With the NCLT (National Company Law Tribunal) allowing insolvency proceedings to be initiated against companies even if winding-up petitions are pending before high courts, provided these have not been “admitted”, some headway has been made in resolving the problem of non-performing assets. Several defaulting companies had argued that insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) would be infructous if winding-up petitions were pending before high courts.
The aggregate debt involved in seven stressed companies, now cleared for insolvency proceedings, is Rs 1.3 lakh crore, a little over half the amount that these companies owe banks. The Reserve Bank of India (RBI) had identified 12 companies, which owe lenders Rs 2.4 lakh crore, that banks should refer to the NCLT.Companies cleared for insolvency proceedings, and for which interim resolution professionals (IRPs) have been appointed, include Bhushan Steel, Bhushan Power & Steel, Alok Industries, Monnet Ispat, Electrosteel Steels, Amtek Auto and Jyoti Structures. While the final word is awaited for ABG Shipyard and Era Infra, arguments are still being heard in the case of Lanco Infratech.
Meanwhile, Essar Steel continues to argue before the Ahmedabad bench of the NCLT that it should not have been listed as one of the 12 top defaulters by the RBI. Earlier, the Gujarat High Court had disposed of Essar’s petition as it failed to find any merit in the argument. At a recent hearing, Essar Steel had pointed out that the signatory of the application filed by State Bank of India (SBI) at the NCLT had not been authorised by the SBI chairman. The company was also apprehensive that an IRP may not be able to run the business like the management and board are able to.
Several of the hearings in the NCLT have taken more time than earlier anticipated owing to adjournments. In some instances, errors have been spotted in papers filed by banks while on other occasions, ambiguities have been found in the arguments put forward by some companies. For instance, in the case of SBI versus Monnet Ispat, a two-judge bench at the NCLT, Mumbai, had pulled up the bank over ambiguities in its submission. Justices BSV Prakash Kumar and V Nallasenapathy had questioned certain ambiguities in SBI’s petition as the claim put forth by the bank was higher than the default, at Rs 2,242 crore.
The counsel appearing on behalf of SBI said the company had defaulted on loans of Rs 1,539 crore. NCLT’s view that action under the IBC is valid even if there are winding-up petitions against a company pending in other courts has helped speed up matters. Industrial Commercial Bank of China (ICBC) had pleaded insolvency proceedings not be initiated against Alok Industries because a winding-up petition was pending in another court. The NCLT bench in Ahmedabad, however, rejected the plea because an official liquidator had not yet been appointed by the high court in the winding-up case against Alok Industries.
Analysts have pointed out their reservations regarding the Insolvency Code and its effectiveness. Kotak Institutional Equities said in a report last month that there were probably no cases where a stage of resolution or liquidation has been reached under the code while there were quite a few cases which were referred to upper benches for interpretation of the law. “Referring large cases at such an early stage is a risky approach though, if resolved, can be regarded as a game changer approach to manage NPAs hereon,” the report said.
On June 13, the RBI said it had identified 12 stressed accounts that would need to be resolved via the IBC. These are the accounts to which lenders have an exposure of more than Rs 5,000 crore and more than 60% of which have been recognised as NPAs.
The extent of the NPA problem can be gauged from the fact that around Rs 10 lakh crore of loans are either non-performing or stressed; this is roughly 12% of total loans. According to Capitaline data, the total bad loans of 37 banks stood at Rs 7.1 lakh crore in FY17, up 25% from last year.