Bank­ruptcy’s Birth Pangs

Frivolous cases un­der bank­ruptcy code have raised fears that yet an­other well mean­ing law could be abused by un­scrupu­lous el­e­ments. But the chances of de­spair turn­ing into hope are high, writes MINTSTREETMasala

The Economic Times - - Money & Banking -

When a lit­tle-known com­pany Shiv Sneha As­so­ciates ad­ver­tised that it would file bank­ruptcy pro­ceed­ings against the NYSE-listed MakeMyTrip, val­ued at $3 bil­lion, to re­cover its dues, it showed how a new law can be­come a tool to in­tim­i­date busi­nesses.

A num­ber of frivolous pe­ti­tions at the Na­tional Com­pany Law Tri­bunal (NCLT), which ad­min­is­ters the In­sol­vency and Bank­ruptcy Code (IBC), is a cause for anx­i­ety among bankers and pro­mot­ers over whether the tool, sup­posed to be a lu­bri­cant for the econ­omy, is be­com­ing an ob­sta­cle.

As ju­di­cial of­fi­cers at NCLTs and in­sol­vency pro­fes­sion­als (IPs) grap­ple to un­der­stand the code, where res­o­lu­tion has to be time­bound, in­dus­tri­al­ists and bankers, who knew the ju­di­ciary as a stalling mech­a­nism, are be­gin­ning to see a dif­fer­ent world.

It is not just the shal­low threat to MakeMyTrip that has raised fears of abuse of the IBC, but strange things like a pro­moter threat­en­ing to sue an IP for loss of a con­tract, an IP shut­ting off funds to sup­pli­ers, phys­i­cal threats to IP from pro­mot­ers, and res­o­lu­tion pro­fes­sion­als over­reach­ing their man­date by in­ter­fer­ing in sub­sidiary com­pa­nies have cre­ated a sense of de­spair.

“It is not that just be­cause this law has come, ev­ery com­pany is go­ing to get liq­ui­dated when a cred­i­tor sends a no­tice,” says Mona Bhide, man­ag­ing part­ner at Dave and Girish and Co Ad­vo­cates. “There is a lot of hue and cry. When­ever there is a new law, it’s al­ways crit­i­cised and there are go­ing to be teething prob­lems.”


The gov­ern­ment en­acted the IBC in May 2016 to en­sure that debt res­o­lu­tion hap­pens in a time-bound man­ner. The Debt Re­cov­ery Tri­bunals and civil courts, which han­dled these cases prior to IBC, were slow and of­ten took years to set­tle cases erod­ing as­set val­ues.

A World Bank study shows that in­sol­vency cases on an av­er­age took 4.3 years to get re­solved in In­dia. And lenders’ re­cov­ery rate was 26 cents to the dol­lar.

The IBC stip­u­lates fi­nal­i­sa­tion of res­o­lu­tion plan within 180 days of fil­ing for bank­ruptcy in an NCLT, and one-time ex­ten­sion for a max­i­mum 90 days. If no agree­ment is reached, the com­pany goes into liq­ui­da­tion. If as­sets are not sold within two years of liq­ui­da­tion, they are trans­ferred to lenders by the in­sol­vency pro­fes­sional.


Spec­i­fied time limit for res­o­lu­tion un­der the IBC has breathed a new life into many cred­i­tors – be it fi­nan­cial ones like banks, or op­er­a­tional like sup­pli­ers, who also can use the law. While this is a wel­come move with banks and oth­ers shar­ing the bur­den of bank­ruptcy, un­like in the past where lenders bore the brunt, the law is also be­ing mis­used to set­tle mi­nor dis­putes. Re­cently, em­ploy­ees of Aruna Ho­tels ini­ti­ated bank­ruptcy pro­ceed­ings against the com­pany for fail­ing to set­tle the dues owed to them. Although, many such claims are be­ing ad­dressed un­der IBC, they are ranked lower when the res­o­lu­tion hap­pens. “These kinds of things will hap­pen be­cause it is part of any sys­tem,” says Shikha Sharma, chief ex­ec­u­tive at Axis Bank. “They may file for bank­ruptcy, but ul­ti­mately you still have to go through the process of 70% of cred­i­tors hav­ing to sit down and agree to the plan. Only then does it go through. One per­son sin­gle-hand­edly can­not do much.”


