equally important to develop an efficient ecosystem and infrastructure for effective implementation of the law. This ecosystem and infrastructure is evolving very slowly. On the other hand, the law is evolving quite rapidly. This mismatch has already caused hurdles in the early stage of the development of the regime. It is important that the Government should take vigorous measures to develop the ecosystem and infrastructure required for the development of the new insolvency regime.
About the Author
With a profound knowledge and expertise in handling infrastructure and project finance transactions, Shiju has advised various government bodies such as the Planning Commission, NHAI, etc. on concession agreements, PPP Projects, EPC contracts, bidding process and documentation. He was a senior member of the legal team involved in drafting Model Concession Agreements for Greenfield Airports and Hospitals for the Planning Commission of India. He actively advises infrastructure companies on bidding and project documentation as well as financial institutions and infrastructure companies on project finance transactions.
Prior to joining the Firm, Shiju was the Head of Legal, International Funds, Kotak Mahindra Group. He also worked in Nishith Desai Associates (Mumbai), Hariani & Co (Mumbai) and HSA (New Delhi). He is an alumnus of National Law School of India University, Bangalore.
Insolvency and Bankruptcy Code: Mismatch between Law and Reality
