What if a company fails and becomes bankrupt? What if a borrower fails to pay back the bank? What if a home buyer fails to get either the promised home or her hard earned money? A single, unified bankruptcy code, it was felt in 2016, would make recovery faster and companies liquidated as early as possible.
But three years later, hopes have been belied. Three years, several amendments and informal, often conflicting, messages and advice from the government later, it is clear that the functioning of the Insolvency and Bankruptcy Code (IBC), 2016 and the National Company Law Tribunal (NCLT) has been less than satisfactory.
In fact, the government this week said that it would be better to settle individual and small disputes involving, say home buyers, outside the IBC and the Tribunal.
Different stakeholders are unhappy for different reasons. The Ruias of the Essar Group are upset, for example, because it was prevented by the IBC from re-acquiring Essar Steel. That is because Section 29A in IBC prevents promoters from re-acquiring their own companies at a discounted rate after mismanaging funds or siphoning them for personal use. But Essar argues that since it had bid ₹54,389 crore, higher than the successful ₹42,202 crore bid by Arcelor Mittal, its higher bid would have benefitted all stakeholders including workers. But a blanket ban on promoters and even third parties related to them from acquiring the companies which couldn’t repay their debt, it says, fails to distinguish between unscrupulous promoters and others who failed to repay debts because of genuine reasons like an economic meltdown or a crash in demand.
A public sector bank, United Bank of India, has publicly criticised the process. It referred 33 cases to NCLT’s Kolkata branch out of which just two cases were admitted.
The time limit prescribed by the IBC, 180 days in 2016 and thereafter extended first to 270 days and then to 330 days, for completing the insolvency process has been exceeded in most cases. Till June, 2019, only 120 cases had been resolved out of 2162 cases lodged by debtors. That is 13.8% of the cases resolved through the Corporate Insolvency Resolution Process (CIRP).
The huge haircuts and low recovery have also put the process under a cloud. Lenders who were owed ₹972 crore by a manufacturer of alloy wheels for cars, recovered just ₹54 crore. Similarly, Reliance Industries (RIL) and JM Financial ARC picked up the ailing Alok Industries for ₹5000 crore although Alok Industry owed lenders ₹30,000 crore. A Pune-based steel products maker was allowed to get away by lenders with a 88% haircut.
The Resolution Plan, as per the 1956 Act, needed approval from 75 per cent of the debtors. The 2016 code has reduced the required percentage to 66 per cent. Fewer creditors now can influence the Resolution Plan. What is more, IBC provides that any creditor who voices dissent to the plan approved by 66% of the creditors, would be paid out before others. This is encouraging creditors to pursue their individual interests over potentially better rewards by pursuing collective interests.
While the Government gloats over repealing 2,460 antiquated laws and India jumping 30 places in the Ease of Doing Business ranking, the same index ranked India 108 out of 189 countries on the Ease of Resolving Insolvencies.
Is it possible that the old wine (older legislation) was better and less costly than the new wine that the government has served?
(The author is a practising lawyer at the Supreme Court of India)