Sangram Patnaik
India’s weak insolvency regime is a significant inefficiency. The implementation of and compliance with the provisions of separate statutes was far better than the Insolvency and Bankruptcy Code (IBC), 2016. The IBC law, in effect, gives creditors greater powers than debtors. The aim is certainly noble; but have we travelled the distance successfully in the last three years of IBC, 2016? The answer probably is, “No”.
The liquidation process under IBC, 2016, is actually old wine in new bottle. IBC, 2016, had prescribed 180 days for disposal of a resolution process, which was then extended to 270 days. According to a Crisil report, by March 2019, 1,143 cases were pending under Corporate Insolvency Resolution Process (CIRP), of which 32 per cent cases were pending for more than 270 days. What, therefore, is the gain from making the insolvency resolution process time-bound?
The IBC amendment ordinance of 2018 proposes that only 66 per cent (as opposed to 75 per cent) of the financial creditors were required to approve a resolution plan, and with no substantial explanation. This poses two major problems. First, lower aggregate percentages for approving a resolution plan mean greater control in the hands of a few creditors, moving away from the objective of collective decision-making. Next, the IBC provides that any creditor who dissents with a resolution plan will be paid out before those who give their approval. This encourages voting creditors to pursue individual interests over the collective interest.
Further, section 29A was introduced in the IBC to prevent promoters from reacquiring their own companies at a discounted rate through CIRP. But why should existing promoters or related parties be prevented from gaining control of a corporate debtor?
There is no reason to not allow related parties that are not an NPA to bid for a better price. The broad sweep of Section 29A does not distinguish between unscrupulous promoters and those who can’t repay debt for other genuine reasons (a poor economy, for example). It violates Article 14 of the Constitution by treating “unequals as equals”.
The code also fails to give adequate say to the debtor. The corporate debtor does not have the right to put forward his or her case, nor is s/he given the right of representation at any stage of the CIRP.
Also, there is no verifiable or cogent evidence to demonstrate that IBC framework is a truly “collective process” under which operational creditors and employees have a say, let alone an equal seat at the table. There is no guarantee that banks will not negotiate lower haircuts with prospective applicants and the sacrifice by other creditors will not be increased to this end.
For instance, in the case of alloy wheels manufacturer Synergies Dooray Automotive Ltd, the first to be resolved under IBC, lenders took a 94 per cent haircut; they recovered only Rs54 crore against a claim of Rs972 crore. In the case of Alok Industries, which was into textiles manufacturing, Reliance Industries-JM Financial ARC combine purchased the company for just Rs5,000 crore after a humongous haircut of 83 per cent, while the company actually owed lenders Rs30,000 crore. Such haircuts are certainly unhealthy for the economy in the long run.
Last but not the least, the public sector bank UBI recently criticised IBC cases that have gone beyond the NCLT-prescribed time-frame. According to UBI, the net present value (NPV) of an asset could be a benchmark to ascertain actual value. UBI has referred 33 cases to NCLT Kolkata bench over the last 4-5 months, of which two have been admitted. Hence, if haircuts were allowed to be done under NCLT supervision and if financial institutions were given the liberty to provide haircuts under strict price discovery mechanism, the involvement of NCLT would be minimised in insolvency resolution process. The situation reminds one of what Mark Twain once said: “There is no such thing as a new idea. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope.”
The writer is an advocate, with practice at Supreme Court of India.