Industry wants revamp of IBC

For all its promise of redeeming stressed companies, the Insolvency and Bankruptcy Code (IBC) is falling out of favour with the industry, which has pointed out several roadblocks to the government. These range from time-consuming litigation to the threat of coercive action post the resolution process. In a series of representations to the corporate affairs ministry, leading consultancies and law firms have suggested a revamp of the IBC post the suspension of initiation of corporate insolvency resolution process.

For all its promise of redeeming stressed companies, the Insolvency and Bankruptcy Code (IBC) is falling out of favour with the industry, which has pointed out several roadblocks to the government. These range from time-consuming litigation to the threat of coercive action post the resolution process.

In a series of representations to the corporate affairs ministry, leading consultancies and law firms have suggested a revamp of the IBC post the suspension of initiation of corporate insolvency resolution process.

Dogging delays

Investors feel IBC’S promised twin benefits — a time-bound process and assurance of a clean slate — don’t necessarily come through. Even after the resolution is approved within the 270-day limit, cases have kept lingering in the National Company Law Tribunal (NCLT) for a couple of years. In practice, the decision on the admission of an application, too, does not happen within the prescribed 14-day limit.

There is also a sense that NCLT often goes beyond its remit by raising questions on the commercial wisdom of the Committee of Creditors (COC). For instance, a dissenting creditor can appeal in the NCLT against the decision taken by the COC and then the matter is stuck for another six months at least.

The pandemic, too, has left NCLT working at much less capacity. “There is a need to educate the NCLTS to make them aware of their duties. The ministry should push for training of NCLT members, which it had started in 2017,” an IBC expert said.

One suggestion to discourage frivolous litigations, such as those filed by disgruntled promoters or operation creditors, is to increase the fee for filing an application in the NCLT.

“Given the (tardy) speed of resolution and with most cases going towards liquidation or operational creditors getting nothing, financial lenders taking a haircut, one can say that there will be a decrease in creditors opting for this (IBC) option,” Daizy Chawla, senior partner, Singh & Associates said.

Making IBC attractive again

While the four-year-old law has undergone a slew of amendments, experts feel it needs to change its stance to allow a stressed company to resolve parts that can continue to operate and liquidate those where no value can be recovered. “Revival of even part of the company can be beneficial to many stakeholders. Some companies go in liquidation as RPS (resolution professionals) are not able to resolve the entire company with multiple business segments or assets,” Rajiv Chandak, partner, Deloitte India, said.

The move could help save the jobs that would otherwise be lost in the event of a liquidation. The current provisions do not permit this and a company has to either find a resolution plan or be liquidated in entirety.

Another suggestion is to increase the period of moratorium, which gets over right after a plan is approved by the NCLT.

The road from the plan’s approval to implementation is often long and rough, with the new acquirer losing all immunity given by IBC. There are instances where the operational creditors start asking for their older claims after the resolution plan is approved. “No coercive action can be taken against the company while it is under IBC... But for successful implementation, this period needs to be extended even after the approval of the plan,” a senior industry executive said.

In cases where the insolvency is triggered by the financial creditors, analysts feel the moratorium period should start right at the time of filing of application instead of admission, similar to NBFC insolvency. “The move could help in giving lenders the control of the company and maintain it as a going concern,” Chandak said.

The big question remains: How to make IBC more effective across jurisdictions?

While the IBC provides that a plan once approved has to be binding on the Centre, state and local authorities, several government bodies have questioned the validity of resolution plans that reduced their claims. In spite of this amendment to the code, the Supreme Court in the Sevenhills judgment last year held that IBC cannot override the right of a local authority to control its properties that have been provided on lease to the insolvent company.

That the plan does not seem to be binding on all government authorities is evident in the Aircel case where the Department of Telecom has appealed against the NCLT order allowing control of the defunct telco to UV Asset Reconstruction Company, since it involves the transfer of spectrum, which the government said it has yet to approve.

The IBC also guarantees, under Section 32A, that once the resolution plan is approved, the successful applicant cannot be burdened with the wrongdoings of the corporate debtor. However, there has been a tussle between the ministry and the Enforcement Directorate in the probe against JSW Steel, which placed the winning bid for Bhushan Power & Steel.

“If none of the advantages promised by IBC can be delivered, then why will investors opt for it?” the senior executive said.