A member of the committee that drafted the Insolvency and Bankruptcy Code (IBC) and founding partner at AZB & Partners Bahram N Vakil told FE that establishment of information utility will be the last lap in creating the infrastructure for resolutions under the code. He said global accounting firms are flying down experienced insolvency professionals from other jurisdictions as they expect a fair degree of business in the days ahead. Edited excerpts:
To what extent do you think the bankruptcy law will help resolve the problem of stressed assets in the banking system?
I think it should certainly be one of the tools that will help in resolving it. I should also make it very clear that I have a biased view because I was part of the committee that drafted the bankruptcy code. So, I am very vested in it and hope that it succeeds. The reason I am cautiously optimistic is because the code is seven months old and so far so good. NCLT (National Company Law Tribunal) has done a very good job. There have been no stays, to the best of my knowledge. So everything is moving on track in a very speedy process.
What are the challenges to implementing the code?
The key challenges are in terms of NCLT bandwidth and court intervention. Fortunately, there wasn’t a burst of cases in the beginning. It was a gradual increase month-on-month and most of the cases were of smaller values, until we had the 12 accounts recommended by the RBI for resolution under the IBC. Those are, of course, all huge – Rs 5,000 crore and above.
So, now will be the real test for the law. One is the bandwidth of the NCLT – we have 11 of them. So far they have done a tremendous job, but these are much more complex and difficult cases, but I’m sure they will be up to the task. The second, as I see, is that the courts don’t interfere unless they really need to. Where natural justice is not followed or the rules are not followed, of course the courts will have to come in. But otherwise, I hope that they realise that it’s the last resort. The court should not jump in on any commercial issues, for sure.
Then the infrastructure. We have brand new professionals — insolvency professionals. So they will also be taxed to the limit with all these cases. It’s mainly large accounting firms together with international restructuring firms like Alvarez & Marsal and of course almost a thousand smaller firms and individuals. About 700 professionals have done the exam. So, I think that the ramp up has been good.The only piece of infrastructure which is yet to come into place is what we call the information utility. That is in the process and it will come up in the next few months. What that does is that when you file with this entity, it’s binding evidence that that money is owed to the creditor. So then you can’t waste weeks of the tribunal’s time in deciding whether the money is owed or not.
How easy or difficult will it be for insolvency professionals (IPs) to take control of a company, given how recalcitrant Indian promoters can be?
The good part is that the way the law works is that when the case is admitted and the insolvency professional is appointed, the board of directors stands suspended and the insolvency professional becomes the de facto CEO for 180 days. The creditors’ committee becomes the board of directors because all crucial decisions have to be taken by this committee and the person running the show on a day-to-day basis is the insolvency professional. Management also reports to the insolvency professional, which is all extremely clear in Section 17. In that sense, if the promoter or management wants to obstruct that would be very difficult because the statute is very clear.
Having said that, there are many cases where it’s more the cycle or global scenarios, etc where you may have good management and good promoters. All promoters are not bad ones. It is the IP and creditors committee’s choice whether to continue with current management or not. It’s not that they have to be replaced. So they must decide whether they have faith in the management and the promoters or not.
Do IPs we have in India have wherewithal to manage such a range of companies?
It’s a huge task because with this power comes great responsibility. I’m not saying that companies or individuals we have are not good. Many are super-competent. The benefit that the likes of the Big Four and Grant Thornton have is that they have done this in other jurisdictions where there are similar laws. So they are flying in people from their other offices who have been doing this for 10-15 years. They are beefing up their own bench strength here because they realise that now there is a lot of work. Right now, it’s okay. But, if there are another 20-30 big cases, all of us would be struggling.