We wish all our subscribers a happy and prosperous new year. At Sarthak we had a very interesting 2018 and in no small measure was it thanks to the Insolvency and Bankruptcy Code.
Firstly, as in October 2018, 65 orders of resolution have been issued against corporate debtors by the NCLT with a net realisable amount of Rs 60,636 crore.
According to the RBI’s Report on Trend and Progress of Banking in India 2017-18, this number compares favourably with other recovery mechanisms such as Lok Adalats, Debt Recovery Tribunals and the SARFAESI Act.
Bankers say that the revolutionary law has changed the creditor-debtor relationship in significant ways.
Away from the public eye, in out-of-court settlements for instance, it has now introduced a new worst-case scenario for debtors.
Dinesh Kumar Khara, the Managing Director of the SBI, said that the high resolution percentage was a very positive sign for the new law.
In a recent address to fund houses and law firms in New York, the Union Finance Minister Arun Jaitley said that because of the IBC’s fair processes, India’s bankrupt companies offered a never-before opportunity for global investors.
In fact, shareholders at cash-strapped Indian groups under threat of losing control over their assets have welcomed financing from private lenders like Bain Capital and BlackRock even before they are forced into a rigorous bankruptcy process.
For who would bear the law’s delay
Non-adherence to the timelines set out under the law, however, seems to be a sore point.
While the IBC intended that cases would ordinarily be completed in 180 days, there is a very high probability of that not happening.
Corporate Affairs Secretary Injeti Srinivas identified it as a major concern.
“Minimising the time taken to resolve cases and the development of a conducive environment that discourages unnecessary delays assume importance,” the RBI said in its banking progress report.
Attachments of assets by various probe agencies for past investigations has been identified as an important cause for delays in liquidation.
Frivolous bids have been identified as another reason. Central Bank of India’s new CEO and managing director Pallav Mohapatra advocated amendments to the IBC to require bidders to show proof of money in their accounts or get a bank guarantee.
In fact, the government and the Insolvency and Bankruptcy Board of India are exploring the use of provisions such as Section 74 of the IBC which provides for penalties including a possible jail term against companies that have gone back on their plans to take over companies through the resolution process.
An important caveat to any analysis of the IBC’s performance so far however, is that it has not delivered a solution to the problem of stressed assets of banks.
One prong of the strategy adopted by the new RBI Governor to tackle this problem is the old policy of forbearance, that banks had often misused in the past.
Law’s unintended consequences
The law may have had some unintended outcomes too. A new study has argued that some flawed incentives in the IBC may have led to ‘value destruction’ in profitable businesses. For instance, any insolvency resolution plan under the law relies on the vote of financial creditors, who are likely to prefer selling the firm’s assets to cut their losses rather than evaluate the risk of letting the company run its operations.
You too, can be a certified valuer
One of the new professions envisaged by the IBC is that of the valuer. The IBBI has now published a syllabus for a course and examination to become a valuer for three asset classes – securities or financial assets, land and building, and plant and machinery.
From the docket
In Export-Import Bank of India v. Astonfield Solar (Gujarat), a pledge deed between the corporate debtor and the financial creditor provided that in case of default, the shareholders’ voting rights will be exercised by the security agent authorised by the pledgor. The NCLAT held that the right of a shareholder under Section 10 of the IBC to approve or disapprove a corporate insolvency resolution process overrode that provision.
The Allahabad bench of the NCLAT has held in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited in the matter of IDBI Bank Limited and Ors. v. Jaypee Infratech Limited, that the disclosure of the names of homebuyers in the list of creditors will not result in a violation of privacy. It observed that “the object of directing the IRP to publish the list of the creditors containing the names of the creditors along with the amount claimed by them, is to maintain transparency in respect of their claims and to determine their voting share”.
In Consolidated Engineering Company v. Golden Jubilee Hotels, the NCLAT held that the amount of total debt for the purpose of representation in the Committee of Creditors has to be calculated on the basis of claims collated and verified by the ‘resolution professional’. Amounts claimed by operational creditors cannot be the basis for it until they are verified.
The Supreme Court in Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Limited has held that winding up proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 will continue in the High Court and not the NCLT, until an application for transfer to the NCLT is filed by a party under Section 434(1)(c) of the Companies Act 2013.
In Lalit Mishra v. Sharon Bio Medicine, the promoters of the corporate debtor challenged the order approving the resolution plan on the grounds that no amount had been provided to them. Delivering another jolt to promoters who have provided personal guarantees, the NCLAT held that shareholders and promoters are not creditors and a resolution plan could not balance maximization of the value of the debtor’s assets with the creditors. “The promoters being ‘related parties’ of the corporate debtor, have no right of representation, participation or voting in a meeting of the committee of creditors,” the tribunal held.
That’s all we have for you this month. Thank you for starting the year by reading our updates on the IBC. We hope you will be reading these again next month and throughout a wonderful and creative 2019.