It is one of the tragedies of India that sooner than later, even the best of legislation is allowed to decay into irrelevance, thanks to endless litigation.
In the 1980s, we had the Board for Financial and Industrial Reconstruction (BIFR) and the Sick Industrial Companies Act (SICA). Repeated resorts to courts ensured that both were rendered useless in either reviving sick companies or closing them down to recover value from assets.
Then we had the Debt Recovery Tribunals (DRTs) of the early 1990s. They too failed to solve the problem of hastening the recovery of assets from moribund or failing companies. In fact, the courts, through various judgements, introduced more complications in the earlier resolution laws by giving some categories of creditors (like cane growers in a 2014 case filed by Rashtriya Kisan Mazdoor) precedence over banks with valid collateral. In another judgement the same year (the Arihant Threads case), the Supreme Court decided on the overlaps between the SICA and DRT laws by giving the former precedence, which meant reviving units had to take priority over loan recoveries.
Now, we have the Insolvency and Bankruptcy Code (IBC), which is less than three years old, but increasingly shows signs of wear and tear. The last two years of IBC-related litigation have shown that we are capable of ruining the best of legislation by allowing court processes to drag on endlessly when the whole purpose of the IBC was quick resolution of bad debts.
Nothing demonstrates this as well as the case of Essar Steel. The insolvency process began some 21 months back, and today, after several missteps, and spoiler bids by the promoters (the Ruias), the Committee of Creditors (CoC) faces another challenge before (hopefully) giving the company to the winning bidder ArcelorMittal. The reason: one of the creditors, Standard Chartered, which does not have first charge on the assets of Essar because it gave the money to a subsidiary, is not happy with what the CoC is giving it.
The CoC initially offered Stanchart Rs 60 crore against its loan outstanding of Rs 3,500 crore; then, when the National Company Law Appellate Tribunal (NCLAT) asked the CoC to consider giving Stanchart more, the lenders recently offered to raise the payment by another Rs 1,000 crore, but Stanchart is likely to take the matter to the Supreme Court, though there is an NCLAT hearing ahead of that on 8 April.
This is the real problem with the IBC. If any and every creditor is going to take the matter to the Supreme Court or the appellate tribunal (NCLAT) even though the broad contours of IBC case law have already been decided, we are going to have needless delays. The IBC will soon meander into worthlessness as cases drag on in court.
Already, under an NCLAT judgement, delays caused by legal issues are to be excluded from the 270-day limit to resolve insolvency cases. This means that deadline is now a dead letter whenever large recoverable assets are involved (as demonstrated in the cases of Bhushan Power, Binani Cement, Essar Steel).
In two different judgements (one in the Binani Cement case) and another in a broader case that challenged the constitutional validity of the IBC itself, the Supreme Court gave important guiding principles. In the first case, it said realising the highest value for creditors was an important goal for the IBC process. This is how Binani Cement went to the Birlas, who had initially lost the bid by a whisker to Dalmia Bharat, but later offered a much better deal to all creditors.
In the second case, the Supreme Court decided that financial creditors had precedence over operational creditors. In the Essar case, the CoC represents the financial creditors, while Stanchart is technically an operational creditor. Using the second judgement as the guiding principle, Stanchart should lose this case and accept what has been offered by the CoC. One also wonders why the NCLAT suddenly confused the picture by asking the CoC to up their offer to Stanchart.
Two things are clearly needed. The IBC code needs to be comprehensively rewritten, so that the law does not get rewritten piecemeal by judges deciding the law based on appeals and arguments by various litigants in specific cases. Secondly, apart from deciding the precedence of creditors in receiving their share of asset values realised, there ought to be a stronger provision on delays.
The NCLAT order that excluded legal delays from the 270-day deadline for resolution needs to be modified in the law. The Binani case offers one possible solution. Since the Birlas were fighting a legal case in courts, in order to retain favour with the CoC, they offered additional compensation to the lenders to account for the time cost of money.
This offers a possible solution. If the IBC gets a new provision, where once the 270-day limit is crossed, the time cost of further litigation is billed to the litigating party, the tendency to keep challenging orders in court will reduce. For example, if Rs 1,000 crore is the resolution amount possible today, and some creditor, financial or operational, challenges the CoC decision, the litigant should be forced to compensate creditors for the delay at, say, the RBI’s bank rate, or the State Bank’s base lending rate. The courts can, however, be given over-riding powers in case there is real injustice to any party in the process.
A law to resolve bankruptcy that pays no attention to the time costs involved in settling cases is not worth the paper it is written on. In a recent interview to Business Standard, Insolvency and Bankruptcy Board of India Chairman M S Sahoo said that IBC is a marked improvement over the previous processes. The average time taken to resolve cases is 300 days, and the cost of resolution is 0.5 per cent of money realised against 9 per cent under BIFR.
He may be right. But 300 days is already 30 days longer than what the law permits. And if we have more contested cases like Essar Steel, which is still to be finally resolved after more than 630 days, we should worry about the IBC’s future too. The time to pull back is now by raising the cost of delays through litigation.
While filing cases right and left, nobody is asking a more basic question: if a litigant manages to quash the Arcelor bid, ArcelorMittal will presumably be right to say, sorry, this does not work for me. We are back to square one.
The right measure to evaluate the IBC is not the yardstick of what happened under SICA or DRT laws, but what is happening in its own context – a 270-day deadline for resolving cases. This means litigation delays must show up as a cost to somebody.
R Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi
This article first appeared on Swarajya Magazine.