Two years of insolvency law: The hits & misses

Two years after enactment of the Insolvency and Bankruptcy Code

(IBC), it has become clear that creditors, particularly financial ones, cannot focus only on recovery of value for themselves. In these two years, 800 companies have been undergoing the insolvency process.

At a recent event, Insolvency and Bankruptcy Board of India (IBBI) chief M S Sahoo said creditors need to show more initiative. “The objective of a CoC (committee of creditors) is to generate competitive resolution plans and then approve that which maximises the value for everybody — in contrast to recovery which maximises the value only for one set of people. There is a lot of facilitation in the law for making it happen. The objective is to revive if viable or close it (the asset) if not viable. You can't directly go to liquidation,” he said.

Resolution professionals (RPs) agree but bankers find it too idealistic, for lenders to be told at such a pressing juncture to look at broader issues. Issues RPs feel bankers do not come prepared for creditor meetings. On of the former, handling one of the first list of 12 big cases referred by the Reserve Bank of India, now coming close to the end of its moratorium period, says: “There were 14 banks in the case. They treated the meetings like their Joint Lenders Forum (JLF), which is why many meetings went inconclusive."

Another RP says banks often choose not to decide. He adds that at least for public sector banks, whose parent is the government, there should be a rule that one person should represent all these entities, to stop the multiplicity of divergent views, leading to no resolution.

“It would help PSBs to maximise value if they were able to take bolder decisions in such cases without constraints like CVC (Central Vigilance Commission) guidelines. I do not believe the CVC guidelines should be applicable in IBC cases,” adds Nikhil Shah, an insolvency professional with Alvarez and Marsal.

Senior PSB executives, however, say asking the CoC to look at broader concerns (the interest of all stakeholders) at a time of grappling with sickness and recoveries

is not practical.

A senior advisor to the Indian Banks’ Association says lenders are driven by the immediate objective of recovering as much as possible of the money at stake, within the parameters laid down by the bankers’ grouping.

Another factor is fear of legal action at a later date for decisions taken in IBC cases. An example is the legal troubles for bank executives in cases such as Kingfisher Airlines, says the head of recovery management at a large PSB.

The way it went

Assented by the President in May 2016, the Act took six more months to become active, by December. Rules were framed, professional standards were made, professionals enrolled. Thus began the regime outside the erstwhile Board for Industrial and Financial Reconstruction (BIFR). The code gained momentum when RBI identified 12 bigsize bad loans for banks to take to the insolvency route.

Of these, Bhushan Steel has just got resolved —Tata Steel bought it for ~325 billion. The fact that the lenders took a 60 per cent haircut (writeoff) shows creditors do also look for something beyond recovering all their money. However, the decision has irked Larsen & Toubro, which has asked NCLT, the appellate body, to treat it as a financial creditor, not an operational creditor.

The Code has succeeded in deterring corporates from defaulting, says Anuj Jain, who

handled the Jaypee Infratech insolvency case.

Says Shah: “The preliminary results of the new insolvency regime seem to indicate a significant improvement for financial creditors. The new regime has enabled an average 40-50 per cent recovery rate for them in large cases, in a time-bound manner. The earlier recovery rates were about 25 per cent.”

Ahead

He says there has been a mindset shift for corporates as well – they are beginning to take steps much earlier to avoid going into insolvency. “This will help prevent the creation of more stressed assets,” he adds.

Experts add that in future cases, resolution will yield better results, as cases being filed might not have a backlog as in the ones so far, where debt has accumulated over decades. Many of these cases have been through JLFs and the BIFR. After no resolution, they have been referred to the National Company Law Tribunal (NCLT) under the IBC regime.

There are 11 benches of NCLT handling insolvency cases, with one appellate tribunal. In a newsletter of the ministry of corporate affairs, the secretary says pressure is mounting on these 11 tribunals and these need to be strengthened.

In these two years, the bankruptcy board has notified rules for corporate insolvency; those for individuals’ bankruptcy are stiil being prepared.