Overview

The issue of insolvency and bankruptcy is as old as the human civilization. Over the years, while some businesses have flourished others have vanished for myriad of reasons. It may be on account of market forces of demand and supply, comparative cost situations, quality issues, integrity issues of the promoters, international trade exposures (like falling import prices, currency rate fluctuations, stock market fluctuations, regulatory changes / exposures, technological revolution and the failure to keep pace with the same) or competency issues of the entrepreneur involved etc. However, it is safe to say that nobody enters into a business to run losses and to wipe out one’s wealth painstakingly built over a long period of time. Thus, in this article we have tried to address the key pain points being faced by various stakeholders while dealing with challenges existing in the present legal ecosystem in India.

Before the introduction of the Insolvency and Bankruptcy Code (IBC), 2016, individual insolvency was governed by the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Apart from this as regards the corporate insolvency is concerned provisions relating to winding up of companies unable to pay their lawful debts found reference in the Companies Act, 1956 (later Companies Act, 2013). Further, Sick Industrial Companies Act of 1985 (SICA) was enacted to detect unviable sick companies that could pose systematic financial risk, which was administered by the Bureau of Industrial Finance & Reconstruction (BIFR).

In this background IBC was introduced in the year 2016 to consolidate different laws relating to insolvency and bankruptcy then prevailing in India. Primarily, IBC was introduced with the objective to speed-up the long drawn insolvency process under the then prevailing laws. IBC for the companies was conceptualised to accomplish the Corporate Insolvency Resolution Process (CIRP) within a period of 180 days with an extension of 90 days. Recently the Government has revised this timeline to 330 days[1].  For start-ups and small companies, the process was to be completed within 90 days with an extension of 45 days. However, we are yet to witness the theory in practice. It is relevant to note, that due to outbreak of Coronavirus, a few days back, the Government of India through a gazetted notification dated March 24, 2020, increased the threshold limit to initiate proceedings under IBC from Rs.1 Lakh to Rs.1 Crore to safeguard the interest of smaller companies.[2]

Another objective of the IBC was to predominantly tackle the ‘bad loan’ problem being faced by the banking system (commonly referred to as NPA[3] problem) to speed up the resolution / liquidation process under an institutional mechanism. While the law has in some instances revived and provided relief to the bankers, it has also adversely affected many businesses which failed to pay the debt within the timeframe set by the bankers. Some of the reasons for this failure includes embargo on release of sanctioned credit line, businessmen being declared as RBI defaulters etc.

However, as per the grapevine, some of the insolvencies / bankruptcies have been dexterously engineered by unscrupulous promoters to take advantage of the system and to win doles from the financial institutions, banks, utility companies, tax authorities etc. It is suggested, that such act (s)/ omission (s) have occurred under the garb of Resolution Plans which are orchestrated by such promoters through their friends / contacts within India / overseas. In all this, the erosion of capital is ultimately booked against the public at large, who is made to suffer for all such misdoings of certain unscrupulous promoters. Thus, a balance of interests is essential for making the resolution plans successful.

Primarily, IBC was brought in to maximize the value of assets and strike a balance between liquidation and reorganization.[4] However, the lack of professionalism and practical wisdom within the emerging IBC domain (among all concerned) coupled with lack of efficient and predictable resolution plans has raised concerns amongst the stakeholders. Initially seen as a beacon of hope, many critics have now come heavily on the said law due to its adverse impact on the ongoing businesses. Some of the issues pointed out by the critics are as follows:

1. Incentive Problem – Since IBC provides no distinction between the economically[5] and financially distressed[6] companies, the bankers have taken the bull by its horn by either going for liquidation or selling of the company or separately selling its assets to recover their claims. In this process the companies have largely suffered due to no incentive being present for the financial creditors to revive the companies. This has led to adverse implications on a number of stakeholders involved with the affairs of the company including its work force. It is interesting to note that, by and large neither the financial creditors (i.e. the Committee of Creditors) nor the Resolution Professionals have either expertise or inclination to revise the companies. Each party looks at the subject company as a milking cow. The way the bench strength of the Insolvency Professionals is being created and the qualification criterion itself is faulty to the core. The Resolution Professional is required to run the company as its Managing Director / Chief Executive. Therefore, the whole experience criterion should have been fixed keeping this in mind. A chartered accountant, lawyer, company secretary, cost accountant and any other such professional cannot be expected to run a company as a going concern till the resolution happens (even in some cases where the financial creditors show such inclination towards resolution). Running an enterprise is an entirely different ball game and the people concerned including the IBBI have failed to appreciate this aspect. What is happening is that the enterprises are being stifled by unprofessional handling during the CIRP process itself. Thus, there is a need to have business managers at the top most level to run the company as a going concern, even in the interregnum, as against compliance professionals, unless they have past experience and exposure to running businesses in their careers.

