Insolvency, Bankruptcy and Restructuring- A Discussion

It is felt that the IBC or the Insolvency Bankruptcy Code has been a game-changer in economic legislation. Five years into its introduction, the IBC is a well-oiled apparatus, with a thriving ecosystem comprising about 3500 Insolvency Professionals, three Insolvency Professional Agencies, about 80 Insolvency Professional Entities, one Information Utility, 16 Registered Valuer Organisations, more than 3900 Registered Valuers, several benches of the Adjudicating Authority with pan India presence and a massive volume of jurisprudence that has facilitated the cause of the Code time and again. However, five years after the introduction of IBC, a few important questions arise on the functioning and delivery of the law and whether it has been able to achieve the stated objectives. As per available data, the average time taken for initiation/admission of IBC cases has gone up to more than 180 days. Several critical legal questions have arisen regarding the rights of various stakeholders, such as the rights of secured creditors, the ability of bidders to take control over a company pending approval of the resolution plan by the NCLT, and the creation of liquidity in the distressing phase. Hence the esteemed panelists of the SKOCH group’s panel discussion on “Insolvency, Bankruptcy and Restructuring” will discuss various issues surrounding it.

The bankruptcy code has been a resounding success. The recoveries that we have seen as a result of the bankruptcy process, the mere threat of the bankruptcy process, and the settlements that had occurred before a company went into insolvency have been quite enormous. Lenders also acknowledge that they have never had such an essential tool in the history of independent India when it comes to restructuring or, for that matter, recovery of use, whether restructuring or recovery is the appropriate goal of bankruptcy. The point remains that, in a banking sector, such as ours, where predominantly it is owned by public sector lenders and ultimately, where any losses to public sector lenders have to be back-ended by the public exchequer at some stage. The fact is that this is an essential tool in the hands of recovery as well as resolution.

Delays in the admission of IBC cases

It must also be noted that over the last two or three years, there have been significant delays in admission in cases being called from a resolution standpoint, in terms of entertaining litigations that may not be probably entertained during the process, and there are multiple reasons for this. One is if we look at the number of vacancies available at the NCLT, we can see how many vacancies are there and how many have been filled and are yet to be filled. As of today, about 50% of the vacancies are yet to be filled, so there is a big gap. Number two, some of these things we took for granted is that if there are amounts due by a creditor, then there shouldn’t be any questioning around this. There should be no adjudication around it, and it should be admitted. It is probably a lack of understanding of the role or maybe a more socialistic mindset in terms of allowing an opportunity for everybody to be heard, taking their own time to get adjudicated. That is probably causing much of these delays as far as admissions are concerned. 

Typically, the process from admission to approval takes around 400 days. So, substantially long as compared to what is prescribed by the code. Here the critical question is if some of these raised applications or issues need to come to NCLT? According to Deepak Chauhan, Director and Head (Legal), Welspun Group, observation has been generally on things, for instance, multiple applications getting filed, provisional applications, and interlocutory applications, throughout the process. Hence it is not a simple admission process that goes straight to approval. So now, for what issues can be before NCLT, that itself needs to be framed, which means that for these specific issues, one could be before NCLT. Some pleadings even run for 800 pages. 

Solving delays

Managing Director of Alvarez and Marsel, Mr. Venkatraman, said with regards to solving delays that “if we were to look at the delay in admissions, what we have seen have been on twofold. Firstly, an application filed by an operational creditor can still be a matter of question or a matter of diligence that needs to be done. Still, when an application is filed for a financial default by a financial creditor, the admission process should not take time. It’s not very difficult to establish the integrity and authenticity of that default being established, and the application is filed.” He further says that “one way of solving it could be that there were some thoughts initially that information utility or a third party be interested. This verification of the entire application establishes the financial default. The third party would be put in place, reviewing this entire application in parallel form from debt, from a loan agreement, governance, and payment history perspective to establish that a default has happened.”

“In most of these situations, there is a consortium of lenders. There has to be a discipline among the consortium of lenders that they meet together, agree together, and one of the lead lenders files for it, and they’re after the whole process of who will be the RP and who will run the process. Here again, you have different lenders filing for applications at different points in time, and then each needs to be heard separately, bringing all of them together. Time is being wasted in the whole process, meaning the lenders need to agree and decide that it’s the time to file and then agree upon who’s going to be the resolution professional,” he said. Now, the judiciary should look at only the process compliance, and that window for natural justice has been provided for people to hear. Many times, it is seen that the commercials also get debated in sometimes. There have been instances, but probably that’s more of a learning exercise.