Yet an­other draw­back is that there is hardly a dis­tinc­tion be­tween the pro­moter share­holder of a com­pany and the top man­age­ment. With the pro­moter be­ing hands on, it be­comes dif­fi­cult to take a com­pany into bank­ruptcy be­cause he can put a spoke in res­o­lu­tion. “All of us know that 90% of In­dian busi­nesses are fam­i­lyrun and the nu­ances of the busi­ness are known to the fam­ily mem­bers,” says Ra­jesh Narain Gupta, man­ag­ing part­ner at SNG& Part­ners, a law firm. In a case in­volv­ing RS Poly­chem ver­sus Ekadan­tam In­fra, the New Delhi bench of the NCLT or­dered that in­sol­vency pro­fes­sional Rakesh Vad­hwa be given po­lice pro­tec­tion since the pro­moter was not co­op­er­at­ing and there was a pos­si­ble threat to his life.

Po­lice pro­tec­tion may not re­main an ex­cep­tion but could be­come a norm if pro­mot­ers in­dulge in de­lay­ing tac­tics. Since the law is strict on time lim­its, any de­lay would lead to de­gen­er­a­tion of as­sets and loss.

“There will be re­sis­tance on the part of pro­mot­ers about los­ing their busi­ness, which is nat­u­ral,” says Su­nil Sri­vas­tava, deputy man­ag­ing di­rec­tor at State Bank of In­dia. “It’s in every­body’s in­ter­est to re­solve it as soon as pos­si­ble. Now, if some­one is not in­ter­ested in do­ing it, then the force of the law comes into play.”


In­dian ju­di­ciary is feared as much for the de­lays in re­solv­ing dis­putes as it is known for its fair­ness.

The nascent bank­ruptcy law it­self has been thrown into a tail­spin with the Supreme Court re­cently rul­ing that two par­ties can go for set­tle­ment even af­ter ini­ti­at­ing bank­ruptcy pro­ceed­ings in the NCLT. The mo­ment an IP is ap­pointed, he in­vites all cred­i­tors to work out a res­o­lu­tion plan. If the two par­ties set­tle, then the en­tire process of bank­ruptcy col­lapses.

But other rul­ings have been en­cour­ag­ing. The Gu­jarat High Court dis­missed the pe­ti­tion of Es­sar Steel chal­leng­ing the Re­serve Bank of In­dia or­der in tak­ing up 12 pri­or­ity cases for bank­ruptcy and the NCLTs have been tough go­ing by the rule book.

Though there are pe­ti­tions seek­ing wind­ing up of a com­pany for trade dis­putes, there are prece­dents that bank­ruptcy can­not be ini­ti­ated in such is­sues. The fear that bank­ruptcy may be abused by busi­ness ri­vals may be overblown.

“Now there is a dis­tinc­tion be­tween op­er­a­tional cred­i­tors and fi­nan­cial cred­i­tors, which was never there,” says Bhide. “Ear­lier even a chai­wala (tea-seller) could send you a no­tice. The point is now the seg­re­ga­tion has been made with a view to avoid too many ir­rel­e­vant no­tices be­ing is­sued. When­ever there was a re­cov­ery no­tice, it would be ‘we will sue with a wind­ing-up pe­ti­tion’.’’


Strict bank­ruptcy laws may ap­pear to be a mon­ster for some, as the coun­try is wit­ness­ing which it never had—a black and white process—where lenders can re­cover their money when busi­nesses fail.

Just like the in­tro­duc­tion of de­riv­a­tives and open­ing up of the in­dus­try for global com­pe­ti­tion, bank­ruptcy is an­other step in mak­ing In­dian busi­ness and as­so­ci­ated ju­di­ciary in­ter­na­tional.

The role of banks, as we know, would come down. Once the pro­cesses are es­tab­lished and in­dus­try re­alises that they either pay up or lose the as­sets, dis­tressed as­set buy­ers like JC Flow­ers would troop in.

“A lot of things have to evolve, which is not dif­fi­cult,” says Srid­har Ra­machan­dran, founder Dhar­sha Ad­vi­sors, a spe­cial­ist in deal­ing with dis­tressed as­sets. “Five years down the line, in­stead of deal­ing with bankers, the sys­tem would be deal­ing with hedge funds who would own these com­pa­nies. Bank­ruptcy and re­vival would be­come a smooth process.”


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