Strengthening the IBC

SC decision to send Jaypee matter back to NCLT is welcome

One of the concerns about the Insolvency and Bankruptcy Code (IBC) has always been how well it will stand up to legal tests. The National Company Law Tribunal (NCLT), which is to preside over cases under the IBC, is after all a tribunal — and in the past the higher judiciary has not always looked kindly upon the tribunalisation of legal disputes. What worried many was that the speed and efficiency built into the design of the IBC would, when it faced the reality of the administration of justice in India, come a cropper. It is in this context that the Supreme Court’s decision on matters related to the bankruptcy of Jaypee group companies should be seen. Last week, the Court sent the insolvency proceedings against Jaypee Infratech back to the Allahabad bench of the NCLT. This should be read as the higher judiciary’s conditional support of the NCLT’s ability to move forward on insolvency cases. This significantly reduces the hope nurtured by certain promoters that they will be able to tie the IBC process up in knots through clever legal moves, opening up the possibility that they will be able to hang on to their assets.

About a year ago, Jaypee Infratech was hauled to the bankruptcy process by IDBI Bank, which accused the company of defaulting on a loan of ~5.26 billion. When bids were opened for the company, a combine of an asset reconstruction company and a realtor won the auction, albeit with a bid that was less than half what was hoped for as the liquidation value of the company’s assets. The Court has directed that another round of bidding take place, but also that Jaypee Infratech’s promoters and their parent firm Jaiprakash Associates Limited, or JAL, be barred from bidding. The 180-day clock under the IBC has been restarted, and the committee of creditors will be reconstituted to take into account the recent amendment to the IBC that placed apartment owners of such projects on a par with financial creditors. This process will also be closely watched, since there was some heartburn among banks at the prospect of also having to consider homeowners’ preferences. The court also heard and allowed an application from the Reserve Bank of India that banks begin proceedings under the IBC against the parent firm, Jaiprakash Associates Limited.

The Supreme Court bench, which was led by Chief Justice Dipak Misra and also included Justice A M Khanwilkar and Justice D Y Chandrachud, has shown wisdom in accepting that the insolvency process is correctly the domain of the NCLT and the IBC process more generally and not of the courts. If assets under dispute in the IBC are to retain some of their value, the process must be expedited and supervised by specialists. The efforts of defaulting promoters to try to regain control of their companies at bargain-basement prices must also be defeated if the bankruptcy process is to retain its integrity. The Supreme Court’s judgment goes some way to ensure the IBC functions as it was designed. It is good news that the bankruptcy process is being strengthened in the process of its use and application.