It was billed as one of Modi government’s biggest achievements. But two years after the Insolvency and Bankruptcy Code (IBC) came into force, the action is way slower than expected and critics say the code’s flaws have prevented it from having the impact it should have. Most cases are overshooting the 270-day (180 days with a 90-day extension) resolution timeframe by a long margin.

Of course, it could be argued the National Company Law Tribunal (NCLT) has been a victim of its own popularity. In February 2018, there were 2,000 cases before the tribunal. Now there are 10,000 cases before 11 benches. This is making it impossible to meet the 270-day deadline despite the government hiking the number of benches and judges.

But even with the longer resolution wait, the IBC is changing the way India's corporate world operates. For the first time, many promoters are facing the harsh reality they could lose their companies if they don’t pay their debts to banks and other creditors. That’s making the firms think twice about skipping loan repayments.

Still, a number of big corporations with deeper pockets continue to find ways to hold up cases and keep them in permanent motion between the NCLT, the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court. Bhushan Power & Steel, for instance, has been before the tribunals for 520 days and Essar Steel has been awaiting resolution for some 500 days. Amendments have closed some loopholes but many more keep surfacing.

Chinks in the law

Much of the action is centred around distressed steel firms. The industry, though, isn’t so distressed now. In fact, it’s experiencing good times projected to last for some time. Thus, there are ongoing tussles for companies like Essar Steel and Bhushan Power & Steel. One case though that's been resolved is Bhushan Steel, which went after quite a battle to Tata Steel.

Now it looks as if Bhushan Power & Steel will go to JSW, which battled Tata Steel. In the Bhushan Power & Steel case, JSW was allowed to make a second bid which was accepted. Tata Steel argued JSW shouldn’t have been allowed to offer a second, completely revised, bid.

Then there’s Essar Steel which ArcelorMittal hasn’t been able to get its hands on even after paying off ₹7,000 crore as part of a debt repayment for its stake in two other companies Uttam Galva and KSS.

ArcelorMittal had a passive stake in both companies which had built up extensive debts and it was ordered by the Supreme Court to repay these debts before it could bid for Essar Steel. A Russian company, Numetal, meanwhile, was disallowed from bidding for Essar Steel because Rewant Ruia, who’s part of the Ruia family that promoted Essar Steel, was a stakeholder.

In fact, the battle for Essar Steel demonstrates some of the weaknesses of the Act that still have to be ironed out. In October, ArcelorMittal was declared the winner of the Essar Steel battle after submitting a bid of ₹42,000 crore. Essar Steel attempted to get back into the game with a higher bid which was turned down.

But the game isn’t over yet and, now, State Bank of India (SBI), which is Essar Steel’s largest creditor, is planning to auction off its debts to the highest bidder. The successful bidder for the stake could attempt to change the direction of the case.

In other cases, similar ping-pong games are going on. Lawyers, though, insist this was inevitable and that once all the different legal issues are gradually sorted out, it’s going to be a different corporate ballgame.“The negative aspect is that not many resolutions have happened. But understandably it takes time for things to settle down and 2019 will set the tone,” says Saurav Kumar, a Partner at IndusLaw.

Adds Bikash Jhawar, Partner, L&L Partners: “You have to develop your fighting skills by fighting mammoths. But I think the insolvency thought-process is winning. In the next set of NCLT cases, people will know what to expect.”

The IBC has been broadly modelled on foreign codes. But there are crucial differences. Other major countries don’t put a time-limit within which cases have to be resolved. In India though — because of the creakingly slow judicial system — the government decided a time-limit was required. But with the growing volume of cases, the deadlines have obviously become increasingly tough to meet. In fact, says Kumar: “I’m not sure the 270 days can be adhered to. There are so many things to be sorted out.”

Mindset change

Similarly, the Indian bankruptcy code differs slightly from those of other countries in that the “resolution professionals” — otherwise known as RPs — take over a company once it goes into “resolution”. In the US, the management usually stays in place when a company is in resolution. In India, as management and ownership are often in the hands of the same person or family it was felt that the management had to be transferred.

While that approach is well-intended, it poses practical problems as it means RPs must learn the ropes in a very short time. Also, many are chartered accountants and often more experienced at offering advice rather than actually running a company. These drawbacks are why the Insolvency and Bankruptcy Board of India is looking for ways to encourage management and other professionals to become RPs.

Also, in India, the fact that RPs have a limited timeframe within which to reach resolution puts them at a further disadvantage. In the UK, for instance, the RPs don’t face a tight deadline. “In the UK, the RP works to find an optimum solution over a period of time,” says Jhawar.

As noted, there have already been some changes to the code and more are on the way to address the various shortcomings. For instance, there have been attempts to buy back companies cheap by promoters. So Section 29(a), which defines people related to the promoter, has been amended to prevent such practices.

Some lawyers say the Act was drafted too fast and that’s why so many amendments have already become necessary. Still, warts and all, experts say the Act is having the desired effect of changing corporate mindsets. Notes Kumar: “Earlier, companies weren’t bothered because cases would be pending for 10-15 years. Now there’s more sincerity about borrowing. And people will be more careful about vendor relationships.” So even if the IBC remains a work in progress, it could be putting India on the road to corporate health.

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