The Insolvency and Bankruptcy Code (IBC) process is long-drawn and, off late, even admission of cases has become laborious, taking 6-18 months, according to Raj Kumar Bansal, Managing Director and CEO of Edelweiss Asset Reconstruction Company.
Referring to recoveries stalled on account of frivolous litigations from stakeholders including former promoters and unsuccessful resolution applicants, Bansal, in an interaction with businessline, called for amending laws to help reduce frivolous litigations. Excerpts.
Are banks preferring IBC over ARCs when it comes to recovery? Why?
The Corporate Insolvency Resolution Process (CIRP) under the IBC was initially assumed to be an auto pilot or self-driven process, where the Resolution Professional takes the lead in managing the whole resolution of assets of the Corporate Debtor in accordance with the collective decisions taken by the Committee of Creditors (CoC). In the initial phases of IBC, there definitely was a simplistic bias on the part of the banks to directly initiate IBC when it comes to recovery rather than assigning it to the Asset Reconstruction Company (ARCs) and recover through Security Receipts (SRs). However, as the IBC evolved over the next few years, the banks started realising that contrary to initial perception, the CIRP did require intensive participation and efforts for a lender to achieve recovery, that too after sustained efforts with stretched timelines. It is seen now that the IBC process is long-drawn and off late even admission of cases has become laborious, taking anything between 6-18 months. Even the resolution process takes time with various legal appeals/interventions by multiple stakeholders, including competing Resolution Applicants (RAs).
The decision (IBC or DRT) largely depends upon certain case specific dynamics —extent of provisioning, overall non-performing assets (NPAs), size of exposure, industry type, pool of likely potential bidders, government policies, market liquidity etc. Therefore, lenders may prefer to opt for the IBC route in an operating asset with good valuation and investor interest. However, it is also seen that to overcome time lags and uncertainties in the IBC process, many banks have been coming out with notices for sale of assets to ARCs (even the large assets sale to NARCL), including assets under National Company Law Tribunal (NCLT) resolution.
What changes in regulations are required so that ARCs can play a more meaningful role in helping banks and NBFCs in recoveries?
On paper, the present set of laws and regulations are fairly effective to enable ARCs to play a more meaningful role in helping banks and NBFCs in recoveries. However, the real challenge lies in the area of implementation. Over the years, we have seen that all the recovery processes initiated by the lenders under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) or IBC before DRT (Debt Recovery Tribunal) or NCLT are invariably stalled on account of many frivolous litigations instituted by various stakeholders including ex-promoters or unsuccessful RAs. Hence, it is essential that certain areas of laws are suitably amended so as to reduce instances of such frivolous litigations. Some of the contentious issues that need a relook include the status of statutory dues, vis- a-vis, the secured dues; inter se priority amongst the secured financial creditors in the waterfall; determination of liquidation value for various class of secured creditors, etc. It is also important that the primacy of commercial wisdom of the CoC is respected. On the pre-pack front, expanding the scope to include large corporates should be considered. Another area that needs strengthening is the filing of personal insolvency where one is seeing misuse of moratorium.
How helpful will the provision to allow ARCs as Resolution Applicants in IBCs be?
This would work well particularly in cases where the corporate debtor belongs to an industry which would require some time to revive and warehousing such assets (for example, thermal plants) could substantially enhance the value of resolution.
This would also require ARCs (which do not have inherent capability and skill set to run businesses) to engage professional management and set up necessary monitoring and review mechanism. What is not clear is the implication of any debt taken over by ARC as a resolution applicant in its balancesheet and equity/ taxation related matters. Further, if the corporate debtor resolution takes longer than five years for substantial scale down/exit of ARC, it would adversely impact its ability to act as RA in subsequent transactions. Hence in the present regulatory landscape, the provision to allow ARCs as RAs in IBCs would not be helpful/ effective unless further clarity/amendment on related laws and regulations are brought about.