The suspension of the Insolvency and Bankruptcy Code (IBC) proceedings for a year raises concerns for various stakeholders. IBC has arguably been one of the crown jewels of reforms and has helped India jump a few notches on the ‘ease of doing business’ index. If the intended consequence of the suspension was to protect India Inc. from a stringent legislation for NPA resolution and prevent companies from being acquired at rock-bottom valuations, we may need to take a closer look to see whether intent and effect will actually converge.
IBC has been strenuously positioned as a tool for restructuring rather than for recovery. Prior to it, the modes of restructuring were primarily limited to the failed SICA, provisions under Section 391 of the Companies Act, 1956, and the then-applicable RBI guidelines. SICA has been repealed and the provisions of the Companies Act, 1956, have folded into the Companies Act 2013 (the Act).
After the suspension, avenues for rehabilitation are currently only under the Act and RBI’s Prudential Framework for Resolution of Stressed Assets (June 7 Circular). Both are inhibited by their own limitations, which makes them fall short of being an all-encompassing rehabilitation programme. The scheme under the Act or the June 7 Circular only binds the creditors and shareholders if they are a party to it. The sweep of the resolution plan under IBC is far more comprehensive and binds all stakeholders. It has the ability to whitewash all past liabilities (including statutory liabilities) and give the corporate debtor a fresh start. Concessions in the form of extension of time for obtaining government approvals are an added benefit not available under the Act or the June 7 circular.
Billions of dollars have been stuck in non-performing companies. The IBC came as a beacon of hope for freeing the money. It allowed some of these companies (where at least the assets were of good quality) to be put back into profitable operation. Though there have been valid concerns raised by investors on the timelines being extended much beyond the stipulated mandate, empirical data has shown the IBC to be the most effective resolution framework till date.
Further, Covid has and will create a large pool of distressed assets across the globe. Investors will naturally be attracted to jurisdictions where there is certainty. One view can be that all the good assets in India have already been taken up in the first phase and there may not be too many meaningful distressed assets left. This ignores the fact that a ‘good performing asset’ pre-Covid may slip into ‘good NPA’ now.
But the debate cannot be restricted only to the absence of distressed ‘good’ assets in India. The IBC is essentially a framework for restructuring. Bottlenecks did exist, and the Insolvency and Bankruptcy Board of India (IBBI) and the Centre consistently demonstrated remarkable proactiveness to remove these bottlenecks regularly after receiving inputs from stakeholders.
The intent to suspend IBC is, at one end of the spectrum, a socio-economic one to prevent companies from being acquired at abysmal valuations through adversarial action of the creditors, and at the other end to prevent the system from choking up with countless cases. Needless to mention, action against defaulting companies is in any event available under the debt recovery tribunals/civil courts/ arbitration or even SARFAESI Act. Interestingly, jurisdictions in the EU and UK are also considering or have already implemented partial suspension of insolvency proceedings. However, this article is not delving into the nuanced differences both in the law and the socio-economic topography between them and India.
Even if the argument was to prevent acquisitions at pandemic valuations, the below-mentioned three-pronged approach may be considered by the Centre as a lifeline to struggling companies:
(i) Allow applications to be filed under Section 10, which the defaulting company (or its shareholders) can submit under the IBC for its own rehabilitation;
(ii) Introduce the framework for allowing pre-packaged resolutions to enable companies and creditors to negotiate an acceptable restructuring package and implement the same through the judicial supervision of NCLT;
(iii) As a corollary to the pre-packaged resolutions, suspend the controversial Section 29A (which prevents promoters from participating in resolutions).
This would give flexibility to the lender community and the stressed companies to agree on the extent of credit concessions. The same would have been blessed by the NCLT through a judicial process to expand the binding nature of the restructuring package to all stakeholders. This would allow the company to restate its obligations to an acceptable level and allow continuity of the business.
Whilst the extent of the economic impact of Covid-19 is still being assessed, there is little doubt about its enormity. The ominous cloud of recession or at least a hitherto unexperienced economic slowdown requires a robust framework for rehabilitation more than ever before. It is the healing balm that the economy needs more than ever. To shut that door would be like keeping a critical patient hanging outside the ICU with neither certainty nor hope for recovery.
Managing Partner,Argus Partners