Implementation gap may hit Insolvency and Bankruptcy Code

Tribunal justice system is now a recognised trend globally, but India's experiment with this has nothing to boast about. 

Given diverse judicial functions it performs, the National Company Law Tribunal (NCLT) is burdened with the workload of enormous magnitude and, in the process, it might lose focus on revival and rehabilitation of sick entities. 

In the fast-changing scenario of growing cross-border investment, trade and commerce, cross-border insolvency cases are bound to increase and a comprehensive bankruptcy code alone can address such issues, taking into consideration international practices. 

Sonam Chandwani, Partner at KS Legal, in an email interview with Zee Business (Digital) delved into various matters related to Insolvency and Bankruptcy Code. 

IBC is in existence from 2016. The government and the courts need to work together for incremental improvements and large-scale reforms.

— Adv.Sonam Chandwani (@muskannn) March 5, 2018

It has been almost a year since the IBC was introduced, do you think this is the one-stop solution for resolving NPAs?

Insolvency law is just one piece in the puzzle. Effective systems, rather than just laws, need to be created to generate right dynamics at an appropriate time to resolve the NPA problem in a realistic way. In India, one needs to focus and improve upon the implementation and execution mechanism.

The new amendment in the IBC allows the promoters to repay their dues and bid in the liquidation process. It also bars a person who has an account under NPAs from participating in the resolution process or submitting a plan. Though this was intended to reduce the number of NPAs, it won’t help banks getting back enough money that they had lent. The moment when a case is referred to the NCLT for insolvency, banks may have to take a haircut of approximately 50% if not more than that. As the trend shows that the cases registered under the IBC are of either small or mid-sized companies.

There is minuscule interest from buyers for most of the small and mid-sized companies. This could fail the resolution, making it difficult for the banks to recover NPAs. Only the promoters are interested in these companies, but by virtue of the new amendment the promoters with large debts cannot bid in the process. Therefore, if a bank gets a buyer for the stressed assets, it has to take an enormous haircut and otherwise, the bank may end up losing all the money they lent by going into liquidation.

Now, insolvency cases have to resolve within 270 days, is not it a very short period of time? According to a World Bank report, it took an average of 4.3 years to resolve a soured account.

According to the data collected from the Ministry of Corporate Affairs, it does not indicate how long the companies have been under the liquidation process. World Bank data on insolvency resolution indicates that in India, it takes 4.3 years on average to liquidate or dissolve a company due to backlog of cases. However, in other South Asian countries on average it takes 2.6 years to liquidate a company.
 

The success of IBC will depend on how effectively it is implemented. The execution can be better if the banks begin to take a deeper look at borrowers’ financial health. One thing that needs to be recognised is that certain companies are irredeemably insolvent, and no amount of restructuring will return them to viability. Such companies should be cut off from credit and banks should work towards the early and efficient liquidation of assets and collateral. Nonetheless, the new amendment bars many debtors such as wilful defaulters, promoters having an account under NPAs from submitting resolution plans.

This ensures that fewer number of cases would get registered with NCLT. Now, more concentration shall be given to the existing cases, resulting in the faster disposal.

Also, there is a provision for fast-track resolution, the time frame of 270 days can be achieved by the NCLT.

 
Do you think a sound framework is in place to deal with insolvency cases?

Despite improvements in the insolvency law, the pace of insolvency and resolution remains slow. There is a dire need of laws regulating cross border insolvency.

With the number of defaults having doubled, the large backlog of cases continues to grow and hold back NPA resolution. Here, the insolvency reforms would benefit from improving the efficiency of the court system. 

To relieve the burden on the courts, a more extensive use of out of court restructuring is needed. Further, steps to reduce the legal burden and speed up collateral foreclosure would also be helpful. We always advise our clients to settle the matters out of court, as we believe, they are best served by the lawyer assisting them with formulating a settlement position and negotiating an out-of-court settlement, be it by way of negotiation or mediation.

Since the code came into being, cases are not being resolved within time-frame, why so? What are the steps the government and judiciary should take to improve efficiency?

The IBC Code is in existence from 2016. In practice, enumerating the law is difficult. The government and the courts need to work together for large-scale reforms and incremental improvements of the problem that is taking a large toll on the economy. 

According to the data collected from the Ministry of Corporate Affairs, does not indicate how long the companies have been under the liquidation process. World Bank data on insolvency resolution indicates that in India, it takes 4.3 years on average to liquidate or dissolve a company. However, in other South Asian countries on average it takes 2.6 years to liquidate a company.

The following steps can be taken for the improvement in efficiency:

•  Fast-forward proceedings to resolve Insolvency
• Establishing new NCLT Benches
• Transfer cases that are in High Courts and other courts to NCLT
•  Monitor the performance
• Allot judicial powers to lower courts that will reduce burden on high courts and the Supreme Court 
• Promote modernisation and digitisation in the judicial proceedings 
• Courts should consider prioritising pending cases and imposing strict timelines within which cases with temporary injunctions should be decided
• Improve courts case management and court automation systems