Events thereafter buttress the fact. One of the four pillars of IBC is the Adjudicating Authority. The situation at National Company Law Appellate Tribunal (NCLAT) and National Company Law Tribunal (NCLT) is an indication of the attitude that prevails vis-à-vis IBC. NCLAT, after the retirement of Justice S J Mukhopadhaya, in March 2020, got a full-time chairperson in October 2021. Similarly, NCLT did not have a full time President from January 2020 to October 2021. The dwindling bench strength at NCLT forced Supreme Court to intervene. Even today against a sanctioned strength of 63, NCLT has 45 members. It seems similar modus-operandi is being adopted to deal with another important pillar of IBC i.e., the regulator. After, the retirement of Chairperson MS Sahoo, the Central Government has appointed a part-time Chairperson at IBBI.
The finance minister in her budget speech of February 2021 had proposed establishing a National Asset Reconstruction Company Limited (NARCL) and an Asset Management Company to take over the existing stressed assets; manage and dispose of the same to investors. The budget announcement led banks to identify the NPAs, that they intended to transfer to NARCL, and slowed the march towards resolution under IBC. In the six months ending September 2021, post lifting of the Covid moratorium, only 285 NPAs were admitted under IBC. Without getting into the debate of moral hazard, less than two months away from the next budget, not a single loan account has been transferred to NARCL. Furthermore, attached to the loans are the personal guarantees of the promoters. A delay in transfer of loans will thus have a concomitant effect on the insolvency action against such promoters.
The budget also proposed setting up of a development financial institution, now called the National Bank for Financing Infrastructure and Development (NBFID) to act as a provider, enabler, and catalyst for infrastructure financing. NBFID can take over or refinance loans extended for infrastructure projects or acquire a business the principal object of which is providing infrastructure finance. The carte blanche powers in NBFID’s charter may turn out to be the saviour for some of the NPAs that will be transferred to NARCL.
The August 2021, Jayant Sinha Committee report had practical recommendations on most of the facets of IBC. However, two of the recommendations of committee if implemented will be detrimental to IBC. The first being creating a benchmark for the quantum of haircut; an asset will usually fetch what it is worth in an open-market bidding and the recovery percentage is sometimes distorted due to inclusion of invoked cross-guarantees in the total claims. The second being provision of additional protection to MSMEs in the distribution mechanism in consonance with MSME Act; implying a carve out from financial creditors pie. Secured financial creditors will be reluctant to use IBC if these clauses are incorporated.
The September 2021 Report of the Committee to Review the Working of Asset Reconstruction Companies, (ARCs) of Reserve Bank of India, was comprehensive in all aspects. Nevertheless, if all the committee’s recommendations are accepted, on one hand it will enhance the functioning of the ARCs but on the other hand it will make IBC a less preferred option for resolution. Moratorium is a distinguishing feature of IBC; the aforesaid report recommends a moratorium of two years on proceedings against the borrower and deferment of Government dues, in cases, where an ARC has acquired 66% of aggregate debt pertaining to a borrower.
Determination of liquidation value and fair market value is prescribed for all accounts above Rs 100 crore; a concept borrowed from IBC. Financial entities need to list out reasons if more than two-year-old loan, over 100 crores, without an active resolution plan is not included in the list of NPA’s to be sold to ARCs. Interestingly, there is no requirement for financial institutions to list out reasons if an account in default is not marked for resolution under IBC.
IBC is a good legislation and catapulted India in the World Bank’s ease of business rankings. Unfortunately, Doing Business Report got embroiled in scandal on account of data irregularities in 2018 and 2020 and thus the World Bank discontinued the rankings. It will be a pity, if a few years down the line, someone maligns IBC in the same vein, as a legislation that was in full force, initially, to address the cohort of unfavoured and thereafter was tactically soft-pedalled for the favoured.
The contributor is an Insolvency Professional and Restructuring Consultant.
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