Legal complications have slowed the bankruptcy process

Not long ago, India Inc. and banks were pinning high hopes from the Insolvency and Bankruptcy Code 2016 (IBC) for a meaningful and timely recovery of stressed assets. Three years on, the initial exuberance has fizzled out and the disappointing progress on the IBC front, is costing banks dearly. High profile, large accounts such as the Essar Steel case, which has been undergoing resolution for over 800 days, underlie the festering and grave issue of excessive delays in the resolution process. For banks, the poor recovery in most cases---barring few accounts such as Electrosteel Steels, Bhushan Steel, Binani Cements etc.- is also proving a big setback, weighing on earnings and balance sheet.

To be fair, the IBC is indeed a giant leap forward from the earlier resolution mechanisms, when there was no organised process, and different stakeholders approached different forums to resolve the issue. With interest of all parties---lenders, borrowers and even operational creditors--- addressed under a unified law under the IBC, resolution can be quicker and more efficient. Also, earlier, bankers had little ability to threaten promoters. Debarring wilful defaulters from the IBC process has led to a sea-change in the credit behaviour of borrowers. Promoters, fearing of losing control of the company, don’t want to be dragged into IBC and bankers say that huge number of cases are being settled before being admitted under NCLT.

But the resolution of cases under the IBC process itself, has fallen short of tall expectations. The latest data reveals that of the 2542 cases admitted till date, only 156 have seen approval of resolution plan. Also, of the 1497 cases undergoing resolution, 535 have been in the system for over 270 days. The overall recovery rate so far is a dismal 37 per cent. If we exclude big cases such as Electrosteel Steels, Bhushan Steel, Binani Cements and Bhushan Power & Steel- the recovery rate falls further to 24 per cent.

So what is leading to the undue delays? Can the Code having evolved over the past three years, with several amendments, start delivering time-bound resolution?

Settling points of law

It was the judicial intervention and inefficacy of the Debt Recovery Tribunals (DRTs) that prevented lenders from expediting recoveries under the earlier regimes. Under IBC too, endless litigations and judicial interventions have led to excessive delays. To be fair, in many cases, the intent of the adjudicating authorities have been to settle various points of law and remove ambiguity in the Code.

For instance in the initial stages of implementation, the landmark ruling by NCLT in the case of Schweitzer Systemtek India, sought to thwart borrowers/promoters efforts to delay the recovery process. Equally important was to ensure that defaulters’ interests are safeguarded under the principles of natural justice (the famous ruling of the Calcutta high court in the matter of Sree Metaliks).

Then there were delays owing to the back and forth in bids, to ensure the oft-repeated intent of the Code---value maximisation for stakeholders. Bhushan Power & Steel was under IBC for 540-odd days until NCLAT upheld JSW Steel’s bid for Bhushan Power & Steel. The adjudicating authority and CoC had allowed multiple rounds of revision in bids to ensure maximisation of value.

There have been other deeper and more complex issues, leading to several amendments in the Code.

Key cases and issues

Section 29A was inserted in the Code in 2017, to keep out errant and wilful defaulters from buying back assets. But there have been a number of litigations questioning the eligibility of competing bids, stalling the resolution process.

The Essar Steel case has been a classic case where the long-drawn litigations to settle the matter over eligibility of bidders has dragged the insolvency process. The case was originally admitted by the NCLT on August 2, 2017.

However on March 23, 2018, the resolution professional found both ArcelorMittal and Numetal to be ineligible under Section 29A. It was only on Oct 4 2018, that the Supreme Court cleared the air and gave one more opportunity to both resolution applicants to pay off the NPAs of their related corporate debtors and resubmit their resolution plans.

One of the most contentious issues under IBC has been the manner of distribution of proceeds. In the Essar Steel case the NCLAT order--on the ground of fairness-- had prescribed a sharing arrangement that treated all classes of creditors — secured, unsecured financial creditors and operational creditors — identically.

But swift amendments made to the Code in August this year, quelled concerns of secured lenders. The amendment (Under Section 30 in subsection 2 (b)) has clarified the rights of dissenting financial creditors and operational creditors, ensuring a minimum amount both under resolution or liquidation in accordance with Section 53, in turn giving priority to secured creditors.

More delays?

There have been other key amendments made in August to address the various chinks in the IBC process. For instance, to ensure timelier resolution, in Section 12 under subsection 3, a provision now has been added that the resolution must be concluded within 330 days---importantly including any interim litigation period. But whether the current NCLT and NCLAT benches can tackle caseload and adhere to the timelines needs to be seen.

Also, under section 31 of the Code, the adjudicating authority can review the resolution plan. But more clarity is needed here. After all, cases cannot drag on endlessly to challenge the CoC decision.

Avoiding consistent delays and limiting judicial overreach will be imperative, if IBC has to serve its intended purpose.