Insolvency and Bankruptcy Code: Peer economies should be our benchmark, says Jayant Sinha

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August 16, 2021 4:00 AM

Sinha said insolvency professionals (IPs) should be allowed to dispose of different assets, instead of the stressed firm as a whole, as going concerns to maximise gains.

While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%.While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%.

India needs to benchmark its recovery from the resolution of insolvent firms against that of peer economies, and not against the low liquidation value of the toxic assets, Jayant Sinha, chairman of the Parliamentary Standing Committee on Finance, told FE in an interview.

The committee, which submitted a report on the Insolvency and Bankruptcy Code (IBC) this month, cautioned that the five-year-old law might have strayed from its original objectives, thanks to inordinate delay in resolution and large haircuts for lenders.

Sinha said it’s incumbent on the National Company Law Tribunal (NCLT) and insolvency professionals (IPs) to prevent defaulting promoters or their surrogates, who are ineligible to bid under section 29-A of the IBC, from delaying resolution process through frivolous litigation, which are often blamed for the erosion of asset value.

“If you take out some of the high-profile cases, recovery tends to be quite low, and in some cases, people are thinking of liquidation as the benchmark,” Sinha said. “Liquidation should not be seen as the benchmark; instead, we should be looking at insolvency resolution around the world, especially in our peer economies. The recovery for secured financial creditors (in peer economies) should be the actual benchmark.”

While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%. This asymmetry has to be reduced, critics say. Of course, the recovery through the IBC is still way above that via other extant mechanisms, including Lok Adalats, DRTs and Sarfaesi Act.

Asked if the panel’s recommendation that a professional code of conduct for the committee of creditors (CoC) be put in place to define and circumscribe its role would lead to further litigation as aggrieved parties could question the CoC’s decision, Sinha replied in the negative. “The Supreme Court has been very clear that the CoC’s commercial judgement is supreme. However, code of conduct with well-established traditions, protocols should be put in place so that the CoC would recognise that there are certain norms and that there should be transparency in meetings and processes, etc.”

To realise the original goals of the IBC, Sinha suggested that rules and regulations be streamlined, possibly though another amendment to the IBC, and the NCLT (National Company Law Tribunal) apparatus be bolstered to expedite the resolution process.

The most crucial reason for the delay in resolution and asset value erosion are the bottlenecks in the NCLT system, Sinha said. As many as 13,170 insolvency cases involving claims of Rs 9.2 lakh crore are awaiting resolution before the NCLT. About 71% of the cases have been pending beyond 180 days.

To address this, Sinha said, the over 50% vacancies at NCLT benches (against the sanctioned strength of 62, they have only 28 members) need to be filled up urgently. Specialised NCLT benches have to be set up to handle only IBC cases (currently NCLTs also handle cases relating to corporate affairs, mergers and acquisitions, etc).

Similarly, to improve the quality of judgments, only high court judges should be appointed judicial members of the NCLT, Sinha said. “This is because if there is a poor judgement from the NCLT, the aggrieved party appeals against it. The case then goes to the NCLAT or the Supreme Court, which leads to delays as well. So, we should focus on improving the quality of NCLT judges, their training and competence,” he said. The panel has also suggested that the entire resolution process be digitised.

Sinha said insolvency professionals (IPs) should be allowed to dispose of different assets, instead of the stressed firm as a whole, as going concerns to maximise gains.

He also called for strict adherence to timelines and voiced against entertaining late bids by the CoC, as it “creates a lot of procedural uncertainties”. Analysts have pointed out that often the defaulting promoters, or their proxies, try to delay resolution by coming up with late bids.

The House panel under Sinha also batted for a pre-pack resolution framework (currently limited to only MSMEs) for large corporations and a single regulator for both IPs and IP agencies (IPAs). At present, while the IPs are regulated by the Insolvency and Bankruptcy Board of India (IBBI), the IPAs are backed by bodies, including the ICAI and ICSI, which are governed by different laws. It also called for swift introduction of the cross-border insolvency law. The panel’s recommendations, Sinha said, reflect a judicious mix of legislative amendments and operational changes that are required to strengthen the insolvency ecosystem.

Commenting on the government’s move to junk the 2012 retrospective taxation amendment, Sinha said: “It puts to rest the worry that businesses and investors have about retrospective taxation. And it does it in a lawful way, which preserves the sovereign right to taxation. The government found an excellent solution for the uncertainty created by the UPA government’s decision”.

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