The Insolvency and Bankruptcy Code (IBC) is one of the bigger reforms in recent years. Given the paradigm shift ushered in by the regime change, its adoption was naturally not expected to be smooth.
The biggest obstacle to effective implementation of the IBC have not been weak institutional capacity, but the repeated transgressions of the law and spirit of the Code by the judiciary, both the Tribunals and the Courts. Promoters and bidders have left no stone unturned to use the NCLT/NCLAT and Courts to subvert the implementation of IBC, and the latter have on many occasions shown limited maturity and restraint in ultra-vires interventions.
The latest two examples involve the resolution processes of Jaypee Infratech and Dewan Housing Finance Limited (DHFL).
Consider the case of DHFL, whose promoter is currently in jail on serious charges of money laundering and diversion of funds. In fact, given the nature of the fraud, DHFL was referred to NCLT by the regulator, RBI, itself. In a recent decision, the NCLT directed the Committee of Creditors (CoC) to consider again a plan from the promoters which had been rejected by them. These are the two choices,
Wadhawan had reiterated his offer to pay the entire outstanding principal of Rs 91,158 crore to creditors — an upfront payment of Rs 9,000 crore and the remainder in the form of debt-to-equity conversion across 7-8 years. According to Piramal’s plan (which has been accepted), recovery for lenders would total Rs 35,250 crore, with upfront cash of Rs 12,700 crore.
The promoters offer had been considered and rejected, and the CoC had agreed in favour of the Piramal's plan.
Business Standard writes,
DHFL was referred to the NCLT in November 2019 after it failed to service its debt. Subsequent investigations revealed a gap worth about Rs 15,000 crore on its books. Despite Mr Wadhawan’s offer, the lenders chose to opt for the Piramal group after an intense bidding war with three other entities. Given this background, the NCLT should have rejected the erstwhile promoter’s plea and avoided an unnecessary delay in the final resolution. Section 29A of the Insolvency and Bankruptcy Code (IBC) anyway prohibits the erstwhile promoters from participating in the resolution process... The Companies Act does enable promoters to make compromise arrangements with creditors but it will require withdrawal of the resolution process.
This is a good summary of confusion-creating last minute offer attempts by promoters intent on derailing the resolution process. It's been commendable that the government has largely stayed away from influencing this process. However, as the latest instance of NCLT reference on DHFL shows, the same cannot be said about the role of judicial agencies.
The subversionary role of promoters go beyond such formal actions to less edifying acts to intimidate Resolution Professionals,
RPs face a peculiar set of problems. As no promoter wants to let go of his/her company, the resolution professional is seen as an outsider trying to grab control. That leads to non-cooperation and even harassment in some cases. As of 30 September, there were 3,182 insolvency professionals who have passed a specific test and got themselves registered to act as turnaround specialists. Despite being appointed by a tribunal, these professionals are often left at the mercy of frivolous intimidation tactics by irked workers of the company whose debt is being resolved or, as seen in a recent case, by uniformed policemen... problems faced by the resolution professionals include threats of assault, allegations, complaints, litigations pursued by different stakeholders. To be sure, these are in addition to the regular problems that crop up in the process of resolving the stressed debt.
Consider the case of Jaypee Infratech, which remains locked in resolution and litigation nearly four years after the company went into IBC resolution process.
Lenders to the Videocon Industries Ltd and its group companies, with a total claim of Rs 64,838.63 crore, will get just Rs 2,962.02 crore. Anil Agarwal’s Vedanta Group will have Videocon Industries and the group companies in its fold. In another development, lenders have entertained a one-time settlement proposal of Siva Industries and Holdings Ltd for Rs 318 crore, with an upfront payment of Rs 5 crore — a minuscule percentage of the company’s total dues of Rs 4,863 crore... a nexus between the rogue promoters and the community of bankers, and also between the promoters and the winning bidders for the defaulting companies who are fronting the promoters...Between then and March 2021, proceedings have been initiated against 4,376 companies. Of these, going by the data of the Insolvency and Bankruptcy Board of India, 2,653 cases have been closed. Only 348 cases of the closed cases have been resolved. Among the rest, 617 have been closed on appeal or review or settled; 411 have been withdrawn, and 1,277 have gone for liquidation. The average realisation by the lenders was 45.96 per cent of their claims until March 2020. By March 2021, this had dropped to a little over 39 per cent.How does it compare with other markets? Japan, which introduced a bankruptcy law in 2004, takes six months to settle a case and the recovery rate is close to 93 per cent. The UK introduced a new bankruptcy law in 2002. Here, the recovery rate is 88.6 per cent and settlement is normally within a year. The US, where insolvency law is more than four decades old, takes 18 months to settle such cases with a recovery rate of 80.4 per cent. A World Bank estimate says that in India, it used to take an average of 4.3 years to resolve insolvency and recovery was 25.7 cents for every dollar — implying an average haircut of over 74 per cent for every creditor.
