Opinion

The Bankruptcy Code is on test

Paran Balakrishnan | Updated on March 20, 2018 Published on March 20, 2018

Downward spiral Its time someone took care of the liabilities   -  suwichaw

Despite some flaws and the cases slowing it down, the new Insolvency Act is making India Inc wary about its debt pile

For months, Dalmia Bharat Cements and Ultratech Cement have been battling furiously for control of Binani Cements, which has run up debts of nearly ₹6,000 crore and is facing insolvency proceedings before the National Company Law Tribunal (NCLT). Then, on Monday, in an unexpected twist, Binani and Ultratech announced they’d struck a deal on the side that would take care of Binani’s debts and leave spare change. The two companies will present their deal as a fait accompli to the NCLT and hope for the green light. Dalmia Bharat isn’t happy, though, at the sudden turn of events and corporate lawyers predict the company could fight the case all the way to the Supreme Court.

Almost simultaneously, a similar drama has been played out at Uttam Galva Steels which owes the banks about ₹5,600 crore and is about to make its appearance before the NCLT. In a pre-emptive move, Uttam Galva offered to pay 51 per cent (₹2,884 crore) of its debts. The company pointed out its 18 creditor banks were unlikely to do better if the case landed up before the NCLT. The banks may just grab the offer because they’re unlikely to get more if the case comes before the NCLT. That might, however, be the signal for other debt-ridden corporations to bypass the company law tribunals and conclude their own side deals with creditors.

The action’s been fast and furious in the just under a year since the NCLT courts got into full swing. Each day is throwing up new legal issues and situations, many of which weren’t legislated for in the Insolvency Act. Also on Monday, Tata Steel found its bid for Bhushan Steel being blocked by a group of employees. The NCLT president referred the employees’ opposition back for a decision to the insolvency resolution professional (IRP) who’s handling Bhushan Steel.

A big change

If a deluge of cases can be considered a sign of success, then the government’s new company law tribunals must be judged a definite winner. More than 9,000 cases are before the 11 NCLT tribunals that have been set up around the country and the National Company Law Appellate Tribunal (NCLAT) and that includes more than 2,500 insolvency cases. There’s talk of setting up three more tribunals to handle the greater-than-expected volume of cases.

One person who spotted the rush early was Kamlesh Singhania, CEO of AV Resolution Professionals. The new Insolvency and Bankruptcy Act, which took force in 2016, provides for Insolvency Resolution Professionals (IRPs) who will take charge of a company when it’s taken to the bankruptcy court.

In February, Singhania started out as an IRP but quickly realised there would be much more work than he could handle alone. By May last year, he’d put together a team of 25 IRPs across India — they’re a mix of chartered accountants, cost accountants, MBAs and retired public sector executives. Right now, the company’s handling some 25 cases and it expects to be busy in the coming months. Says Singhania: “For the corporate world, it’s a big change. But the code is new and things will settle down.

The legal world, too, is quickly adjusting to the rush of work and stream of judgements. Induslaw, partner Lomesh Kiran Nidumuri says the firm has a dedicated team studying judgements emerging from the company law tribunals almost every day.

Draconian rules?

Still, the sheer number of cases has its downside. The Insolvency and Bankruptcy Code stipulates cases should be heard within 14 days. But in one case, JK Jute Mills company Vs M/s Surendra Trading Company, the tribunal laid down that the 14-day period is only directive and not mandatory. “The time period prescribed under the Code was held to be procedural in nature, a tool in the expeditious dispensation of justice and is directory,” says Robin David of Dua Associates.

After admission, the insolvency resolution process has to be completed in 180 days (extendable by 90 days). Adds Ashish Chhawchharia, partner, restructuring services, Grant Thornton Advisory: “The NCLT started off well but they are clogging up now. They’re taking much longer than they did earlier.”

India’s Insolvency Act has been modelled on similar codes in the UK and the US. But one big difference from the US is that when a company there files for bankruptcy under Chapter 11, the management stays in place. Here, the management is immediately replaced by the IRP, who has six months to sort out the company’s affairs. There are differing views on this. Say Nidumuri: “To throw the management out is a bit too draconian.”

However, others note that in India, top management is usually also the main shareholder and that’s one reason why it can’t be left in place. Says David: “There are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise. But on the other hand. this advantage could be a disadvantage if the stakeholders do not trust the existing management.”

The urgency for putting in place a new Insolvency Act was driven by the giant bad debt volume built up in recent years. The banks, particularly, needed swift recovery of at least some of the huge sums of money owed to them. “In India, we’re more concerned with the recovery of NPA, not with the running of units. The first priority is to save the banking system. It is realisable or written off,” said one bankruptcy expert.

There is impact

Inevitably, there are loopholes in the Insolvency Act and some lawyers complain of poor drafting too. For instance, the act has no provision for an amicable settlement once a case has been admitted. Also, the NCLAT has held that the provisions of the Limitation Act, which sets out the time-limits under which a complainant can approach the courts for redress, do not apply to proceedings under the Insolvency Code. There are also murmurs about the quality of the IRPs.

But the impact of the Insolvency Act is unquestionable. One lawyer points to a case where a company has a disputed debt to one of its suppliers. That company’s also hoping for a cash infusion from a foreign investor and it’s scared it might be taken to the NCLT. So it’s paid up the amount and will attempt to recover it later. Says Chhawchharia: “For the first time, promoters are actually scared.” And that could represent a radical and, in some cases, a long overdue change in the Indian corporate world.

Published on March 20, 2018

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