I BC: Dif­fer­ent strokes for dif­fer­ent folks

Business Standard - - BUSINESS LAW - SHREEJA SEN

Should there be dif­fer­ent in­sol­vency res­o­lu­tion mech­a­nisms for dif­fer­ent sec­tors? This ques­tion has been asked on sev­eral fora, in­clud­ing the Supreme Court, in light of a Re­serve Bank of In­dia (RBI) cir­cu­lar is­sued Fe­bru­ary 12 last year.

The cir­cu­lar pro­vided a ‘har­monised and sim­pli­fied generic frame­work for the res­o­lu­tion of stressed as­sets’, in­clud­ing for large ac­counts where banks had debt ex­po­sures of more than ~2,000 crore. The im­ple­men­ta­tion of res­o­lu­tion plans in the case of large ac­counts was to be within 180 days of the date of the de­fault, fail­ing which in­sol­vency ap­pli­ca­tions could be filed.

It is in this back­drop that power pro­duc­ers ap­proached var­i­ous high courts for a stay on the RBI cir­cu­lar. In Allahabad High Court, they also chal­lenged the power of the fi­nan­cial reg­u­la­tor to di­rect banks to ad­dress stressed as­sets through in­sol­vency res­o­lu­tion pro­cesses. The Allahabad High Court de­clined to stay the cir­cu­lar on Au­gust 27, 2018, and soon the cases shifted to the Supreme Court for a com­bined hear­ing from stake­hold­ers across the coun­try, in­clud­ing the RBI.

The power sec­tor, ac­cord­ing to the firms, faces sev­eral struc­tural con­cerns like be­ing heav­ily reg­u­lated. In fact, ac­cord­ing to their state­ment be­fore the Allahabad High Court, the power sec­tor had about ~2,50,000 crore worth of non­per­form­ing as­sets (NPAs) of the gross ~11,00,000 crore NPAs of In­dian banks be­cause of “non-avail­abil­ity of coal, lack of PPAs (power pur­chase agree­ments), wrong­ful un­der-re­cov­ery, and dis­al­lowance of le­git­i­mate cost changes for le­git­i­mate rea­sons”. But, ex­perts are divided over the need for a sec­tor-spe­cific in­sol­vency res­o­lu­tion frame­work.

Scope­oftheIBC

“The ob­jec­tive of the IBC (In­sol­vency and Bank­ruptcy Code, 2016) is to amend and con­sol­i­date the ex­ist­ing laws re­gard­ing a timely res­o­lu­tion of cor­po­rate debtors to max­imise the value of their as­sets and bal­ance the in­ter­est of all stake­hold­ers. The leg­is­la­ture’s in­tent was to en­act one com­mon law to gov­ern all defaulting cor­po­rate per­sons, rather than mak­ing sec­tor-spe­cific ex­clu­sions… Given this, sec­tor-spe­cific frame­works for in­sol­vency pro­ceed­ings would de­feat the pur­pose of IBC and make it re­dun­dant,” said Shankh Sen­gupta, part­ner at Tri­le­gal, a law firm. “The ef­fort of the ju­di­ciary should be to har­monise the spe­cial laws/reg­u­la­tions for each sec­tor with the IBC, in­stead of cre­at­ing carve-outs,” he added.

L Viswanathan, part­ner at law firm Cyril Amarc­hand Man­gal­das, said: “There is no need for a sec­tor-spe­cific in­sol­vency frame­work other than for fi­nan­cial ser­vices in­dus­try. The IBC frame­work is ca­pa­ble of deal­ing with all sec­tors.” Fi­nan­cial ser­vices providers are ex­cluded from the IBC purview.

Spe­cial con­sid­er­a­tions

There were sev­eral ex­perts, how­ever, who said that the needs of spe­cific in­dus­tries had to be con­sid­ered. Vishrov Mukher­jee, part­ner at law firm J Sa­gar As­so­ciates, said a spe­cial dis­pen­sa­tion was needed for heav­ily reg­u­lated sec­tors. “The UK has a sep­a­rate in­sol­vency process for power util­i­ties. Hav­ing a sep­a­rate process for core/crit­i­cal sec­tors will fur­ther IBC norms of value max­imi­sa­tion and pro­tec­tion of the cor­po­rate debtor,” he said.

Ab­hirup Das­gupta, as­so­ciate part­ner at HSA Ad­vo­cates, pointed out there had been sec­tor-spe­cific in­sol­vency norms drawn, fo­cus­ing on fi­nan­cial ser­vices in­dus­tries, an ex­ist­ing ex­cep­tion. “In­sol­vency pro­ceed­ings can­not be ini­ti­ated against fi­nan­cial ser­vice providers, which are au­tho­rised or reg­is­tered by the RBI, Sebi (Se­cu­ri­ties and Ex­change Board of In­dia) or the IRDA (In­sur­ance Reg­u­la­tory and De­vel­op­ment Author­ity). These in­clude banks, fi­nan­cial In­sti­tu­tions, NBFCs (non-bank­ing fi­nan­cial com­pa­nies) and in­sur­ance com­pa­nies. This is a sec­tor­spe­cific frame­work. Also, in the lat­est amend­ment, MSMEs (mi­cro, small & medium en­ter­prises) were left out from the clutches of Sec­tion 29A(c). There­fore, a sec­tor-spe­cific frame­work may not be against the IBC norms them­selves, but will be very dif­fi­cult to con­cep­tu­alise,” he said.

Clar­ity from the courts

The RBI cir­cu­lar of Fe­bru­ary 12, 2018, will com­plete a year this week. Lit­i­ga­tion on it has led to in­sol­vency pro­cesses be­ing stalled for sev­eral months. Does this im­pact the ef­fi­cacy of the in­sol­vency process?

Ex­perts said clar­ity from the courts was re­quired for bet­ter use of the IBC. “New leg­is­la­tion, in their in­fancy, of­ten face in­ten­sive lit­i­ga­tion. Such lit­i­ga­tion helps the evo­lu­tion of the law by clar­i­fy­ing var­i­ous as­pects and is­sues un­der it. Thus, though we cur­rently see a mul­ti­tude of cases on var­i­ous is­sues con­cern­ing the IBC and these cases tend to af­fect the ex­pe­dited time­line un­der the IBC, this is likely to re­duce over time as the po­si­tion of law be­comes more con­cre­tised,” Sen­gupta said.

Echo­ing Sen­gupta’s views, Mukher­jee said, “The ad­ju­di­ca­tory process is crit­i­cal for en­sur­ing that rights of all stake­hold­ers are pro­tected.”

IL­LUS­TRA­TION: BINAY SINHA

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