Insolvency and Bankruptcy Code: An efficient mechanism for tackling NPAs but resolution professionals face challenges

Intention of bringing in new insolvency law was essentially to clean up the banking mess and thereby providing a boost to the economy

Rajeev Nair January 02, 2018 16:53:35 IST
Insolvency and Bankruptcy Code: An efficient mechanism for tackling NPAs but resolution professionals face challenges

The Insolvency and Bankruptcy Code, 2016 has been in news since its inception due to the innovative and time-bound resolution framework. The Code intends to provide an efficient resolution to the menace of outstanding debts by the corporates and other persons due to the banks and other institutions. The intention is essentially to clean up the system and thereby providing a boost to the economy.

Since its admission of the first case under the Code -- the Innovative Industries matter -- there have been many cases presented under the IBC dealing with various legal aspects of the Code. The Code, being a recent legislation, is at an evolving stage and one can observe that with almost with every other case, several concepts of the Code have been interpreted which have been providing much needed clarity to this nascent legislation which indicate the intentions of the Code.

Current status of admitted Insolvency cases in India

On glancing through the various cases decided by the National Company Law Tribunals (NCLT), National Company Law Appellate Tribunals (NCLAT), it can be understood that tribunals have been adjudicating various cases on its distinct facts. This process provides clarity to the concepts which are not expressly provided under the Code or which may have multiple connotations.

Also, the cases decided till date gives an impression that the Code has been attempting to be impartial to either of the debtors or creditors and thereby upholding the spirit and objective of the Code.

Insolvency and Bankruptcy Code An efficient mechanism for tackling NPAs but resolution professionals face challenges

Representational image.

On the other hand, one has also witnessed certain instances wherein the tribunal has rejected the petitions filed by the corporate debtor where they suspected such petitions to be spurious or frivolous in nature.

As seen in the matter of Reliance Infrastructure Ltd, NCLT provided a difference between non-payment of debt and inability to make payment. The NCLT observed that non-payment of debt should not be reckoned as inability to make payment on behalf of the debtor and dismissed the petition.

Interestingly, in the case of Uttara Foods and Feeds Private Limited v/s Mona Pharmachem, being the recent and one of the two cases till date which have been decided by the apex court on the issue of the Code.

The Supreme Court that by virtue of its inherent powers under Article 142 allowed the parties to settle the matter out of Court (wherein the settlement was arrived between the parties post admission of the petition) expressed that since tribunals did not have inherent powers to decide on the issue of settlement arrived between the parties post admission of the petition, the law needs to be modified so as to permit the same.

The cases that have been decided go onto show that one third of the cases have been filed by the corporate debtors. Although the tribunals are able to adjudicate effectively, being overwhelmed with company matters under different statutes, they are struggling to decide the matters within the prescribed time.

Timeline management of the resolution process

On admission of the petition, an Interim Resolution Professional (IRP) is appointed and is required to step in to take complete control over the management of the corporate debtor and take control and custody of its assets, receive, collate verify the creditor claims, constitute the Committee of Creditors (CoC) and comply with such other tasks.

While the process defined aims for a smooth functioning, there are many challenges that the IRP faces while working towards the resolution process. In most of the cases, the IRP works alongside a company which has been through several ordeals of revival procedures under different laws, and has exhausted its resources hence the formulation of a resolution plan might in certain cases take more time than expected.

The IRP also faces challenges while working around incomplete records, pending compliances and un-cooperative officers of the corporate debtors. Also, since only individuals -- entities being excluded as of now -- are permitted to act as insolvency professionals, it becomes extremely stressful for individual resolution professionals (RP), who face infrastructural and logistical challenges to perform their duties. The IRPs or RPs have to approach the tribunals and wait for their directions thereby making it difficult for them to adhere to the prescribed timelines.

Challenges in access to operational credit for day to day operations

The IRPs and RPs are also beleaguered as they require the working capital in order to run the business of such debtor as a going concern. The IRPs or RPs have to struggle to raise resources to tackle the day to day requirements of the corporate debtor.

As a matter of stark reality, there have been also instances where the IRPs failed to muster up the resources even for a basic thing as convening the first meeting of the CoC. Once the CoC is formed, any major decision of the IRP or IP regarding the finances of the corporate debtor is subject to the discretion of the CoC.

In many instances the IPs or IRPs have approached the creditors even for meeting the operational requirements of the corporate debtor. As seen in the matters of Essar Steel and Alok Industries, where the respective IRPs had approached the existing lenders of the company to infuse more funds in order to keep the firm’s operations, to clear the dues and pay off the salaries of the employees.

In some of the cases, there were issues where illegible or ill-advised persons submitted applications as resolution applicants (RA). Thus, the Code was further amended to address this issue and armed the IP or IRP to do a background verification of the RA and that the Ordinance was another step in this direction. The recent Ordinance has further enhanced the eligibility requirements as to who can act as RA.

Addressing conflicts with suspended promoters

This new Ordinance has garnered tremendous attention and proved to be controversial. This ordinance inter alia bars promoters being willful bank loan defaulters as well as those with NPA accounts from bidding in auctions.

The cardinal reason that the Ordinance has been criticised in some quarters is that it prohibits the promoters (who have NPAs) and disqualified directors to bid for the corporate debtor, who are the heart and soul of the company. The promoters who have a larger interest for the company are, as compared to other competitors, are expected to submit better bids to retain the control of the company.

The Ordinance though does not entirely restrict all the promoters save and except defaulting promoters, for whom also the Ordinance provides a window to participate albeit after repaying their debts. It is difficult to implement one of the popular modes of restructuring i.e. conversion of the debt into equity since it may be highly unlikely for the creditors to subscribe for the equity of the debtor company which has lost its substantial worth.

Building consensus among both operational and financial creditors

The IRP or RP has to ensure that even claims of the operational creditors (OC) are adequately addressed since they are not entitled to vote in the meetings CoC, which comprise of financial creditors, and thereby ensuring that the OC are not sidelined or cornered in entire resolution process. The IRP’s and RP’s are tasked with the responsibility of creating a consensus between the financial creditors and the operational creditors in terms of their claims and the company’s ability to pay.

RPs, who may not be well versed with running a business, are also required to understand the specific business of the corporate debtors, its reasons for financial troubles and accordingly the need to arrive at a settlement with the creditors qua their debts. The ordinance read with the recent amendments to the Code, requires the IP or RP to verify the credibility of the resolution applicant, thereby adding another item to its already bulging compliance list.

Despite the various teething issues that the Code has encountered in its relatively short journey on the legal firmament, the spirit and the object of the Code have been adequately demonstrated by the various cases that have been decided.

The Code is at an evolution stage and one should not undermine the intentions behind its enactment especially in light of the uncertainties or issues of interpretation of its various aspects and not to forget the recent debates about the eligibility of the bidders.

Going by the journey so far, one can only hope and expect that the future augurs well for the insolvency resolution landscape in India and that there is a lot of room for improvement and refinement. It is keenly awaited all the concerned, that this infant legislation would surely grow into a wise and mature adult.

The author is principal associate, Rajani Associates. Suchita Sharma and Gitika Makhija, associates at Rajani Associates, also contributed to the article.

Updated Date:

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