Constituting a 14-member panel to suggest changes to a law little more than a year after its promulgation reflected the government’s keenness to correct mistakes in the original legislation, while also shining the spotlight on an impatient New Delhi that seemed unwilling to give more time.
Even as some of the recommendations rush through the system to become law, the practitioners and lenders – for whom the law was made – believe these changes could engender more issues than helping settle some of the conflicts.
Inconsistencies, dilution in the spirit of the law, sounding more politically right than confronting the reality and bringing in constituencies that do not figure in the bankruptcy laws of mature countries appear to be hallmarks of the recommendations.
Provisions worrying bankers and lawyers include the panel taking an apparent cue from the government’s knee-jerk reactions to home buyers’ agitations, barring promoters from bidding for assets and bringing in the need for shareholder approvals. These aspects, if adopted, could weaken a law that was about to end decadesold corporate chicanery of judicial processes that crippled banks
“My disappointment comes from the fact that some real issues have not been confronted,” says Sumant Batra, managing partner at Kesar Dass, a law firm specialising in bankruptcies. “There may not be empirical evidence but surely there is a strong case to address key issues like cross-border insolvency law and group of companies insolvency.”
A panel headed by corporate affairs secretary Injeti Srinivas has submitted a 100-page report that suggested ways to improve the functioning of the Insolvency and Bankruptcy Code, a report that shook both the business as well as the banking communities. Its other key recommendations are allowing MSME promoters who are not wilful defaulters to bid for their companies, streamlining section 29A and barring only those who contributed to the defaults made by the company, and allowing a company to withdraw from the IBC process if 90% lenders rule in favour.
SHAREHOLDER OR LENDER?
The bedrock of any bankruptcy law is to empower the lender to recover his money – as much as he could – in the quickest possible time. But the panel has even introduced a shareholder clause if a company has to initiate Corporate Insolvency Resolution Process, or CIRP.
One of the recommendations is that if a corporate debtor desired to initiate bankruptcy, the shareholders of the company must pass a special resolution before doing so.
This, many believe, is unnecessarily adding one more layer to the bankruptcy process, which could not only delay the filing but also lead to vested interests or even ignorance scuppering the resolution
“This is a regressive move since the board anyway knows its bankruptcy situation,” says Sridhar Ramachandran, chief investment officer at IndiaNivesh Renaissance Fund, which specialises in companies seeking resolution. “Shareholders in India are generally unaware of many of the intricacies of business and may oppose the bankruptcy move.”
The Reserve Bank of India (RBI), with its new-found power, decided to direct the biggest 12 defaulters – the dirty dozen – to bankruptcy. But nearly a year after the act, resolutions of these cases remain elusive and complicated.
It is the government’s resolve to bar promoters that ran the enterprises aground to not lay their hands on those assets again that has created a whole lot of complications. Through amendment 29A to the IBC, it barred promoters from bidding without clearing their dues or any related party bids.
From Essar Steel to Amtek Auto, the ineligibility clause has derailed resolution. Accusations and counter-accusations by parties such as Numetal, ArcelorMittal or Liberty House have led to numerous litigations, delaying the process.
“Experience of 11 large cases shows section 29A has caused so much disruption and derailed the insolvency process. It needs to be toned down,” says Batra of Kesar Dass. “These are all selfinflicted wounds. If you are going to ignore them, then obviously they will cause serious implications going forward.”
Ineligibility charges are many.
Numetal, where Rewant Ruia, a member of the Ruia family that promoted Essar Steel is a beneficiary, is said to be disqualified. ArcelorMittal, which was a promoter of Uttam Galva Steels even though it did not run the company, is also facing a question mark. Liberty, which owed Rs 20 crore to Exim Bank, is also barred.
While the bids from these are the highest that could resolve pending cases, the law preventing them blindly with an intention to punish them even if no malfeasance is proved should have been addressed, given that it has become a big impediment in resolving cases
BACK TO OLD WAYS
The IBC was born out of the necessity to ensure a speedy resolution of defaulting cases so that lenders are able to recover more value even if they have to take haircuts on their total exposure.
But the relaxation of the deadline to 365 days is diluting a part of the original IBC, which many welcomed. While the current rush of cases at the NCLT may look burdensome to resolve in the existing 270-day deadline, it could have been better if it were adhered to even in the future.
“One year is too long for a resolution,” says Fraser Alexander, associate partner, Majmudar & Partners, a law firm. “You are only extending time and diluting the code. It prolongs a litigation matter to a whole year. Government departments should give all permission within 270 days. The current time frame of 180 and 270 days is the best.”
Furthermore, the new set of rules suggested by the committee is adding more confusion to an already complicated law. That it has suggested three different voting requirements from the creditor for three different actions is in conflict with the overall need for uniformity.
“What is the thinking in creating different thresholds,” asks Kumar Saurabh Singh of Khaitan & Co. “Approval of a plan or withdrawal from the process are in a way addressing the resolution issue only. You can’t be withdrawing without resolving, so if resolution is at 66%, why is withdrawal at 90%.”
EMOTIONAL VS PRACTICAL
One of the key recommendations that has divided the bankruptcy practitioners and bankers down the middle is the suggested entry of home buyers to the high table of lenders committee that would debate the resolution.
The panel has suggested that home buyers are like financial creditors and not consumers.
This probably came after the government signalled it is for such a position in the dispute between Jaypee Associates and home buyers.
“They have paid money and they require a flat, you cannot be thrown on the road just because you are a flat purchaser. You cannot be told that there are other remedies — go use those. With that logic, then why do banks want IBC… they have several other remedies to go to,” said Alexander.
While it may appear to be humane treatment, in the financial world it could create problems for builders to even get funding. While there has been unanimity in the panel over all suggestions, members like State Bank of India’s B Sriram dissented over this.
“The decision to make home buyers as financial creditors is more emotional than practical,” says Khaitan’s Singh. “Why should that not be the case with a telecom company? Why should it not be the same with any other services industry which is consumer facing?”
While the government’s intention may have been to come up with a quick solution to some of the teething troubles, a whole lot of recommendations could rather dilute the IBC law instead of enhancing it.
Source : Economic times, May 2, 2018