IBC delays are hurting banks, economy

The slow pace of resolution under the IBC, even two years after its implementation, is a growing cause for concern. After all it was the inefficacy of the Debt Recovery Tribunals (DRTs) that had prevented lenders from expediting recoveries under the earlier regimes. One of the crucial aspects of the IBC was time-bound resolution. But for most of the big cases and many more, the extended 270-day deadline has lapsed and resolution process is still ongoing. Is the initial intent of the IBC getting diluted?

As is becoming evident, several ongoing litigations are proving to be a drag on the timelines set under IBC. But some of these litigations have helped settle various points of law.

In a very recent ruling, the Supreme Court put to rest the uncertainty over time-barred debts. Varying rulings by the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) had earlier created a lot of ambiguity over the matter. The Supreme Court has now ruled that the Limitation Act, is applicable to the proceedings under the IBC — essentially no action under IBC is possible in respect of time barred debts (if the default has occurred over three years prior to the date of filing of the application).

Another ruling by the NCLT last month, addressed the deadlock faced by home buyers — given the status of financial creditors — where meeting the mandated 66 per cent of voting share for critical decisions and 51 per cent for routine, was proving a challenge. The NCLT taking note of the unique problems in real estate companies ( Nikhil Mehta & Sons Vs. AMR Infrastructure Ltd. ) where financial creditors are scattered all over the country, ruled that in such cases where financial creditors comprise 100 per cent, a resolution may be passed with 50 per cent voting share.

Entangled in litigations

While there is no denying that steady modifications in the Code may be required, undue delays in litigations is impacting the efficacy of the IBC process. The numbers put out by the Insolvency and Bankruptcy Board of India (IBBI) paint a not-so-rosy picture on the progress of cases under IBC. As of June 2018, a total of 977 cases have been admitted for the corporate insolvency resolution process (CIRP), of which only 34 cases have seen successful resolution; 91 cases were closed on appeal/review, 136 ordered for liquidation. A chunk — 716 cases are under CIRP — of which nearly half have been under CIRP for over 180 days.

Since the IBC is still evolving and testing waters, there have been challenges at various stages — right from admission of the case, expression of interest from parties, to submission of plans and final approval by the NCLT.

To begin with, meeting the initial 14-day time frame set from filing of an application to admission, itself is proving a challenge. This brings us to the issue of a low threshold (₹1 lakh default) for operational creditors to trigger the Code. With half of the cases admitted so far initiated by the operational creditors, some re-think on the threshold limit to avoid cluttering of applications may be needed.

At the submission and approval stage of bids, there are other issues. Late bids under the IBC process, which have led to endless negotiations, is one such concern. The situation that arose in Binani Cement with UltraTech’s late bid, after the winning bid of the Dalmia Bharat group, is well-known.

To prevent such problems in future, IBC (Amendment) Ordinance, 2018, promulgated earlier this year, has sought to ensure non-entertainment of late bids and no negotiation with the late bidders.

The IBBI in its July amendment, laid down model timelines for the various stages in the resolution process. For instance, the invitation of expression of interest (EOI) must happen within 75 days of commencement of the insolvency process and submission of EOI within 90 days. But how strictly these timelines are adhered to, still needs to be seen.

The other key issue has been the insertion of Section 29A last year, to keep out errant and wilful defaulters from buying back assets. That has led to a number of litigations questioning the eligibility of competing bids. Take the case of Essar Steel. The case was admitted by the NCLT on August 2, 2017. Both ArcelorMittal and Numetal had submitted the resolution plans on February 12, 2018 — a little over six months after the NCLT admitted the case. However, on March 23, 2018, the resolution professional found both ArcelorMittal and Numetal to be ineligible under Section 29A. The case since then has been jostled around in various courts and appeals.

It was only recently on October 4 — over a year after the case was first admitted — that the Supreme Court cleared the air over the matter. It has given one more opportunity to both resolution applicants to pay off the NPAs of their related corporate debtors and resubmit their resolution plans to the CoC.

Such cases only highlight how interim litigations are a drag on the extended 270-day timeline under IBC.

Lack of resources

There is no denying the fact that IBC has been a game-changer. Earlier, bankers had little ability to threaten promoters. Debarring wilful defaulters from the IBC process has also led to a sea-change in the credit behaviour of borrowers. It also true that there will still be some promoters that try to game the system, and hence steady streamlining of the process is imperative that can lead to delay in the resolution process.

Even so, several steps can be taken to avoid excessive delays. One, in the recent Essar Steel ruling the Supreme Court has urged the authorities to follow the model timeline provided in the regulations. It is hence essential that the resolution period of 180/270 days is strictly adhered to, allowing only a month or so spillover.

Two, courts must avoid intervening routinely, unless key points of law need clarification.

Three, lack of sufficient number of resources in terms of IPs, benches, judicial members, technical members at NCLT — needs to be addressed. Currently, there are over 1,000 cases admitted by the NCLT under IBC and over 2,000 registered insolvency professionals (IPs). But how many of these individuals are equipped to manage affairs of the business, cash flows, labour disputes etc, is critical.

All in all, avoiding undue delays in the process, and limiting judicial overreach is imperative, if IBC is to serve its intended purpose.

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