The Code aims to consolidate and amend the laws governing the reorganisation and insolvency resolution of these entities in India, as well as all insolvency and bankruptcy-related laws in India that have resulted in insufficient and ineffective results.
ISSUES WITH THE IBC
1. SLOW ADJUDICATION PROCESS – The slow judicial process is one of the most serious problems with the IBC, and many other problems arise as a result of it. According to recent data released by the IBBI, only 156 of the 2,542 corporate insolvency cases filed between December 1, 2016 , and September 30, 2019, had resolution proposals approved, a mere 15%. As seen in various cases, the ambiguity in the law used by various agencies such as the ED, CBI, RBI, and DOT exacerbates all of these delays.
For example, despite a parliament amendment restraining ED’s action and providing new owners of insolvent companies with a safety ring from the activities of old promoters, ED has attached various assets of Bhushan Steel.
Another example: CBI delaying the insolvency process in the case of Educomp Solutions, causing Ebix (a Singapore company) to withdraw its bid; RBI and DOT opposing the resolution plan approved by NCLT in the case of Aircel insolvency, further exacerbating the delay and wasting public funds. To make matters worse, there is no time limit or deadline for adjudication once the case reaches the higher levels in the case of appeals.
All of these arguments are supported by facts that paint a bleak picture: for the past three years, at least a dozen big-ticket cases totaling more than Rs 99,700 crore have been stalled due to legal challenges, and such structural inefficiencies stop new investments and deter foreign firms from investing in India, hurting employment opportunities.
Despite the government’s announcement in July that 25 additional NCLT single and division benches would be established in various locations but the majority of these remain non-operational or partially operational due to a lack of adequate facilities or support staff.
And one of the direct consequences of the slow judicial process is that the NCLT misses the adjudication deadline. An insolvent asset must be settled within 270 days, according to the IBC.
However, the deadline is unrealistic and is not met, as the average duration of resolution in 2019 was found to be 340 days! and the same concern is backed up by the World Bank’s ‘time to resolve insolvency’ index, which gives India a score of 1.6 in resolving insolvency, which is significantly higher than countries like Australia (1.0), Singapore (0.8), and Germany (0.8)
Famous examples of such lingering lawsuits include Essar Steel and Bhushan Power, which have exceeded the 270 day resolution and have crossed more than two years, and the government was forced to set a new deadline of 330 days, and this also violates the basic goal of law is that “justice delayed is justice denied”.
Long trials reduce creditors’ chances of recovering outstanding debt and may cause unnecessary confusion for all parties involved. Effective insolvency proceedings help creditors recover debt by making it more difficult for a company’s owners to sell their properties at an unreasonably low price to a second company they own.
2. EROSION OF PUBLIC MONEY – These delays in the judicial process have resulted in not only a delay in justice but also an erosion of public funds, resulting in a loss of income for the public and economy.
For example, in the Essar scenario, the time value of delays is close to Rs.5 crore per day, assuming a 4% inflation rate and a final bid worth over 42,000 crores.
3. HAIRCUTS – One of the most overlooked issues is the waiver, which requires creditors or banks to take a haircut during the process, and there is no set limit on the number of haircuts.
Except for a few successful resolutions or settlements, there is no reduction in stressed properties. Because not every financial institution or operating creditor uses the I&B Code, they are aware that receiving the debt without a haircut if a corporate debtor goes through CIRP proceedings provides a negligible incentive for the creditor. In the worst-case scenario, the financial institution may be forced to accept a 90 per cent haircut or may not be able to acquire anything at all.
Only 7 cases out of 780 have been closed so far; these 7 cases account for 1% of the total recoverable sum, but contribute 65% of the total recoverable sum, thus distorting the true picture of IBC recovery. Electro Steel, Bhusan Steel, Monnet Ispat, Essar Steel, Alok Industries, Jyoti Structures, and Bhusan Power & Steel are the seven companies involved. Except for these seven cases, IBC recovery has only been 10% so far.