If the company has been sick for years, and its assets have depleted significantly, the IBC process may yield a huge haircut or even liquidation. The companies, which have been rescued through IBC till March 2021, had assets valued at, on average, 22 per cent of the amount due to creditors when they entered the IBC process. This means that the creditors were staring at a haircut of 78 per cent to begin with. One third of these were not even going concerns. The IBC process not only rescued these companies, but also reduced the haircut to 61 per cent for financial creditors.A haircut is typically the total claims minus the amount of realisation/amount of the claims. But this formulation may not tell the complete story. The realisation often does not include the amount that would be realised from equity holding post-resolution, and through the reversal of avoidance transactions and the insolvency resolution of guarantors — personal and corporate. It also does not include realisations made in other accounts (recovery of about Rs 8,000 crore incidental to resolution of Essar). The amount of claim often includes NPA, which may be completely written off, and the interest on such NPA. It may include loans as well as the guarantee against such loans. These understate the numerator and overstate the denominator, projecting a higher haircut.
If Mr Sahoo is right, the haircuts should decline in the years ahead. And the haircuts should have been lower than those through other processes. The former remains to be seen, and the later, while lower, is not significantly so.
Based on a recent report of the Parliamentary Standing Committee, this article calls for a Code of Conduct for the Committee of Creditors, and this draws attention to the problems with the quality and integrity of Resolution Professionals. Both compromise the quality of resolution process.
Update 3 (21.08.2021)
In India, creditors decide the future of an insolvent firm with the help of an administrator called the Resolution Professional (RP). The National Company Law Tribunal (NCLT) is the adjudicating authority. The idea is that with banks having messed up in a big way, it is better to carry out resolution under the auspices of independent authorities. Alas, it turns out that the RP is a weak link in the chain. The Parliamentary Committee has scathing observations to make about RPs. Many are graduates. The regulatory authorities have pursued disciplinary actions against 123 RPs in a total of 203 inspections carried out so far. The Committee wants a self-regulatory body to oversee professional standards for RPs akin to the Institute of Chartered Accountants of India. As for the NCLT, its processes are plagued by delays. There are delays of over 180 days in 71 per cent of cases. The NCLT takes a long time to admit cases in the first place —the Committee wants cases to be admitted within 30 days. One reason for that is, as in the judiciary, several positions on the NCLT bench remain unfilled. The NCLT is 34 members short of the sanctioned strength of 62 members.
It is more important to get the estimate of liquidation value right and to get as many parties to bid as possible. Let there be an independent evaluation of a sample of liquidation values and auction processes. Were the estimated liquidation values appropriate? Was every effort made to open up the auction to a large number of bidders? The answers will shed light on the effectiveness of the IBC process and help address infirmities. It may be useful to create an Office of Independent Evaluation at the Insolvency and Bankruptcy Board of India (IBBI) similar to the one that obtains at the International Monetary Fund.
Update 4 (22.08.2021)
Andy Mukherjee on the over-burdened NCLT,
Across the country, 27 tribunals are being run by 29 judges; at least 25 short of what’s required. Many have no experience in financial matters. One judge, M.B. Gosavi, sits on four benches. Cases from Noida, a suburb of Delhi where big builders have defaulted to homebuyers, land before a single tribunal member 300 miles away. The insolvency courts also adjudicate unrelated matters under the Companies Act, overwhelming an already strained system.