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How jury is still out on IBC verdicts

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IBC sought to subsume the existing frameworks for bad loan resolution by creating a single law.

The Insolvency and Bankruptcy Code (IBC) has put a sturdier regulator, the Insolvency and Bankruptcy Board of India, on the lines of SEBI and IRDAI. The Act aimed to resolve the mounting issue of non-performing loans by corporates and find a lasting solution for stressed balance sheets of banks. IBC sought to subsume the existing frameworks for bad loan resolution by creating a single law. Any stressed asset red-flagged to the National Company Law Tribunal (NCLT) by lenders under IBC is referred to a registered and recognised insolvency resolution professional. In case the resolution attempts did not fructify, the professional can refer the case to a Committee of Creditors (CoC) to kick-start the liquidation process by putting the assets on block. The new bankruptcy norms were rolled out as existing mechanisms proved inefficacious. Till IBC kicked in, the absence of a single law dealing with corporates going bust and overlapping jurisdiction made the process cumbersome and time-consuming. According to a World Bank estimate, the average time taken for completion of bankruptcy process is 4.3 years in India, whereas in Singapore, Finland and the US it takes just six months to one-and-a-half years. Also, the recovery percentage in India is as low as 26%, whereas this ranges from 78% to 92% in advanced economies. IBC was considered a welcome regulation. It was expected to solve issues ranging from resolution of bad loans in a time-bound manner, promote entrepreneurship, improve credit flow since lenders’ balance sheets are deleveraged, balance stakeholders’ interests, cut the role of the adjudicating authority to a minimum, and subsume 12 archaic laws.

The resolution plan by professionals under IBC would be binding on corporate debtors, employees, members, creditors, guarantors and stakeholders. If the resolution plan is not approved or not ready within the stipulated time-line ranging from 135 days to 270 days, or the adjudicating authority rejects the plan, it can pass a liquidation order (LO). The resolution professional would act as the liquidator and all the powers of the Board of Directors would automatically be transferred to the terminator. The position was made clear by the Supreme Court in Innoventive Industries Ltd vs ICICI Bank & Anr (2017). The Court stated the scheme of IBC is to divest the erstwhile management of its powers and vest it in a professional agency.
The first crack appeared when promoters or persons acting in concert or related parties who were instrumental in ruining investor wealth joined the fray to retake the control of the company by putting in their bids. Synergies Dooray was one such case. Here, the debtor company (Synergies Dooray Automotive) transferred its debt to its sister concern (Synergies Castings), which, in turn, transferred the debt to a third party (Millennium Finance). The minority financial creditor of the debtor (Edelweiss ARC), however, assailed the transfer of debt from Synergies Castings to Millennium Finance on the grounds that the sole purpose of such transfer was to dilute the voting power of Edelweiss ARC as Synergies Castings being a related party would not have otherwise been able to vote in the CoC.

However, the government quickly moved in to overcome such abstruseness and amended the rules by way of an Ordinance. The amendment prevented unscrupulous, undesirable persons from misusing or vitiating the provisions of IBC and laid out 10 canons for eligible candidates, preventing value destroyers from retaking the control of the firm. The amended IBC will test the jurisprudence and political will of the government and the financial prudence of RBI. It is yet to be seen if the omnipotent CoC would be fair to all stakeholders of a company under liquidation by maximising the value of its assets and take care of the interests of all entities concerned. In other words, they are expected to take informed decisions ensuring optimum value for the assets on the block and maximising returns to stakeholders. The judiciary and policy-makers will have to face the litmus test as the resolution process would come before the NCLT. The task was made more cumbersome with IBC being silent on the order of priority about the respective rights of different stakeholders over the sale proceeds. This leaves the doors wide open for a conflict of interest between the secured creditors with superior charge over the assets and those with subservient charge leading to protracted litigation.