I BC: Different strokes for different folks
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.
“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.
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.”