Understanding the alternatives to IBC

So here comes the critical question of whether every distressed situation should be resolved through or there should be mechanisms that are equally viable outside the IBC process? Answering this question, Mr. Mrinal Chandran, General Counsel (India Resurgence Fund), said, “Bankruptcies are complex, bankruptcy, laws, processes around bankruptcy are complex anywhere in the world, and we’re still scratching the surface in terms of the issues that will come up in the next 10-15 years in bankruptcies as bankruptcies evolve. I think this code is perfect and has everything it needs today.” Mr. Dinkar Venkatasubramanian, India Partner and National Leader- Turnaround and Restructuring Services, EY, was asked to comment on why alternatives to IBC have not seen as much success. He said, “Two big points there, one is obviously IBC has had become the only channel for resolution, from 2017 to about 2020. Also, because it gave the lenders a certain level of protection for decision-making, there was a clear-up of the last things driven through IBC. The biggest challenge on the June seven circular resolutions has been lender consensus-building.  Most of these lenders are multi-banker consortiums, and even if you have a homogeneous set of lenders, driving consensus is difficult. But we have seen a number of these cases where there were multiple types of lenders. Apart from the public sector and commercial banks, mutual funds and other entities. So, trying to make them agree has been a big challenge.”

What’s ailing the non-IBC resolution framework? Will it is June seven or a scheme of the arrangement, and what can be done to strengthen that?

Nilang T Desai, Senior Partner, AZB& Partners, said, “I don’t think there is going to be any way out of the delays until we fill up the benches with adequate judges. I think the fear is for many public sector bankers that how do I get to a position where the number which I agree with outside the court is safe. Again, if it’s a large consortium of 25 banks, maybe it’s more comfortable, but if it’s a smaller consortium, there’s that fear factor. Another undeniable point is that you know IBC crams down all debt, whether you come to the table or not. All your debt is crammed down at one table, so you have a clean whitewash at the end of the process instead of a bilateral process where you need to get all the players to the table.

Process-related roadblocks to effective insolvency resolution- A bidder’s perspective

From a bidder’s perspective, they have probably identified an asset. Whether a fund or a corporate, it’s to aggregate to their business or as part of an investment. They have this construct in mind that they would have planned to deploy a certain amount of capital, and they would have plugged in the potential acquisition into the larger scheme of the business, which, if it doesn’t play out after a point in time, it doesn’t make sense for them to pursue those acquisitions. Their faith in the system erodes in some form or fashion. So that’s a deterrent, which is probably limiting the bidding community.  Over time, the attachment, the tax issues, etc., got resolved through suitable amendments to the code. So, there was a window where this could have become extremely attractive.

Minal Chandran being a financial bidder attempts to explain if financial bidders like him face more constraints and less flexibility. According to him, the number of financial bidders for assets has gone down because it’s getting harder; hence, the ample assets will get resolved. One may take some comfort if it’s a significant asset and an exception to that Videocon. So it is indeed challenging because there remain many other constraints. Hence constraints will always be there unless there is a certainty to this. He believes there’s a lack of clarity regarding how and when this process ends. And that, again, is making it very difficult to go and look for assets.

Understanding the issues surrounding Section 21A

According to Dinkar Venkatasubramanian, the 29A wasn’t a part of the original scheme of IBC. It came in later to prevent tainted people from reading for assets and reviving them in general, not just those, to avoid a moral hazard that promoters should not get the same help back at steep discounts at the expense of the lenders. On the other hand, Venkataraman feels that the interpretation of section 29A is purely from a technical default and because it was challenged, the entire process was dragged for nine months in Court. The intent was that if a company is up for insolvency, the original promoters of the company should not get a window to sneak in at a lower value at the cost of creditors to get back that company. But it has become a technical point used by the existing promoters to challenge new bidders to acquire their company.

Mrinal Chandran then says that 29A is a real problem because it is not there in any other bankruptcy statute. He feels that it will make the process much more complex, and once that happens, it will go back to the original promoter because he is the only one who’ll tell what the value is. On the other hand, Deepak Chauhan explains his view by saying, “we have seen many sectors like gas-based power plants or coal allocations where businesses have failed on many occasions due to government policies, and the problem is 29A.” 

Dinkar Venkatasubramanian and Mrinal Chandran agreed that larger companies should extend pre-packs. At the same time, Venkataraman’s views regarding this particular issue are slightly contradictory to what Dinkar said. Both Deepak and Venkataraman talk about the timing at which pre-packs are allowed. For instance, if one starts at an early warning itself saying a default has happened just before the time when the first default has occurred. These sorts of checks and balances would need to come.

Suharsh Sinha agreeing with Venkataraman’s views, said that the way companies or businesses are structured in India is that they tend to be a hive of group companies. Even if the business is integrated for practical purposes, for various reasons, the promoter wants to house them under different corporates, whether it is for tactical reasons or whether it is for commercial reasons, or tax reasons, but that’s quite prevalent in India.

Recommendations

• Some level of discretion needs to be exercised by the judiciary at the threshold level to filter which of the rights being agitated are frivolous and which deserve to be heard in full.
• There must be a discipline among the consortium of lenders that they meet together and agree on.
• If a company is up for insolvency, the original promoters of the company should not get a window to sneak in at a lower value at the cost of creditors to get back that company.
• Though Section 21A would be there in some form, at the same time, there must be some criteria or some basis for that exception. There is a need to give some thought to it and bring out that exception which can be on a case-to-case basis, where the promoters are permitted to look at the asset.
• There should be an extension of pre-packs to larger companies.
• There should be some level of clarity regarding which of the cases are eligible to appear before NCLT.