The above assertions were proven in 2019 when the haircut on settled cases was as high as 90% (barring Essar steel), and lenders had to forego 83 percent of the claims in the Alok industry case.
All of these facts and figures are backed up by a report from August 2020, which states that the creditors have a “Maximum value” of Rs 1.73 lakh crore for claims totalling Rs 8.19 lakh crore. The resultant Haircut, worth Rs 6.46 lakh crore, has been closed in 970 cases so far.
The same problem is supported by World Bank data, which show that India’s recovery rate (71.9%) is lower than that of all other nations, including Australia (82.7%), the United Kingdom (81%), the United States (81%), and Singapore (81%). (88.7 percent ).
To reduce haircuts a solution must be provided by the government in order to prevent the loss of bank’s wealth which will prevent further loss to the economy.
4. NON-COMPLIANCE WITH THE RULES – Many companies have booked profits during insolvency that belong to financial and operational creditors, but these laws are not followed in reality, as seen in various cases where Vedanta and JSW Steel, which bought Electrosteel Steels and Monnet Ispat and Tata Steels, booked Rs.5,000 crore profit during Bhushan Steel’s insolvency.
Due to the presence of ambiguities in the law, inefficient and opaque regulatory mechanisms encourage such questionable practices, and law enforcement is required to prevent such promotion. The promotion of such practices goes against the underlying goal of law and, in some ways, encourages discrimination.
5. TECHNICAL ANOMALIES IN ANTECEDENTAL TRANSACTIONS AND PREFERENTIAL TRANSACTIONS
Section 164 of the IBC defines the antecedent transactions and its sub clauses run into contradiction with the intended objective of the act.
The division of assets in insolvency proceedings is governed by the principle of Pari passu (as this principle requires that every creditor of the same class must inter se receive a proportionate share from the bankrupt’s property in return for the debt owed) Before an individual is considered to be bankrupt, however, he may enter into a transaction (‘the antecedent transaction’) in which the consideration obtained by the individual is ‘significantly’ lower than the transaction commands’ consideration.
Because such transactions may result in preferential debt payment (or discharge) when compared to a pro rata fulfilment of demands, they will be in the counterparty’s favour and will violate the Pari passu principle.
The second problematic transaction is preferential transactions.
Several firms, and more especially builders, have practically got away with transactions that are patently and ex facie preferential or undervalued transactions with the intention of somehow defeating creditors due to multiple issues in such provisions.
As a result, these unscrupulous firms have been able to keep capital out of the hands of creditors.
A transaction is undervalued if the corporate debtor enters into a transaction that involves the sale of one or more properties by the corporate debtor for a consideration that is ‘significantly less’ than the value of the corporate debtor’s consideration.
The “look back timeline” is a great issue. This is the period during which the Intermediate Resolution Professional (IRP/RP) evaluates completed transactions to determine if they are preferential or undervalued. Currently, each of the timelines is based on the date of the admission order, which decides whether or not a corporation has entered the Corporate Insolvency Resolution Process (CIRP), rather than the date the operational and financial lender filed its petition.
For example, if a corporate debtor facing litigation engages in an undervalued transaction worth Rs 20 crores in November 2017 and the Creditor files an application in May 2018 that is heard in January 2019 by NCLT, this transaction (of Rs 20 crores) would not be counted in ‘preferential transactions’ and the transaction would not be counted as illegal despite the fact that it was undervalued.❡
CONCLUSION
These issues should be considered and reviewed by a committee, and the IBC should be revised to fill the clauses with the lacunae rather than making stop-gap changes to address issues temporarily, in order to make it a streamlined and well-organized process for increasing investment in India and improving India’s economy and a better quality of life for Indians.
[Vinay Kella is a 1st year law student at Nirma University, Ahmedabad. He can be reached at 20bal072@nirmauni.ac.in.]
NUALS Restructuring and Insolvency Law Journal 