The Insolvency and Bankruptcy Code 2016 (IBC) completed nine months, or almost 270 days, in September. Incidentally, 270 is the maximum number of days provided under IBC for completion of insolvency resolution process. It makes a fitting occasion to take a downright look at the IBC journey so far.
The government defied its poor track record on implementation of laws by deploying unprecedented will for effective roll-out of IBC. The Insolvency and Bankruptcy Board imparted the imperative thrust to provide it momentum and the National Company Law Tribunal (NCLT) rose to the occasion with its decisions almost aligning with IBC objectives.
But is all well with IBC? While IBC’s sprint so far has been without any snags, the gigantic NPA cases pushed by RBI into insolvency and other sizeable accounts lined up for filing have hurled legal and practical challenges at resolution professionals (RP), legal experts and lenders, exposing chinks in IBC’s armour. Some notable issues that pose a serious challenge to IBC make a compelling case for amendments in the law and regulations.
IBC requires one committee of creditors comprising of all financial creditors to be constituted without cap on number. Many companies have depositors or investors with assured return running into thousands. Having a large number of creditors in the committee affects smooth conduct of meetings. In many jurisdictions, law provides different committees for different classes of creditors. A similar provision is needed in IBC.
IBC requires decisions of creditors’ committee to be taken by 75% vote share of members. A creditor who holds the deciding 1% vote can hold 74% to ransom. In many jurisdictions, decisions are taken by 75% vote share or 60% in number. A similar provision for better decision-making should be considered.
The requirement to disclose liquidation value in the information memorandum has given it a spin. As IBC provides resolution plan to be based on information memorandum, the prospective bidders are using it as threshold for resolution plan, thereby thrusting deeper haircuts on creditors. The disclosure requirement needs to be deferred to a later stage.
The language of regulation 27 of liquidation process and lack of clarity on RBI provisioning norms has become a stumbling block for raising interim finance. Running an enterprise often requires the RP to raise money from existing or new lenders. While existing lenders of a debtor are reluctant as providing new loan to NPA account renders new loan as NPA, new lenders are hesitant to come forward as regulation 27 freezes payment of interest after liquidation order is passed.
The narrow definition and language of insolvency resolution process cost restricts advance against supplies and similar payments to be treated as resolution process cost, thus preventing refund on priority in the event of default.
Low visibility on path after sanction of plan by NCLT has raised doubts in the minds of potential investors. There is a lack of clarity on approvals required for implementing plan and time-frame for approvals. As the RP becomes functus officio and moratorium is lifted after sanction of a plan, the fate of debtor would hang in doldrums, unless light is thrown.
Many big cases have assets located in other jurisdictions. It is challenging to claw back these assets in the absence of a cross-border insolvency law.
Insolvency proceedings of subsidiaries are likely to end up in different NCLTs as the jurisdiction is decided by the registered office of the debtor. This would lead to incoherence in insolvency proceedings of group companies. The law should also mandate one RP to be appointed for a group of companies.
The sanctioning of resolution plan of Synergies Dooray by taking a technical view of related party provisions sent tremors across the insolvency system. An appeal is also pending before the National Company Law Appellate Tribunal (NCLAT). If not mended, the case would set a dangerous precedent for abuse of law by related parties. The ball is in court of NCLAT and Board.
In lawmaking, a gap usually opens between law on the books and law in action. Thus, neither the Bankruptcy Law Reforms Committee nor the draftsmen of law or Board can be blamed for deficiencies in the law and regulations. Many issues can be resolved by amending the regulations, but others require changes in the law. This needs to be done without any delay. Failure to resolve big cases due to shortcomings in law and regulations could disrupt the successful journey of IBC. Meanwhile, the big cases would have to continue to sail through rough currents.