IBC - The Journey So Far – Part I

PART I- THE BEGINNING AND IMPACT

The Government, as the prime mover of the economic and financial system of the Country, has time and again taken support of law as a tool to given direction to the eco system and to make it more responsive to the changing needs. Right from 1965 Government has tried to address the requirement of the developing economic system by effecting changes in the applicable law. Changes in Company Law, Depository Laws, SEBI, Competition Act, FEMA and so on, has propelled the commercial activities in the Country. This was followed by liberalization of the economy during 1990s. While such changes gave a boost to the economic development but the burden of fulfilling the financing needs of such booming economy largely remained with public sector banks. This acted both as boon and bane for the Banking System. As, failure is part and parcel of any business activity, Banking System did not remain aloof when such failures happened in commercial world, and this lead to rise of NPAs with the Banks.

BACKGROUND:To address the issue the Government initiated structured efforts based on the Narasimham Committee Report[i] by strengthening prudential norms, setting up specialized courts (Debt Recovery Tribunals). This was followed-up by another drastic legislation in the form of SARFAESI Act. RBI too came out with various schemes from time to time to provide solution to ever increasing problem including CDR mechanism. Board for Industrial and Financial Reconstruction (BIFR) under SICA[ii]which was set up for specific purpose to check the industrial sickness, miserably failed to address the issue due to inherent lacunas which were mostly used by defaulters to escape recovery action by banks/lenders. The Supreme Court commenting upon the object of the Code and inadequacy of the system under SICA, observed that:

"The object of the law is clear. A radical departure was contemplated from the erstwhile regime, which was essentially contained in The Sick Industrial Companies (Special Provisions) Act, 1985, and which manifested a deep malaise, which impacted the economy itself. To put it shortly, the procedures involved under the Act, simply meant procrastination in matters, where speed and dynamic decisions were the crying need of the hour. The value of the assets of the Company in distress, was wasted away both by the inexorable and swift passage of time and tardy rate at which the forums responded to the problem of financial distress. The Code was an imperative need for the nation to try and catch up with the rest of the world, be it in the matter of ease of doing business, elevating the rate of recovery of loans, maximization of the assets of ailing concerns and also, the balancing the interests of all stakeholders. The Code purports to achieve the object of maximization of the assets of corporate bodies, inter alia, which have slipped into insolvency[iii]."

The provisions of the Companies Act dealing with compromise and arrangements were very scantly used by stakeholders. Thus, the system needed a mechanism which could address both the issues and provide solution.

NEW LAW & REGIME UNDER IBC: At this stage, the new law governing insolvency in commercial world was brought out in the form of Insolvency and Bankruptcy Code, 2016 (IBC/Code) based on the report submitted by the Bankruptcy Law Reforms Committee headed by Dr T K Vishawanathan[iv]. While the law wasnew, but it was mostly built upon the principles of the then existing mechanism under the Companies Act, 1956 and BIFR and practices followed in other jurisdiction such as UK and USA and UNCITAL Guide on Insolvency Law.Since the law was devised out of experience under SICA/BIFR, it provided in built checks to plug-in the loopholes under the previous regime.

THE CHANGES: The foremost change that was brought in the system was limiting the jurisdiction of Courts to deal with commercial mattersas it was considered that such matters need to be left to experts. Lenders (Committee of Creditors) who were not only equal stakeholders in the fate of the enterprise but also competent to assess its viability, cause of sickness and also suggest and finalize viable options, were entrusted with the job. This later on got to be developed into the concept of "Commercial Wisdom of the CoC". In K. Sashidhar v. Indian Overseas Bank &Ors[v], the Supreme Court, inter alia, held that the National Company Law Tribunal ("NCLT") and the National Company Law Appellate Tribunal ("NCLAT") have no jurisdiction and authority to analyse or evaluate the commercial decisions taken by the committee of creditors ("CoC").

The Court laid down that "….. the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated process within the timelines prescribed by the I & B Code. There is an intrinsic assumption that financial creditors are fuly informed about viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberation in the CoC meeting through voting, as per voting shares, is collective business decision. The legislature, consciously, has not provided any ground to challenge the "commercial wisdom" of the individual financial creditors for their collective decision before the adjudicating authority. This is made nonjusticiable."

The new regime ushered in a new concept of "Creditor in Control" (as against "debtor in control" regime under BIFR) by divesting the promoters of the control of the enterprise and vesting it with the Resolution Professional with approving power on certain critical issue to CoC.

The law also separated the function of managing the insolvency processfrom court officials and vested it with Insolvency Resolution Professionals (IRPs/RPs).

Another significant change was limiting the timeline for completion of various actions connected with insolvency process.

To deal with the delays happening in proving the case of default, the system envisaged setting up of information utility companywhich will house all information about sanction, disbursement and default of Bank cases and whose certificate will be treated as final proof and evidence of default[vi].

The system also envisaged time bound admission and disposal of application by the judicial authority namely National Company Law Tribunals (NCLTs). Overall, the new system promised a robust and much needed specialized avenue for both the banking sector as well as for the industry.

