The Insolvency and Bankruptcy Code, Government of India broadcasts, has propelled India’s rank in World Bank’s Doing Business 2020 report to “63rd position as compared to 77th position in 2018 ”. This and positive commentaries [1, 2, 3,…] notwithstanding, drastic year-on-year change of 56 positions in the subindex for ‘Insolvency Resolution’ should be taken cautiously, insofar as the question of data irregularities in the World Bank publication persists.
In any case, IBC is not an absolute recovery mechanism, which many silently perceive, when they give primacy to the recovery value for financial creditors. About which, in Parker Hannifin India Pvt. Ltd. v. Prowess International Pvt. Ltd., 2017, National Company Law Tribunal (NCLT) emphasized, that the act primarily relates to ‘reorganization’. So, one set of arguments is for a shift from a creditor-dominated process to ‘debtor-in-control bankruptcy process’, which, with an overarching tool for suspension of proceedings, it is believed, may give a suitable space for creditors and debtors to negotiate.
The motivation is that creditors must be stopped from triggering insolvency, but is this position feasible? Or is this a hypnagogic trick from the capitalist playbook to balk at reform? Well, let us see.
As the Supreme Court of India ruled, in Innoventive Industries Limited v. ICICI Bank, 2017: “The obligation of the corporate debtor was, therefore, unconditional and did not depend upon infusing of funds by the creditors into the appellant company,” affirming the creditor-friendly character of the Code. On the other hand, signaling a debtor-friendly approach, in Committee Of Creditors Of Essar v. Satish Kumar Gupta, 2019, the Supreme Court removed the mandatory limit of 330-day (270+60) for insolvency proceedings, sanctifying Article 19(1)(g) of the Constitution.
When read together, some may say, these suggest a middle-path. This path is actually inimical to a developing country like India, with extreme inequalities of wealth and income, which also is structurally threatened by rising crony capitalism that, by definition, protects the interests of politically-connected debtors. For instance, a recent amendment to the Code promulgating pre-packs for MSMEs, or Micro, Small and Medium Enterprises, should be appreciated, but its wider application may open, under current circumstances, the floodgates for phoenixing, as interpreted in Essar’s case—the practice of buying the same business back through a phoenix company; the ultimate aim being to shirk debts.
This catalepsy, it is true, is precisely the reason why Urjit Patel, former RBI Governor, in Overdraft: Saving the Indian Saver, frowns upon the 2019 SC judgment, demanding a balance: the bank’s right to carry business, since delay/non-recovery of dues directly impinges on how much capital a bank gains, saves and loses, which in turn determines whether and how much it can lend, that is, conduct its business.
Patel further cites December 2019 figures from the Financial Stability Report and Report on Trend and Progress of Banking in India, of “frauds of Rs. 5 billion and above in the first half of 2019/20 jumped to Rs. 1.1 trillion from Rs. 617.6 billion in 2018/19,” which, he argues, are the outcome of deviation from strict regulations As there are “no hard consequences for errant borrowers as compulsory recovery/liquidation is off the table,” he puts, “deterrence [effect] works only if defaulters—current and potential—face economic consequences within a (reasonable) timeframe…”
A rapid review: the case of Anil Ambani, known to be close to the present regime, who along with many other industrialists, have now approached the Supreme Court with a demand to ‘safeguard’ the right of personal guarantors of corporate debtors under Article 14 of the Indian Constitution, of equality before law, which they allege, has been violated by ‘selectively’ notifying certain IBC sections. Whatever the outcome may be, it is amply clear that the SBI, the largest public sector bank in country, will not be able to quickly recover Rs. 12 billion, which was retrospectively marked Non-Performing Asset, in 2016, and ordered by NCLT to be recovered through insolvency proceedings against RCom and RITL. If recovered and redirected, this, in Covid-19 times, could be utilized for potential income generating activities among marginalized strata?
Just the tip of the iceberg! And this does not stop at corruption.
India—as is well known, corruption, economic development and violence are interrelated—presents an extension of this to insolvency proceedings, too. As threats, harassment, violence against Resolution Professionals (RP), who find themselves at the fulcrum of Creditor v. Debtor tussle, rise, NCLT’s Chennai Bench felt the necessity to observe in January this year that RPs cannot function under such pressures. Intimidatory ploys against RPs should have rung alarm bells; however, they, it is appropriate to conclude, fell on deaf ears.
And as the NCLAT has finally ruled, learning from Arcelor Mittal (India) Ltd v. Satish Kumar Gupta, 2018, on the authority of IBC over other contravening laws, and also the fact that the Code itself is evolving, it is, therefore, equally important to note here that the problem of envisaging Creditors v. Debtors in IBC also entertains the paraphernalia of the legal linguistics. This, in brief, is why hundreds of court hours went into finalizing what the terminological brackets of the term Creditor should look like. Take the NCLAT order in Nikhil Mehta And Sons v. Amr Infrastructure Ltd, 2017, overruling Delhi NCLT, interpreting Section 5 (8) (a) under Part II of IBC, mandating the integral role of time value of money, or TMV, i.e. the money borrowed against the payment of interest, in defining a ‘financial debt’, and resultantly classifying a ‘financial creditor’; also, applying the same criterion, the Supreme Court, in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited, ruled that that third party pledgees, who only have security interest, case akin to third party security, will remain outside of this class.
In some section, all this is being perceived as ‘a very narrow interpretation of financial debt’—a viewpoint of financial speculators, as commonly seen in any capitalist economy, which nevertheless influences our fiscal space enormously and, accordingly, should be monitored.
These examples of corporates finding loopholes in the system with their enormous resources, and their perception of the opportunity for restructuring bad assets as an ultramodern tool of warfare only suggest that there is a lot for the government to do.
Perchance there will be a solution in the traditional methodology: the regulatory bodies—here, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDAI)—should come together with a joint framework. This may sound a shallow perspective, for, some may ask, again, wasn’t IBC promulgated to tackle this very issue that old legislation, like Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), failed to address?
True, any reactionary legislation is not really a solution needed here. Critical time should not be lost in advancing amendments to dilute the framework which already has been seeing unethical, time-consuming and logic-defying manipulations. The complexity of the problem demands a proactive policy which smoothens and streamlines business processes rather than pitting one player against another, and to lessen the risk of endless litigation in an already overburdened judicial system, it is necessary, above all, to implement the idea of equality before law in truest terms by ensuring equality of opportunity with a level playing field for all players.
Ujjawal Krishnam is a journalist and researcher.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.