1. Delay in execution of resolution plans – The IBC mechanism has been extensively criticized for delays in drawing out capital/money stuck in unviable projects[7]. This has been the case due to vested interests creating and/or protracting the litigations. Essar Steel case[8] is a prime example of this havoc. The IBC law is an evolving law and India especially in its corporate sector is extremely litigious. Every round of litigation leads to erosion of value of the company involved and the threat to its very being as a going concern. At this juncture, it must be noted that the lack of judicial infrastructure i.e. members, clerks, paralegals and stenographers and procedural inefficiencies has further mounted pressure on the Judiciary in dispensing administration of justice under this law which was introduced with so much expectation and fan-fare by the present Government. Thus, the special courts under the IBC have to a certain extent failed to prevent ‘value destruction’ of the businesses due to surmounting pendency of cases. Most of the times they have either been involved in procedural rigmaroles created by the counter parties or have lost track of the resolution process itself.

1. Home-buyers status under IBC – Earlier, the IBC did not recognize the persons who made advance payment towards completion of real estate projects as either operational or financial creditors, this caused delay in administration of justice. However, after the June 2018 ordinance[9] it was made clear that any money raised from home allotees for real estate project (s) was to be considered as financial debt. Despite the due representation being given to the home allotees in the Committee of Creditors (‘COC’), the ambiguity around definition of ‘default’ vis-à-vis home buyer has raised many eyebrows.

1. Faulty Design of Law – In certain circumstances, there is a single bidder and the lender is unable to approve the resolution plans. This happens primarily due to bid value being lower than even the liquidation value. Further, the flexible timeline to execute the resolution plans compels the lender to liquidate the corporate debtor since the operational costs keep rising due to lack of consensus amongst stakeholders and protracted litigation. Thus, there is a need for conclusive decision making amidst the contingent liabilities i.e. statutory/ government dues, pending litigations (tax, labor and commercial disputes) etc. All this eventually kills a going concern.         

In other cases, since there is no bar on number of bids being made ‘essence of time’ is usually overlooked as the resolution professionals get stuck in lenders revisiting the bids for their own commercial gains. This uncertainty over unattractive resolution plans has affected many sectors like infrastructure, power etc.

On the other side of the spectrum is the mafia like stranglehold held by some of the erstwhile promoters of companies under CIRP, who leave no stone unturned to derail the process and eventually create such circumstances, which lead to the company falling to a planted party at a song, eventually leading to bleeding of all the stakeholders involved including the employees, banks, financial institutions, operational creditors, utility providers, and last but not least the State, who all suffer due to the staged stifling of the process.

Conclusion

Despite the criticisms and challenges faced by the IBC, it is safe to say that the law has to a large extent bettered the Non-performing asset (‘NPA’) problem of the banking system but at what cost. There is still a need to have a robust time bound process and efficient resolution plans to maximize the value of recovery of the stressed assets. Thus, based on secondary data, it can be said that as of December 31, 2018, 30% of ongoing cases of Corporate Insolvency Resolution Process (‘CIRP’) crossed ‘270 days’ threshold and 20% crossed 180 day deadline.[10] A similar trend was observed till September 30, 2019 where out of 1,497 ongoing CIRPs, 535 cases were found to have crossed the 270 day threshold[11]. This is despite the revised timeframe of 330 days. In light of the above said and growing pendency of cases, it is suggested that new initiatives like ‘Samadhan’ and ‘Sashakt’ which aim to encourage pre – NCLT resolution need to be promoted to reduce delay in execution of resolution plans. Moreover, these initiatives need to be supported by trained insolvency professionals (who are not merely accounting or legal professionals without experience of running businesses, but those having adequate experience of running business as Chief Executives) who design such resolution plans which are not only practical and executable, which can also assist in reducing the inordinate delays caused due to lack of consensus amongst the stakeholders.

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[1] https://www.business-standard.com/article/companies/ibc-resolutions-exceed-new-time-limit-of-330 days-prescribed-by-govt-119102800661_1.html; Inserted by Insolvency & Bankruptcy Code (Amendment) Act, 2019 (w.e.f. 16-8-2019)

[2]  https://www.livemint.com/news/india/to-help-small-companies-threshold-limit-for-defaults-under-ibc-raised-to-rs-1-cr-11585043359072.html

[3] The Reserve Bank of India in its master circular (DBOD No. BP.BC/ 20 /21.04.048 /2001-2002) defines Non Performing Asset as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time. The limit for the banking institutions for such NPA is dependent on period of default and category of NPA. Look at https://www.business-standard.com/article/finance/rbi-allows-banks-30-day-window-after-default-to-draw-resolution-plan-119060701489_1.html

[4] https://www.pwc.in/assets/pdfs/publications/2018/decoding-the-code-survey-on-twenty-one-months-of-ibc-in-india.pdf

[5] Economically distressed firms are those whose expected profits are less than value of assets of  company

[6] These companies are not economically distressed but are unable to service its debts

[7] https://economictimes.indiatimes.com/industry/banking/finance/banking/changes-challenges-and-interpretation-of-bankruptcy-law/articleshow/69017429.cms?from=mdr

[8] https://www.thehindubusinessline.com/opinion/editorial/long-and-winding-road/article26536344.ece

[9]  https://ibbi.gov.in/Agenda_02_26062018.pdf

[10] https://www.vccircle.com/stressed-assets-investment-scenario-in-india/

[11] https://www.business-standard.com/article/companies/ibc-resolutions-exceed-new-time-limit-of-330-days-prescribed-by-govt-119102800661_1.html