THE BEGINNING: As the system was untested, it took some time and some impetus from the Government and Reserve Bank[vii] to accelerate the process of filing cases with the Tribunals under the provisions of IBC. The journey which started with the case of Innoventive Technology Ltd,has since completed more than four years. Since inception of the Code in December 2016, 4,117 applications have been admitted as on December 31, 2020. Nearly 23 per cent of the cases admitted were settled or withdrawn after the commencement of Corporate Insolvency Resolution Process (CIRP[viii]). Out of the 1420 cases for which the CIRP process has been completed, liquidation has happened nearly 3.6 times the resolution as at this stage 73 per cent (799 cases) of cases undergoing liquidation and 33 per cent of cases (101 cases) undergoing resolution had been brought in from earlier regime under BIFR where most of the cases were practically dead. Having been able to revive 101 of such cases is an achievement. The CIRP for non-BIFR legacy has yielded 195 resolutions and 288 liquidations till December 2020. This also means that the resolution rate for non-BIFR legacy cases is more than three times higher at 40 per cent when compared to BIFR cases[ix].

Resolution Under IBC& Recovery for Banks: As per the statistic under the Economic Survey 2020-2021 Report, the Code has rescued 308 CDs (which owed Rs 4.99 lakh crore to creditors) as on December 2020 through resolution plans. The creditors recovered Rs 1.99 lakh crore, which is more than 193 per cent of the realisable value of such CDs. The recovery for financial creditors (FCs), as compared to their claims, was found to be more than 43 per cent. RBI data indicates that as a percentage of claims, scheduled commercial banks (SCBs) have been able to recover 45.5 per cent of the amount involved through IBC for the financial year 2019-20, (the amount recovered by SCBs under IBC was Rs 1.73 lakh crores) which is the highest as compared to recovery under other modes and legislations[x]. The recovery though not as expected but has yielded satisfactory results for the Banking Sector in the absence of any other effective alternative timebound mechanism.

COVID-19 pandemic has halted this process as the Government came out with the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 on June 5, 2020 which suspended initiation of the CIRP of a corporate debtor (CD) under section 7 though, personal insolvency remained outside this restriction.

TIME-LINE UNDER IBC & AREAS OF CONCERN: The IBC offered very promising and optimistic timeline for culmination of the CIRP within 180 days with only one extension of 90 days being allowed[xi]. The Code also prescribed time limit of 14[xii] days for admission of the application by Tribunals. This was very optimistic given the fact that under the previous regime of insolvency resolutiontook 4.3 years on an average. However, so far this time limit has remained a distant dream to be achieved. As per the Study by IBBI[xiii], the average number of days taken for admission of applications under CIRP is 133 days. As regards CIRP, the result in 308 CIRP cases which have yielded resolution plans by the end of December 2020, it took on average 441 days for the conclusion of the process. Similarly, the 1112 CIRPs, which ended up in orders for liquidation, took on average 328 days for the conclusion. Further, 181 liquidation processes, which have closed by submission of final reports till December 31, 2020, took on average 380 days for closure but most of such cases pertained to BIFR regime and the time taken liquidation process extends to almost two years as against the time of one year allowed under the Regulations.Thus, the actual timeline in cases both at admission and approval stage, remain a cause of concern and IBBI has been mulling various options to address this including bringing out an amendment in IBC and use of the word "mandatory completed[xiv]" but it has not yielded desired outcome so far. Not only delay at admission is a cause of concern but repeated challenges of such proceedings also affect the entire process. For example, in the case of Reliance Communications Limited the application was admitted on May 15, 2018, this order of NCLT was however, stayed in appeal by the National Company Law Appellate Tribunal (NCLAT) by its order dated May 30, 2018. The stay came to be vacated after 11 months on April 30, 2019. IBBI Research on delays under IBC note that reducing the delay at stage of admission as one of the most important factors for securing success of IBC.

Delay at approval stage (approval of resolution plan after it is recommended by CoC) has also impacted timely resolution and recovery for the Banks. IBBI study also note that 27.4% of the total delay is caused in taking approvals of the resolution plan from CoC. IBBI Study also point out that litigation is taking maximum time and there is an urgent need to develop the capacity of NCLT to reduce delay at two main stages i.e., admission & approval of resolution plan. A separate study needs to be done to evaluate whether the delay is due to a smaller number of judges at NCLT or whether the productivity of judges is not up to mark. The latter signifies the need for appropriate training as well as need for providing conducive environment and support in form of backend administrative functions which are vital for efficient performance of judicial function.

BEHAVIOURIAL IMPACT: The single most achievement of IBC, if we may say so, apart from resolutions facilitated, is the fact that the Code has brought about significant and much needed behavioral changes among the creditors and debtors thereby redefining debtor-creditor relationship. Threat of losing control of the enterprise under CIRP has led to perceptible change in the manner the eco system looks at default. It was noticed that in the absence of a potent legal regime, defaulting to banks was not perceived as a threat by promoters as litigations before DRT or otherwise action under SARFAESI seldom posed threat of losing control of the enterprise. However, the Code delinked 'default' with lenders and thus paved way for initiation of CIRP even when the company is not in default to that lender. Threat of action under the Code has forced debtors toaddress and settle default expeditiously with the creditor, preferably outside the Code. It is very much visible from the fact that since the enactment of the Code in 2016, 18,892 applications that were dealt with, as many as 14,884 cases involving defaults of Rs 5.15 lakh crore were withdrawn by September 2020 before admission and 897 processes were closed mid-way by December 2020. These figures indicate that almost 83 per cent of the CDs are getting resolved on the way, before the official commencement of CIRP under the Code on account of behavioral change among the defaulting debtors[xv].

Experience of cases under the Code has also forced the lenders to revisit the credit appraisal modules and mechanisms and built-in better risk mitigations.