Bankruptcy law will help lenders only if judicial resolution is quicker

The recommendations of the Bankruptcy Law Reforms Committee (BLRC) and the draft bill on insolvency and bankruptcy can potentially change the life of Indian banks, neck-deep in bad-debt, as it assures speedy resolution in insolvency cases, where companies fail to repay their creditors. [caption id=“attachment_2462970” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] The panel, headed by former law secretary, T K Vishwanathan, has made a slew of critical recommendations. It proposes creation of an insolvency regulator and setting a time limit of 180 days (which can be 90 days in special cases) to deal with insolvency resolution cases. If 75 percent of the creditors approve the plan, the insolvency resolution process can kick off. If not, the adjudicating authority can order liquidation of the company. The panel has mooted the government as the regulator until the time a permanent regulator is formed. These changes are much-needed in the Indian context where, in most cases of large corporate defaults, banks are sitting ducks when it comes to recovery of money like in the case of Rs 7,000 crore default by Vijay-Mallya owned Kingfisher Airlines . When the recovery process gets delayed by several years, the value of the underlying assets deteriorates. Large corporate defaults, including those by wilful defaulters (promoters and companies, which have the ability to repay but wouldn’t do) form a significant part of the Rs 300,000 crore gross non-performing assets (NPAs) of Indian banks. According to a 2014 World Bank report, the average time to resolve insolvency is four years in India, compared with 0.8 in Singapore and one year in London. The Vishwanathan panel too has observed that, the loan recovery rates obtained in India are among the lowest in the world. When default takes place, broadly speaking, lenders seem to recover 20 percent of the value of debt. The proposed bankruptcy law, which will replace The Presidency Towns Insolvency Act, 1909, when enacted, would come handy for banks to deal with future cases. However, a big question remains with respect to the existing stock of bad loans, where recovery from corporations pending for several years. It’s not clear whether the new code can apply to existing cases. A major challenge faced by the banks at this stage is how to repair their cracked balance sheets. Speeding up the process of liquidation in a few months too would be a task for banks since lenders typically find it difficult to sell the assets quickly and recover their dues, simply because there aren’t many takers for distressed assets. “I have my doubts whether speedy insolvency resolution is possible within 180 days,” said Abhishek Kothari, equity research analyst at Anand Rathi Securities. Faster judicial resolution key The biggest challenge for the bankruptcy code to work, however, is the intervention of judiciary in the insolvency cases. Typically, bankers get dragged by debtors to courts to delay the recovery process, whenever the creditor-debtor relation goes sour. Such litigations goes on for years by when the asset value would have eroded leaving a pittance to lenders. Thus, unless the bankruptcy law gives clarity with respect to judicial intervention, the new code wouldn’t make much difference even if majority of the lenders agrees to commence the liquidation process, said Kothari of Anand Rathi. The Vishwanathan panel, in its report, has observed the challenges judicial intervention poses to the recovery process. “The current state of the bankruptcy process for firms is a highly fragmented framework… In a situation where one forum decides on matters relating to the rights of the creditor, while another decides on those relating to the rights of the debtor, the decisions are readily appealed against and either stayed or overturned in a higher court. Ideally, if economic value is indeed to be preserved, there must be a single forum that hears both sides of the case and make a judgement based on both.” Further, the panel also questions the business and financial expertise of the judicial forum that decides on the insolvency process. “The fora entrusted with adjudicating on matters relating to insolvency and bankruptcy may not have the business or financial expertise, information or bandwidth to decide on such matters. This leads to delays and extensions in arriving at an outcome, and increases the vulnerability to appeals of the outcome,” the panel observed. Speedy judicial resolution in insolvency cases is crucial since a company’s cash flows are already hit when it negotiates with banks on insolvency process. This problem has been highlighted by Minister of State for Finance, Jayant Sinha. “We also have to ensure that necessary judicial capacity is available so that as and when particular cases come to the bankruptcy code…We also need to resolve many of the situation immediately because they are short of cash in most of these bankruptcy types of cases”. Presently such cases typically go to debt recovery tribunals and often are challenged in higher courts by debtors causing further delays. The issue can be addressed if all cases of insolvency are directed to a special court, which has the expertise in business and financial matters and which exclusively looks at such cases. The short point is the bankruptcy code will lack the teeth unless there is clarity on faster judicial resolution of insolvency cases.