The Insolvency and Bankruptcy Code [IBC], 2016, has captured the imagination of corporate India, the banking sector and professionals alike. The pink newspapers carry significant coverage of all the IBC cases, demonstrating the importance of the code at a time when non-performaing assets (NPAs) of banks are reaching unimaginable proportions.
Cases are being filed under the IBC at breakneck speed and investors, both domestic and foreign, are exploring the prospect of picking up stressed assets worth billions of dollars that are up for grabs. The IBC is a game changing legislation providing a composite legal framework to ensure timely resolution in the case of a default. However, there are multiple challenges being faced in the implementation of the IBC. This article discusses some of the key challenges in its implementation.
Inadequate number of National Company Law Tribunal (NCLT) benches and judges
Currently, there are only 11 benches of the NCLT across India with a combined strength of 26 judges handling more than 2,500 IBC-
related cases. This is grossly inadequate to handle the deluge of cases that are currently being filed under the code.
In addition to IBC cases, the NCLT also has to deal with cases under the Companies Act such as those of oppression and mismanagement, schemes of mergers/demergers and amalgamation, rectification of registers, etc. This puts the NCLT under tremendous pressure resulting in delays in disposing of cases. NCLT benches are unable to deal with the cases filed under the Companies Act due to the pressure of IBC cases.
It is thus recommended that the number of NCLT benches as well as qualified judges be increased to handle the volume of cases. Ideally, each state should have at least one NCLT and the larger states should have more than one NCLT bench.
Lack of qualified resolution professionals
Resolution professionals are one of the important pillars of the IBC. However, the current functioning of these professionals is a cause for concern. Most qualified resolution professionals are practising chartered accountants, company secretaries, lawyers, etc., with very little or no experience on how to run a business. Resolution professionals are required to discharge two primary duties – run the business as a going concern to ensure there is no value erosion and facilitate a resolution by coordinating with the committee of creditors. However, there seems to be a gap between expectations and the reality. In most cases, resolution professionals just act as mere administrators and react to situations rather than being proactive in discharging their duties. In reality, the choice of a resolution professional is often driven by costs instead of ability and expertise of such professioanls. This should not be the case if the idea is to revive a company or maximise value. Ideally, resolution professionals should have expertise in running a business in the relevant sector. An interesting observation is that in the case of smaller companies, the resolution professional pushes the matter for liquidation as against facilitating a resolution, as his economic gain under liquidation is pre-fixed at a handsome level under the law.
Action against guarantors
Can a financial creditor proceed against the assets of a guarantor while the corporate debtor is undergoing a corporate insolvency resolution process (CIRP) during the moratorium? The National Company Law Appellate Tribunal (NCLAT) judgment in the case of State Bank of India v. Mr. V. Ramakrishnan and Veesons Energy Systems Private Limited is in contrast to two other NCLAT judgments in the cases of Alpha & Omega Diagnostics (India) Limited and Schweitzer Systemtek India Private Limited. We understand that the State Bank of India has challenged the verdict of the NCLAT in the Veesons’ case before the Supreme Court of India. The IBC itself provides that the moratorium can only apply to the assets of the corporate debtor and hence the question of extending such a moratorium to the assets of the guarantor does not arise. However, some ambiguity exists on whether any action against the guarantors is permissible while the corporate debtor is under the CIRP. Clarity on this is expected in the next round of amendments to the IBC.
Inability to come up with a resolution plan within the period of 180 + 90 days
There are many instances where the resolution professional is unable come up with a resolution plan or have the resolution plan approved by the committee of creditors. In such cases, the NCLT has no option but to allow the company to go into liquidation. The deluge of cases that the NCLT is currently dealing with, both under the IBC as well as the Companies Act, makes it difficult for the NCLT to deal with this process within the stipulated 270 days. The need of the hour is to either revisit the 270-day deadline or increase the number of benches and judges substantially. The latter is a better solution.
Section 29A of the IBC
This section has created several controversies since its introduction on November 23, 2017. Section 29A disqualifies certain categories of people from submitting a resolution plan. The categories are wilful defaulters, accounts classified as NPAs for over a year, a person disqualified to act as a director under the Companies Act, 2013, a person who has executed an enforceable guarantee in favour of the creditor in respect of a corporate debtor (under the CIRP) or any other connected person, etc.
With regard to wilful defaulters, the Reserve Bank of India circular stipulates specific conditions and requirements which are required to be complied with before a bank can declare a person a wilful defaulter. However, the terms “defaulter” and “wilful defaulter” are often used loosely and interchangeably as a result of which directors (including independent directors) of a corporate debtor are also declared as wilful defaulters on occasion. If this is the case, such a person will end up litigating for at least a few years to have the tag of wilful defaulter removed. However, till such time, he would be deemed to be ineligible to participate in the resolution process under Section 29A of the IBC.
Another instance is the recent action of the Ministry of Corporate Affairs disqualifying over 200,000 directors on account of certain non-compliances. Subsequently, the ministry came up with a scheme for having those defects rectified in order to remove the tag of disqualification, but this process took four-six months. In the interim, many directors would have lost an opportunity to bid for their companies on account of Section 29A of the IBC.
Section 29A appears to be disruptive as it presumes that all promoters of the defaulting company are dishonest and fraudulent. Earlier, the resolution plan had to qualify for submission to the committee of creditors. In addition to that, now, even the person submitting the resolution has to qualify. There is no scope for considering promoters of companies that have become NPAs due to a bad business environment. Globally, promoters are entitled to bid for the asset. This can cause, and is in fact causing, severe difficulties to promoters of small and medium enterprises who are in the best position to get back into the company in order to revive it. However, Section 29A prohibits this. The outcome in high profile cases such as Essar Steel, Binani Cements Limited, etc. may determine how the IBC is viewed by international investors looking to invest in distressed assets in India.
The controversy caused by Section 29A of the IBC in cases like Essar Steel, where ArcelorMittal and NuMetal were bidding for a resolution plan but were both disqualified, and Binani Cements Limited, where a revised bid by an unsuccessful bidder, UltraTech in partnership with Binani Industries Limited (promoter of Binani Cements Limited), was allowed after the Dalmia Bharat Group was declared a successful bidder. While value maximisation is the objective, the same has to be achieved within the ambit of the IBC.
Some of the critical challenges emanating from cases such as Essar Steel and Binani Cements are as follows:
- Does the NCLT have the power to extend the CIRP beyond the stipulated 270-day period, if the potential resolution applicant is disqualified under Section 29A of the IBC?
- What is the extent of the cure period which should be allowed for such resolution applicants to rectify the defects?
- Should an out of court resolution/settlement by a resolution applicant be permitted? Is a resolution applicant permitted to join hands with the promoter of the corporate debtor under the CIRP? If yes, then should Section 29A of the IBC be amended to include such an eventuality?
All these issues will need to be resolved either through an amendment to the IBC or through a verdict of the Supreme Court of India.
Overall, the IBC is well intentioned with its implementation under evolution. This is a great opportunity for India to clean up its NPA mess. However, one needs to remember that the success of the IBC is dependent on the institutional framework under the IBC – the Insolvency and Bankruptcy Board of India, the NCLT, the NCLAT, resolution professionals, information utilities – functioning in a coordinated manner. If the above-mentioned challenges are addressed, it will just be a matter of how the objectives of the IBC (in terms of maximisation of value in distress situation and creation of a robust debt market) would be achieved.