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Opinion | New courts for IBC will help, but more needs to be done

Resolving insolvency cases speedily is necessary to clean up the balance sheet of both banks and corporate India and is a key condition to kick-start bank lending and boost private investment demand

August 08, 2018 / 12:33 PM IST
Bankruptcy

Bankruptcy

The Ministry of Corporate Affairs has proposed setting up of eight new courts under the National Company Law Tribunal (NCLT) to deal exclusively with Insolvency and Bankruptcy Code cases, reports the Business Standard. That’s a much needed boost for the company court which is struggling with a backlog of pending cases. Resolving insolvency cases speedily is necessary to clean up the balance sheets of both banks and corporate India. It is also a key condition to kick-start bank lending and boost private investment demand.

According to data presented to the Rajya Sabha, there were 9,073 cases under consideration by NCLT at the end of January. That included 1,630 cases of mergers, 2,511 cases of insolvency and 4,932 cases under other sections of the Companies Act.  These numbers have only increased and are set to accelerate as Reserve Bank of India new norms nudge banks to speedily refer default cases to NCLT if they are not resolved within 180 days of the first non-payment of dues.

But the numbers also show that the pace of admission and resolution has been slow. Since the legislation kicked in , only 701 cases have been admitted under insolvency law till March, according to data from the Insolvency & Bankruptcy Board of India’s (IBBI) quarterly bulletin. Of these, 22 cases have gone into resolution and liquidation has started in 97 firms.

Infrastructure in the form of increasing number of courts to deal with the influx of cases is only the first step. Far more needs to be done especially when it comes to timely resolution. The cornerstone of IBC is the fact that resolution must happen within 270 days of a case being admitted. That is under threat.

There are delays happening at two stages. One, cases are taking long to get admitted because the Supreme Court  has ruled that judicial discretion needs to be applied before an insolvency case is admitted to the NCLT. Last year, the National Company Law Appellate Tribunal (NCLAT) had ruled that the 14-day timeline for rejecting or admitting a case under the bankruptcy was only directive and not mandatory. When courts are struggling with so many cases, making admission of cases a clerical decision would hasten the process.

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Two, the 270-day timeline is not being strictly adhered to. Part of this is owing to the fact that the bankruptcy law is still in the teething stage. There have been two amendments in the last 12 months, which has led to a bunch of litigation. However, NCLAT has ruled that the 270-day timeline does not include time spent on issues outside the control of bidders/resolution professional such as stay on litigation, time taken by the resolution profession to take charge of a case, etc. In some other cases, the NCLT has allowed bidders to submit revised bids, which leads to further rounds of litigation and more delays.

Thus, high profile bankruptcy cases such as those of Essar Steel, Bhushan Power & Steel and Binani Cement are still pending before one court or the other with the 270-day deadline whooshing by. Nearly a year has passed since the RBI referred 12 big defaulters who held a quarter of the banking system’s bad loans between them to courts under the bankruptcy law. So far, only 4 cases from the big 12 have been resolved. From RBI’s second list of 28 firms, only 17 have been admitted.

The pace of cases passing through the bankruptcy system needs to be hastened to solve the twin balance sheet problem. Many of the assets that form the underlying basis for the bulk of the banking system’s Rs 10 lakh crore bad loans are either inoperative or working at low capacity. A successful resolution means they can get back to business as usual. Higher revenue and profits is good for the company, its employees and suppliers and also for the economy. A resolution package will see banks take a partial haircut and the rest will be repaid or restructured. Even if the asset is sold on a piecemeal basis, i.e. it is liquidated, there are higher chances it will become operative. Either way, the loan book of banks becomes healthier. If the new owners run the business well, they should soon begin to earn interest on the restructured loans as well.
Ravi Krishnan
first published: Aug 8, 2018 12:33 pm

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