More than five years after India introduced the Insolvency & Bankruptcy Code (IBC), issues of poor infrastructure and inordinate delays in the resolution of stressed assets continue to haunt lenders.
Strict timelines prescribed under the code, the multiplicity of cases, and the lesser number of tribunals have increased the backlog of cases, multiple bankers and experts told Moneycontrol on July 5. Lenders, on the other hand, have had to take steep haircuts on their exposure to stressed companies.
“The lack of infrastructure and lesser number of members manning the adjudicating authority are among the major factors resulting into the delay in the resolution process,” said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors. “Rotational benches are hardly able to justify the pressure of work involved.”
Bajaj added that unless the adjudicating authorities under the Code are provided with adequate infrastructure with a sufficient number of members and supporting staff, the sheer number of cases under the Code are bound to be “overwhelming” for the existing infrastructure and will be “enough to cripple the IBC mechanism.”
In December 2016, the provisions on the corporate insolvency resolution process under IBC came into effect. The code aimed to expedite and simplify the process of bankruptcy proceedings, ensuring fair negotiations between the borrower and creditors. It aimed at the timely resolution of stressed assets so that lenders could ensure maximum recovery from these assets.
To be fair, IBC has created a mechanism to resolve the deadlock between stressed borrowers and lenders. This has made defaulting companies more conscious about debt while allowing lenders to act upon them and maximise their recoveries.
However, the numbers paint a bleak picture, indicating that debt resolution of stressed companies under the code has slowed down.
According to data released by the Insolvency and Bankruptcy Board of India (IBBI), distressed companies liquidated under the bankruptcy code have far outnumbered those rescued as of March-end.
To put in perspective, beginning December 2016 till March 2022, 47 percent of corporate insolvency processes went into liquidation, compared with 14 percent that ended in a resolution plan, showed the IBBI data.
To quantify, out of a total of 5,258 corporate insolvency proceedings initiated under the code till March, only 3,406 have been closed. Among those closed, as many as 1,609 proceedings have ordered liquidation, while 480 have ended in approval of resolution plans. Further, till December 2021, only 457 cases had yielded resolution plans.
IBC cases are dealt with, at the first instance, by the National Company Law Tribunal, or NCLT. There are just 15 NCLT benches across India. The appeals against the orders of NCLT lie with the National Company Appellate Law Tribunal (NCALT), which has a principal bench in New Delhi and one in Chennai. Appeals thereafter are dealt by the Supreme Court.
Also read: 47% of IBC cases ended in liquidation till FY22, shows IBBI data
In 2017, the Reserve Bank of India asked banks to resolve 12 large accounts under the bankruptcy process. These included Essar Steel, Bhushan Steel, Amtek Auto, and Alok Industries, among others. These 12 accounts had an aggregate outstanding claim of Rs 3.45 lakh crore as against the liquidation value of only Rs 73,220 crore, according to IBBI.
Lenders, including banks, have mostly taken the IBC route as the last resort and have had to take steep haircuts on their exposure to debt-laden companies admitted under bankruptcy. Among the large cases admitted under IBC, are Essar Steel, Jet Airways, Dewan Housing Finance, and have been resolved with a certain portion as a haircut. In the case of Jet Airways, for instance, banks had to take a haircut of around 95 percent of their exposure.
“Banks have a sole agenda of maximising their recoveries when insolvency proceedings are initiated on a defaulting company, but if that very objective is not fulfilled in the majority of cases, the provisions of the code probably need a significant rethink,” said a senior banker with a state-run bank, requesting anonymity.
“We will have to work around a way in which the code actually justifies its goal of expediting the resolution process and simultaneously help both the parties.”
Under IBC, company law tribunals have to admit or reject an insolvency case in 14 days. The resolution process should be completed within 180 days of making the application unless extended for 90 more days as per the provisions of the code. Resolutions can take a maximum of 330 days, according to the law.
“None of this (adherence to timelines) is actually being done in practise,” said Sonam Chandwani, Managing Partner at KS Legal and Associates. “The Jaypee Infratech insolvency, for instance, took five years to complete rather than the 330 days specified in the 2019 amendment.”
Chandwani said that the officials or resolution professionals, responsible for completing this process are governed by law, but there is no accountability. Further, the process comes to a halt as these officials are, more frequently than not, are replaced by new ones, added Chandwani.
“The key part of this is to ensure timely disposal of matters by the NCLTs and discourage legal intervention on matters which are squarely within the domain of the commercial wisdom of the Committee of Creditors (CoC),” said Nirav Shah, Partner at DSK Legal.
Take, for example, Bank of India’s plea to admit insolvency proceedings against Future Retail. The plea was filed on April 14 but is yet to be admitted due to intervention by Amazon. Amazon holds a 7.3 percent foothold in Future Retail and has alleged that the Bank of India’s petition against the company was “malicious.”
DSK Legal’s Shah added that a failure to adhere to timelines prescribed under the IBC in turn has a huge bearing on the value of the corporate debtor. With every delay, the value of the corporate debtor erodes. Secondly, the value quoted for the corporate debtor is low as there are not too many takers for the assets, he said.
Moneycontrol had reported on June 2 that many times lenders are left with no choice but to go for liquidation of stressed assets under IBC due to a mismatch between the quoted value of the asset and the bid price.
“With the lack of bench strength and the adjudicating authority also required to devote its time for taking up cases or schemes under the Companies Act, there are general delays in each and every step,” said Arka Majumdar, Partner at Argus Partners (Solicitors & Advocates).
Also read: IBBI’s proposed amendments to liquidation regulations may help banks streamline recovery process, say experts
IBC has been an important code that is trying to provide a systematic solution to the bad debt problem. It is still a young code and has been evolving on the basis of observations. Its effectiveness will depend on timely and correct usage by the creditors, and covering up the current backlog would require a lot more resources, said experts.
“Clogging of cases at NCLT level has been an issue for a number of years and more benches are thus required for quicker turnaround,” said Abhishek Dafria, Vice President and Group Head at ICRA.
Other analysts also agreed with Dafria’s view. Increasing accountability on all the stakeholders including the corporate debtor, banks and financial creditors, resolution professionals,s and liquidators can make the process more transparent, said Punit Patni, the equity research analyst at Swastika Investment.
The IBBI has, in multiple discussion papers, already proposed several new guidelines with an aim to provide a better monitoring framework of the IBC process and prescribe a timeline for the auction of assets. More recently, it has been proposed that the resolution professional and Committee of Creditors (CoC) can explore resolutions of part of the assets or businesses by allowing the submission of different resolution plans for them. However, their implementation will be key.
“IBBI’s proposals are certainly a step in the right direction, but the key is to execute it,” said another banker. “Or else, it may just end up being excellent proposals on paper, which may not be desirable.”
Legal experts said that tweaks to timelines and greater automation of the legal process could also do the trick.
“Timelines for resolution also need to be shortened -- 90 days at best -- with some grace period for exigencies,” said Aditya Chopra, Managing Partner at Victoriam Legalis - Advocates & Solicitors. “The judges need to be a lot less lenient and must disallow unnecessary interruptions and frivolous litigation, too much of which has come from incumbent promoters.”
KS Legal and Associates’ Chandwani said that lenders are more often than not reluctant to initiate insolvency proceedings as it involves high fees to resolution professionals. “Hence, in my opinion, fees of professionals who participate in the insolvency process should be capped,” she added.