MC EXCLUSIVE 'Insolvency is of a company, not a real-estate project': Baijayant Panda rejects project-wise codification in IBC

The IBC has to do with insolvency and bankruptcy of the companies, and not with debt recovery, says Panda.

• Project wise insolvency contradicts IBC principles, says Baijayant Panda
• IBC Amendment Bill enforces strict timelines and eases MSME resolutions
• Clean state principle clarified; new promoter liable only for approved dues

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The concept of project wise insolvency is contradictory to the principles of the IBC, Baijayant Panda, chairperson of the Parliament’s Select Committee on IBC told Moneycontrol in an exclusive interview.

"This issue was debated at length in the Committee. You can have project wise resolution, but how can you have insolvency of a project. Insolvency will be of a company only," Panda said.

He explains that sometimes, the real estate companies take money from homebuyers and use it for other purpose, rather than completing the project. “Now if they don’t build the flats, the company goes into insolvency, which means, a new promoter comes and replaces the promoter.”

“The whole concept of project wise insolvency goes against the fundamental tenets of IBC. IBC means the promoter has to go out. In the DNA of IBC, the promoters are not allowed to participate in the resolution, either directly or indirectly,” said the Member of the Parliament.

On the backlog of cases in NCLT, Panda noted that it’s being addressed, "...the government is working on increasing the strength of benches and improve infrastructure of courts to clear backlogs of cases. But we must understand that the single largest source of backlog is real-estate cases, and that too, which are pre-RERA. After RERA, real-estate cases are not piling up."

"The backlog is a legacy issue, a one-time issue. The Committee has said that any new real-estate cases, should first be resolved by RERA, and if not, then they should come to IBC," said Panda

Edited Excerpts:

Q. What are the key changes in the IBC Amendment Bill?

The Insolvency and Bankruptcy Code (IBC) was first enacted in 2016. In these past 10 years, it has had a revolutionary impact. 10 years back, banks were in a mess due to high non-performing assets (NPAs). Today they are among the healthiest in the world, and one major reason for that is IBC.

People should remember that before IBC, companies which were doing badly lingered on for decades. But because of IBC, there have been vast number of resolutions, and some liquidations. One figure astonishes me, in the last 3-4 years, on an annual basis, about Rs 50,000-60,000 crore is being recovered by banks from stressed assets. This is a very significant number. Despite this, it was felt that IBC should be further improved.

One key focus of these reforms was to enforce strict timelines, as the resolution were taking longer than 330-day period. This is a major overhaul. It’s like a reboot. GST was recently rebooted, and we saw the results on consumption.

The timelines have become very strictly spelled in the Amendment Bill. This will dramatically reduce the time for resolution, and the recovery will also go up dramatically. Rs 50,000-60,000 crore is a good number, but it may also double.

Regarding other aspects, the new Bill makes resolution of MSMES much easier. Small companies don’t have the wherewithal to deal with IBC. For MSME, a pre-packaged resolution plan has been envisaged. The bar has been lowered for initiation of the pre-packaged process. Now 51 percent votes of the financial creditors are required for the process to start, earlier it was 66 percent.

Another big change is, if there is no resolution, the resolution professional (RP) should be changed. If resolution can’t happen, a fresh RP should be appointed for liquidation. The idea should be that the company should be saved. Liquidation is a fairly straightforward process. The RP should have no focus on liquidation.

Also, the new code introduces cross border insolvency and group insolvency norms. This was a major gap in our insolvency ecosystem, which doesn’t exist anymore.

Q. Operational creditors say that they don’t get adequate dues in liquidation. The new Bill, however, doesn’t address their concerns. The Select Committee made recommendation of distribution waterfall, but said nothing on OCs...

A. We have not changed anything in the waterfall mechanism, we have only codified what had already become the norm because of earlier amendments and court rulings (government dues getting lower priority).

Regarding OCs, nowhere in the world, there is a special arrangement for them. The IBC has to do with insolvency and bankruptcy of the companies, and not with debt recovery. Debt recovery is happening as a by-product of the process. The primary purpose of the law is resolution of the company, or else, liquidation.

OCs, however, do have other avenues. They have debt-recovery tribunals (DBTs), and the SARFAESI Act.

It’s important to understand this. There is a significant difference between long-term secured loans, and unsecured business advances. When banks fund a project for a 10-15-year period, they take a certain risk. It’s a loan, it’s treated differently than a business advance. On the other hand, when an OC supplies some equipment or materials to the company, it’s an advance…they fully understand that the status of the company. If the company is already defaulting, OCs wont supply. So, in basis principle, you can’t equate long-term secured debt with short-term unsecured advance.

Q. The Select Committee has suggested a 3-month timeline for NCLAT to decide on IBC appeals. Despite the timelines being imposed, can resolution time reduce if the strength of the benches is low?

A. It’s being addressed. The draft bill which came to us already has provisions for rigid timelines, with respect to phases of resolution plan. At the appellate level, there was no timeline. That has been recommended by the Select Committee.

Separately, the government is working on increasing the strength of benches and improve infrastructure of courts to clear backlogs of cases. But we must understand that the single largest source of backlog is real-estate cases, and that too, which are pre-RERA. After RERA, real-estate cases are not piling up.

The backlog is a legacy issue, a one-time issue. The Committee has said that any new real-estate cases, should first be resolved by RERA, and if not, then they should come to IBC.

Q. Is there a case in your view for project wise insolvency to be codified in the IBC statute?

A. This issue was debated at length in the Committee. The concept of project wise insolvency is a contradiction in terms. When we talk about IBC, we are talking about company. You can have project wise resolution, but how can you have insolvency of a project. Insolvency will be of a company only. There have been some court orders on this as well.

Imagine, there is a real estate company, and they have projects all over the country. The company is doing well, but one project has gone bad. The people want the flats, or the refund. They don’t bother about resolution of the company.

Sometimes, what happens, the real estate companies take money from homebuyers and use it for other purpose, rather than completing the project. Now if they don’t build the flats, the company goes into insolvency, which means, a new promoter comes and replaces the promoter.

The whole concept of project wise insolvency goes against the fundamental tenets of IBC. IBC means the promoter has to go out. In the DNA of IBC, the promoters are not allowed to participate in the resolution, either directly or indirectly. IBC has the put the fear of god into promoters. If the company doesn’t go out of their hand, why will they co-operate?

Q. Have all recommendations of the Select Committee been accepted?

A. The Ministry of Corporate Affairs will take our report, and discuss it internally and the Cabinet. We hope most of the recommendations will be accepted.

The single biggest one was timelines. The general consensus was, IBC is doing a great job, but it is taking longer than envisaged. You may complete in so and so time, now, shall is added.

Another main issue which came coming up is the clean state principle. When the company goes bankrupt, new promoter comes, who pays the dues.

Your debts maybe X, but this company is only viable at X minus some percent, for the new promoter. Once the resolution process is complete, the resolution plan is approved, this is what the new promoter should be liable for.

Unfortunately, it was seen, that many claimants keep seeking their due even after the resolution plan was approved, including government agencies. The Supreme Court has ruled in favour of clean state principle, but it was not being followed.

The Bill has made it amply clear.

Q. The Select Committee’s press release said clean state principle to apply on a “retrospective” basis, which some stakeholders are interpreting as a new addition in the law…

A. This principal of clean state has existed right from 2016 only, when the Principal law was enacted. We’re only reiterating. We have seen evidence of people violating the clean state principal, so we made it clear, that this principal exists in law, for clarity. The "retrospective" term is not any new addition. The Supreme Court has ruled in many cases that clean slate principal applies in IBC, so how can retrospective be a new addition.