IBC taking the road less travelled, and that’s making all the difference

Originally Posted on MoneyControl

In the World Bank’s Ease of Doing Business index, the single-biggest factor behind the improvement of India’s ranking has been enactment of Insolvency and Bankruptcy Code (IBC), 2016.

From 130 in 2016 to 63 in 2019, what has transpired is the fact that India now makes it easier for companies to exit its market. The pre-IBC regimes were highly entangled and prompted multiple fora for judicial action leading to creation of ‘zombie firms’.

Zombie firms are those ones that ought to have died, but are kept alive through state and bank support. The lingering presence of these firms increases the cost of output and reduces profitability of healthy firms. IBC is ‘moksha’ mechanism for them through its in-built ‘creditor in possession’ model. The entire process is concurrently acting as a crash course on ‘behaviour change’ for promoters.

The idea is simple -- instead of first taking the loan and then thinking of its repayment, a debtor must plan its repayment first and then take the loan. For, in the event of insolvency, promoters lose control of the company and are barred by law to get the control back as a resolution applicant.

Interesting as it may sound, the entire concept has pushed IBC to face situations unknown to Indian economy. Time travel to December 2017. It had been just one year of IBC and it faced the ire of melting real estate sector.

Big giants like Jaypee Infratech got admitted into insolvency and moratorium came into effect. Under it, no judicial proceedings can be instituted against such company in any court of law or authority. This left homebuyers in the lurch. They could not avail fora like the Real Estate Regulatory Authority (RERA) and consumer courts to seek recovery of dues paid or homes promised.

As a result, scores of writ petitions were filed in the Supreme Court by homebuyers. Acting on welfare state ethos, the government pushed an amendment empowering such homebuyers as financial creditors. Which then meant that, if a homebuyer had paid the dues towards realisation of property over Rs 1 lakh, she could drag the builder to insolvency and even exercise their voting rights in the committee of creditors.

Jump back to December 2018. IL&FS had recently collapsed and worries of a spillover effect were imminent. The shadow banking sector otherwise regulated by the RBI (Reserve Bank of India) was out of the ambit of IBC. The fall of IL&FS prompted the government to plan the next recourse under IBC if another NBFC tumbles like a pack of cards.

This opportunity was soon given by fall of DHFL (Dewan Housing Finance Corporation Ltd). Without further ado, the government utilised its power under Section 227 of IBC and notified resolution mechanism for NBFCs (non-banking financial companies) under the code last month.

In December 2019, the government has proposed further amendments. After the ED (Enforcement Directorate), the SFIO (Serious Fraud Investigation Office) and the CBI (Central Bureau of Investigation) led agency crackdown on Bhushan Steel and Power, investors were hesitant to adopt the IBC route against risks of being troubled by past actions of promoters.

The current Bill proposes to do away with such crackdown by providing immunity to successful resolution applicants. All erstwhile liabilities, of the corporate debtor, shall stand withdrawn and no action will be taken over the property covered in the resolution.

The prospects of IBC looks bright. Extensive consultations are under way on all fronts to notify cross-border insolvency anytime soon. Its need had already arisen when Jet Airways got admitted into insolvency in India and the Netherlands during the same time period.

Group insolvency measures are also being worked around for early enactment. Under it, various companies falling under one group will face one insolvency proceeding alone. Such provisions will help in consolidating operational and financial debt obligations while offering a platter of businesses as a single group to a resolution applicant. While the formal measures are yet to be notified, the National Company Law Tribunal (NCLT) in August 2019 consolidated 13 entities of the Videocon group into a single process.

As of now, no provision under IBC covers personal insolvency. Nonetheless, the government is all prepared to launch it within the next 10 months and a related petition was filed at the NCLT in Andhra’s Amravati this December only.

A byproduct of personal insolvency will also be a debt-relief framework for insolvent individuals with minute exposures. Such frameworks may put a permanent halt to the demand of farm loan waivers each election.

Overall, never in the legislative history of India, an economic law has been that agile to demands of economy, industry and stakeholders alike. All efforts must be made by the government to save it from issues such as slow disposal of cases, inadequate judges, lack of professional integrity that currently plague the Indian judicial system.