Amay Bahri[i]
Introduction
The Parliamentary Standing Committee on Finance (‘the Committee’) has recently released a Report titled “Implementation of Insolvency Bankruptcy Code- Pitfalls and Solutions” (‘Report’) observing that the Insolvency Bankruptcy Code, 2016 (‘IBC’ or ‘the Code’) has deviated from its objectives and requires a structural change in design as well as implementation. The thrust of the observations of the Committee rely on the fact that there have been huge amounts of hair-cuts (95% as per the Report) to creditors, and that the timeline of 180 days is not being followed. The Report further points out that the Code is not achieving its intended objective of securing creditor’s rights to payment, which would enable borrowing and reduce risk costs. To overcome these issues, the Report has also made a few recommendations to amend the Code. This piece will analyse some of the suggestions put forth by the Committee, and find that some of the suggestions are misplaced.
Important Recommendations of the Committee
1. Benchmark for quantum of hair-cuts
The Report suggested that since the Code has matured, it is essential to introduce some benchmark on the quantum of hair-cuts permissible in a Resolution Plan. Haircut refers to the difference in the amount owed to the creditors, and the amount they receive from the debtor. The amount received after the insolvency process is usually lower than the principal amount originally owed.
2. Institute for resolution professionals
The Report recommended establishing a self-regulating institution, similar to the Institute of Chartered Accountants of India, for Resolution Professionals (‘RP’) that would regulate and overlook the function of RPs to ensure that there are appropriate standards and streamlined approaches. An RP is the person appointed by the Committee of Creditors (‘CoC’) to conduct the insolvency process under IBC, and to run the business of the Corporate Debtor (‘CD’) till the resolution process under the IBC is concluded.
3. Non-acceptance of bids after H1 bidder
H1 bid is the highest bid of all the bids submitted for resolution of the CD. All bids are supposed to be submitted within a specified timeframe, after which the highest bid is decided. It was pointed out by the Committee that there are an increased number of instances where bids are permitted after the announcement of H1 bid. The Report highlighted that such late submission of bids after announcement of H1 bid prejudicially affects the H1 bidder and creates uncertainty. Furthermore, it delays the insolvency process, thereby affecting the time-bound nature of the entire insolvency process. As per the law at this moment, it is upon discretion of the CoC to decide if a delayed bid can be accepted or not; however, to deal with the problems of delayed bids, it is recommended by the Committee that no post hoc bids after the announcement of H1 bidder be entertained.
4. Resolution for particular parts of CD
The Committee has suggested that the Code should clearly provide ways for resolution plans to take certain parts, thereby permitting multiple businesses to resolve the CD.
5. NCLT structuring
The Report noted that the National Company Law Tribunals (‘NCLTs’) are functioning at 50% of the sanctioned capacity. Thus, it suggested that there should be a restructuring in the working of the NCLTs so that there are dedicated benches for IBC matters.
Few of the suggestions made by the Committee are rightly pointed out and warrant further deliberation by the legislature. However, there are some glaring flaws in the observations made by the Committee; more specifically, in the suggestions regarding benchmark for quantum of hair-cut and resolution of CD by multiple businesses.
Quantum of Hair-cut
The Report highlights that the creditors, under the mechanism of IBC, have faced large hair-cuts in the amount they finally end up receiving. The suggestion of the Committee, that there has to be a benchmark for quantum of hair-cut, is based on an erroneous understanding of the Code. The suggestion of the Committee was made in light of its understanding that IBC has failed its fundamental aim of securing creditor rights. This understanding of the aim of IBC is itself flawed. There are numerous decisions by the Supreme Court that clarify that the aim of the Code is not to ensure that creditors get the maximum amount, but to ensure that the CD is revived and able to continue its business. This revival would be beneficial for the economy as the concerned business would continue functioning, and would also employ more people. Thus, the Report grossly misconstrued the aim of the Code by understanding the Code to be a recovery mechanism protecting the rights of the creditors.
Furthermore, the mechanism under the IBC has been working well and has already devised a satisfactory standard of ensuring an adequate amount of recovery. Hair-cuts for creditors have certainly been there, but there is no need for further quantum because a Resolution Plan already has a minimum threshold of giving amount at least or close to the liquidation value of the CD. Any further regulation would affect the free market forces, thereby pushing the entity into liquidation rather than revival. The findings of the Committee also disregard the problems created by Non-Performing Assets (‘NPAs’). Hair-cuts that are faced by the creditors are also because of NPAs; and after removing the haircuts suffered due to NPAs, the quantum of hair-cuts actually suffered reduces. Even with the current plight of NPAs, the recoveries in IBC have been superior to other mechanisms like Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’) and Debt Recovery Tribunal (‘DRT’); thereby supporting the position that there is no need to introduce any sort of quantum. Hence the Report seems to have made a fundamental error in its findings. Instead of introducing a benchmark for quantum, tackling the problem of NPAs would not only ensure greater return but also give the CoC the autonomy intended under the Code.
Resolution of CD in parts
The Committee also suggested that instead of selling the CD as a whole, parts of the same should be sold separately so there can be greater bidding for the desired assets, leading to an increase in the value of the CD. This recommendation is made to allow more value to be received from the resolution process. However, this suggestion also stems from the flawed understanding that the primary objective of the Code is to protect the creditors’ right to receive money.
The approach of resolution of CD in parts raises two fundamental issues in CIRP. The first of these issues is that the independent selling of CD is contrary to the objective of ensuring that the CD is revived and able to continue as a going concern. An independent sale of different parts kills whatever possibility there is of a revival of the CD. The second issue is that the suggestion will cause practical issues such as priority of bids in cases where an applicant bids to buy multiple parts, while another bids to buy only one of those. Furthermore, it will also lead to instances where selling one particular part to one applicant devalues the other parts of the business. In addition to this, the sale of independent parts of the business is already available under the Code, via the liquidation process.
Thus, the resolution of CD in parts would contradict the very objective of the Code, and will not have the intended result of value increase. Once the CIRP fails and the company is facing liquidation, in such cases, a part-by-part sale of the CD is possible; however, the first attempt has to be a revival of the CD as going concern.
Conclusion
The Report submitted by the Committee has provided some useful observations and valuable suggestions that the legislature must look into for improving the effectiveness of the Code. However, the recommendations regarding threshold on hair-cuts and resolution of CD in parts are flawed as they undermine the fundamental objective of revival of CD as going concern. These two recommendations are ill-conceived and cannot be reconciled in a growing economy like India where market forces maintain a delicate balance. Even with a few issues, the Report is helpful in highlighting other issues like the functioning of NCLTs, post-hoc bids, and self-regulation of RPs. Out of all the issues, the issue of NCLTs remains one of the most challenging concerns for the legislature.
Amay Bahri is a final year law student at National Law University Delhi. He is interested in Dispute Resolution and IBC. For any discussion about the topic, he can be reached via mail 9amay9@gmail.com.