IBC - Rapidly maturing but needs cushion of timely Amendments!
Published: Dec 06, 2018
TIOL - COB( WEB) - 636
DECEMBER 06, 2018
By Shailendra Kumar, Founder Editor
THE two young laws which have truly proven 'transformational' or 'disruptive' with certain mild side effects are the GST and the Insolvency & Bankruptcy Code. IBC came into force a few months before the GST laws and both have evolved rapidly. The history of legislations does reveal that new behavioural laws take time to mature but the maturity can be achieved faster with responsive Executive and the Legislature. Though the Modi Government has been a bit slow in amending the GST laws but it has done well on the IBC front. IBC has just become two-year-old and it has shown healthy signs of evolution. Its evolutionary trend has also been acknowledged globally by the IMF and the World Bank which has given some brownie points to India on the Ease of Doing Business ranking.
IBC owes its birth to the ever-mounting woes of Non-Performing Assets (NPAs) problems India has been grappling with for several years. The issue of NPAs has become a little more serious with a good number of corporate frauds being exposed by the media. Although 'chalata hai' approach was the lending philosophy governing the realm of borrowing in India but it finally eroded the capital base of the Public Sector Banks and also private sector banks to such an extent that NPAs accounted for almost 10% of the GDP - a level much higher than the red mark or global standards. And this happened despite a clutch of commercial laws in place which are invoked for recovery of loans through seizure of assets and securities. However, the rising graph of litigation prevented all such commercial laws from yielding the fruits to the lenders and the business credit environment was badly polluted. Since the cycle of higher economic growth sustains itself on the cushion of a healthy credit market, the rising NPAs restrained the banks and other lenders from providing easy credit to the industry and that finally retarded the growth cycle.
Thus was born the IBC with a set of many tall objectives - to address the twin balance-sheet culture in our financial sector; to develop a strong corporate bond market, to improve India's business competitiveness, to strengthen the credit milieu and streamline the insolvency resolution process to contain value destruction of assets created. With half a dozen goals, the IBC was rolled out on December 1, 2016 and it has turned out to be a powerful weapon against loan defaulters. Though its main aim is to facilitate the process of insolvency and liquidation but its side effects have emerged more potent to rectify the behaviour of defaulters in the economy. With the law stipulating a threshold of Rs one lakh to invoke its provisions, any lender can initiate the process of Insolvency in case of delay in repayment or wilful default. A good evidence to such a trend can be inferred from the fact that the NCLT received as many as 12000 cases and about 4000 of them were resolved at the pre-admission stage itself. This clearly indicates that the legal teeth coupled with the efficient enforcement machinery has produced the desired fear in the minds of defaulters who know that once the IBC proceedings are rolled out, the owners of the defaulting companies may lose their control over the management which no promoter would like to suffer from. So, as soon as a case is referred to the IBBI for admission, a good chunk of defaulters rush to repay or clear their outstanding dues and as per some guesstimates, the operational creditors have recovered as much as over Rs one lakh crore from their defaulters.
It is indeed no less than a magic that the defaulters have a live fear of a particular legislation which bites within a time-frame. As per the IBBI Chairman, Dr M S Sahoo, the IBC has brought a paradigm shift in the behaviour of both debtors and creditors. It is true that the IBC has not been framed for recovery but its fear does lurk in the mind of corporate debtors who have begun to settle their loan dues before its provisions are invoked. So, what is its main purpose? Dr Sahoo says IBC tries to reduce incidence of business failures; to rescue failing businesses and to release resources from failed businesses for productive use. It is to enable entrepreneurs to exit from business with ease if one has suffered genuine business failure. This is to promote entrepreneurship.
If we leave aside the stated objectives, IBC is presently dealing with sticky and gigantic failure cases. The RBI had referred a list of top 12 defaulters who accounted for almost 25% of total NPAs. Out of 12, only four have been resolved so far as multiple litigations have delayed the process of resolution and defeated the time-frame stipulated within the law (180 days + 90 days). Though only four cases have been resolved, financial creditors must be happy as they got back as much as over Rs one lakh crore of lost funds from the failed businesses. Secondly, the resolution process led to large and reputed corporates participating in the bidding process and finally infusing fresh capital in these sinking companies which are going to be revived in future. It not only saves business assets from being destroyed but also keeps live jobs of thousands of workers.
Though litigation delayed the process of resolution which needs to be revisited by the law-makers but intervention by the higher judicial forum has also done some good to this new piece of legislation. For instance, application of certain provisions of the Limitation Act was questioned in certain decisions of the NCLAT but the Supreme Court has clarified that the limitation provisions cannot be wished away and do apply to many sections of the IBC (See 2018-TIOLCORP-07-SC-IBC). Another decision given by the Delhi High Court made it clear that the IBC will override anything inconsistent in any other enactment, including the Income Tax Act (2017-TIOLCORP-54-HC-DEL-IBC). This was an important clarification to guide the recovery of tax liability from such failed businesses. Secondly, litigation also brought to the fore some unique sectoral issues, particularly relating to the power and real estate sectors. Netizens may recall that the IBC had initially not acknowledged the existence of home buyers as a financial creditors but after the Jaypee case which was heard by the Apex Court, the Government felt compelled to amend the provisions through Ordinance and bring home buyers on equal footing with other creditors and now they have a representative in the Committee of Creditors which takes a call on highest or credible bid.
In the context of bids, a major flaw which experts may notice is that even after the highest bid is made public, the second highest bidder has a choice to further revise its offer and if such an offer looks more attractive, the CoC may go for that. Such a process may add to the delays and it may become a never-ending process. It is true that the creditors would get more upon recovery of their loans but such greed does defeat the purpose of time-bound resolution of either insolvency or liquidation.
The second set of amendments in the IBC should take into account all such aberrations which have emerged in the past two years. Secondly, if our experience shows that 180 days (plus 90 days) period is not enough to resolve the cases, it is better to create two categories of cases - more time may be earmarked for large cases which involve a sum exceeding Rs 10,000 Crore. Similarly, Rs one lakh threshold may be revisited if too many cases mount and choke the Board and the NCLT in the coming years. The future amendment should also address the lack of clarity clouding the treatment to be given to a Guarantor. Then, the Expert Panel recommendation on insolvency process in cross-border cases should also be accommodated.
The IBC has indeed made an enviable beginning and it must be cushioned to move forward in a healthy way and the speedy process should be the soul of the resolution. Competition and innovations would continue to fail businesses which would require a process for its revival or quick liquidation. And it can be achieved only through a seamless process of resolution laws which IBC is likely to be in the coming few years. Let's hope the New Government at Centre in 2019 would like to revisit and further strengthen its teeth and processes so that a robust credit environment emerges in the economy!
