The stigma of financial failure has been around throughout history and was particularly severe in ancient times when it was accompanied by severe punishments for the unfortunate debtor. The Greeks allowed the amputation of the debtor’s limbs and his sale into slavery.”
—Catherine Bridge, Counsel, European Bank for Reconstruction and Development
The Insolvency and Bankruptcy Code, 2016 (the Code), shall be two years old next month with mixed experience, despite government’s move at an unprecedented pace to operationalise the law. Being a time-bound process to resolve insolvency cases, the Code has received praise from the World Bank and the International Monetary Fund and has materially contributed to India’s 30-rank jump in the 2018 ‘Ease of Doing Business’ rankings.
Seeds for early resolution of stress and distress in the banking system was laid in 2014 when the Reserve Bank of India (RBI) introduced Joint Lenders Forum to deal with elevated stress loans by prescribing a time-bound 45-day plan. The RBI’s well-intended step faced early hurdle with conflicting opinion amongst lenders due to differing security positions and their inability to oversee the restructuring process.
To overcome the limitations, besides dealing with archaic laws to implement recovery against delinquent loan defaulters/restructuring of debt, the code has divested the erstwhile management of its powers. It has instead vested the powers with a professional agency under the supervision of creditors/lenders with an objective to continue with the business as a going concern until a credible resolution plan is drawn up. The rationale to bring the Code under a single unified umbrella which would deal with the debtors, creditors and promoters was intended to speed up the insolvency process.
Though the focus of the Code in its early stages is expeditious operationalisation, effective implementation by way of the revival of business, albeit under new management is yet to come off the age. International experience suggests that the US approach of ‘fresh start’ in bankruptcy has proved extremely influential in the subsequent development of ‘business rescue’ legislation in Europe.
For long, India’s government-controlled banking sector has supported loan default by failing enterprises with enormous haircuts and new loan extensions. Whereas in a few cases, such defaults were attributable to the genuine failure of the business model, perhaps most fall in the category of promoters fleecing banks under the garb of lucrative cash flows built with window-dressed business plans. A few promoters also resorted to illegitimate means, including over-invoicing and other forms of laundering mechanisms, crippling the Indian banking system.
Given the quantum’s of insolvency cases before the adjudicating authorities (National Company Law Tribunal and National Company Law Appellate Tribunal) as well as the Supreme Court, India’s challenge will be to deal with errant promoters, unwilling to accept a separate identity of creditors i.e. then Committee of Creditors with the resolution professional acting as a trustee and new management, in the insolvency process. For promoters to argue that the Code offers another opportunity for debt recovery is a fallacy and goes against the grain & preamble of the law. Similarly, it is not a remedy for creditors to pursue their individual rights; instead, the Code is a symbiotic mechanism for all stakeholders collectively. This is the very purpose for the Government to rush through an ordinance in late 2017 prohibiting loan defaulters, either acting on their own or in concert with others, including in some cases with discontent bidders, to be a part of the resolution process. Therefore, where any promoter pleads for an ‘out of court’ settlement before the adjudicating authority just on the basis that it is ready to pay off the debts without a haircut, the very purpose of this Code is defeated. If adjudicating authorities encourage such settlement after the admission of insolvency application and the resolution process reaching an advanced stage, the objective of the Code stands jettisoned.
The past few months have witnessed several disputes, including challenging the Constitutional validity of various provisions of the statute in the Supreme Court. In its yeoman service, the Supreme Court has appreciated expeditious process of the Code and has rendered several judgments, including dismissing frivolous petitions. In addition, it has selectively invoked Article 142 of the Constitution of India ‘in the interest of equity and justice’, insofar as various stakeholder interests are concerned. As it happened last Friday, the Supreme Court was not interested in invoking its inherent jurisdiction (under Article 142) since it seemed convinced with the argument of the opposing party that a disqualified promoter was acting in ‘unholy alliance’ with a failed bidder.
In summary, though India’s Code has been praised by international fora, its success will lie in ‘time-bound’ implementation process. The 270-day resolution plan under the Code to bring the business back on its feet is predicated on the principle of going concern, avoiding layoffs and satisfying debts, which will address twin balance sheet challenges. There are several learnings for the lawmakers from experience thus far.
The writer is Managing Partner, BMR Legal. The views are personal.