Supreme Court verdict on IBC: Indian banks’ fight against bad loans has just got a thumbs-up from judiciary

The Supreme Court had to step in to restore the constitutional validity of the Insolvency and Bankruptcy Code (IBC) 2016 in its 'entirety'.

The intent and purpose behind the enactment of the IBC was to pave the way for expeditious resolution of the burgeoning pile of non-performing assets (NPAs) in the financial sector. The lenders’ helplessness due to excruciatingly slow and cumbersome legal processes afforded an upper hand to the borrowers at the cost of the creditors.

The unbreachable timelines of 270 days prescribed by the IBC wherein the stakeholders have to either resolve or liquidate the enterprise, was intended to ensure that the solution does not get bogged in red tape.

Supreme Court verdict on IBC: Indian banks’ fight against bad loans has just got a thumbs-up from judiciary

Representational image. AP

The legal, accounting and financial engineering fraternity, however, on behalf of the defaulting corporates, devised innovative stratagems to thwart the working of the law to enable the principals to retain their malefic hold on the mismanaged loss-making empires.

The Supreme Court in its 25 January verdict has very clearly reiterated and accorded the position of primacy to the creditor as against the overwhelming advantage enjoyed by the debtor in the pre-IBC days.

Since its strict enforcement by the lenders, consequent upon the Reserve Bank of India (RBI) instructions to institute resolution proceedings in the National Company Law Tribunal (NCLT) against top 20 non-performing exposures and subsequent 12 February 2018 RBI circular on the subject, the IBC has been subjected to every legal test including inter alia its very validity.

But the most rigorous scrutiny has been witnessed in the afore mentioned Supreme Court judgement in the litigation pursued by promoters/owners of M/s Essar Steel in their fight to keep control from going away to M/s Arcelor Mittal, and a host of others.

The apex court vide its judgement on 25 January 2019 and earlier on 11 October 2018 cleared several ambiguities. It laid down the principles which in future will lead to smoother, faster and transparent resolution process and substantially reduce scope for manipulation of the Corporate Insolvency Resolution Process (CIRP) by the unscrupulous borrowers insistent upon retaining ownership by working around the system.

Accordingly, the validity of IBC 2016 in entirety has been upheld by the court.

The court qualified the bar under Section 29A to mean that the "related person" should be a person connected to the defaulting entity which will make him ineligible to participate in resolution process. However, 'related person' not connected with the activity of the resolution applicant cannot be barred.

The charge of discriminatory and unfair treatment by the IBC of operational creditors vis-à-vis financial creditors, has been negated by the Supreme Court by stating an obvious intelligible differentia between the two on the basis of qualitative and quantitative dissimilarities between the two classes of lenders.

Further, the IBC cannot be initiated on the basis of time barred claims.

The challenge to the 12 February 2018 circular of the central bank directing lenders to initiate the IBC proceedings against a class of defaulters as it is ultra vires the RBI Act has been kept aside by the court for a separate hearing.

The IBC, despite gaining considerable traction since its enactment, remains a work in progress. The number of NCLT benches need to increase. The Supreme Court has also commented about the need for institution of circuit benches of NCLAT in metros.

The threat of losing control has forced many promoters/owners to settle dues through non-IBC route. The conduct of the account and adherence to the financial discipline has improved.

The bankers are back in the game with a new-found enthusiasm to recover the overdues for an expanded resource base for re-lending.

Pursuant to a large volume of assets put on the block by the lenders, the acquisition opportunity at attractive costings has multiplied. Asset reconstruction companies (ARCs), foreign portfolio investors (FPIs) and alternative investment funds (AIFs,) domestic as well as foreign, are active to corner such assets.

Merger and acquisition activity is seeing an uptick. Advisory service intermediaries are salivating on the hope of having plenty in their hands from the asset resolution business. For investors, however, winning the bid for an impaired asset is just the start of a long haul to bring the asset back to a performing state.

Turn around professionals are in great demand. The commercial banks have rejigged and expanded their stressed asset verticals to cater to the ballooning volume of impaired assets requiring resolution. Many of them are contemplating floating ARCs sensing an opportunity for value creation.

With IBC in place, the future seems a little less prone to accumulation of NPAs in the financial sector.

(The author is a former executive of SBI)

 

 

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Updated Date: Jan 30, 2019 10:19:53 IST

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