How to tackle errant borrowers? Here is what banks must do now

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Published: November 1, 2017 5:28:56 AM

The Insolvency and Bankruptcy Code (IBC) can be a potent weapon, like the Sudarshana Chakra, to destroy the demons of NPAs.

Insolvency and Bankruptcy Code, tackle errant borrowers, errant borrowers, NPAs, demons of NPAsThe Insolvency and Bankruptcy Code (IBC) can be a potent weapon, like the Sudarshana Chakra, to destroy the demons of NPAs.

The Insolvency and Bankruptcy Code (IBC) can be a potent weapon, like the Sudarshana Chakra, to destroy the demons of NPAs. Its efficacy will depend upon the willpower and honest intent of the user to find a just and equitable solution. It is necessary to discern and destroy the ill-motives of anyone to defeat the real purpose of the law. In fact, resolution under the IBC has to be based on intelligence through discrimination and not through shoddy implementation. Therefore, all the stakeholders must understand the law, its processes and implications if default and defaulter are not appropriately dealt with. Banks are yet to come to grips with the situation arising from the implementation of the IBC. They need to educate their staff about the IBC and conduct training/workshops in-house or depute executives for such training elsewhere. The law is evolving through various judicial pronouncements, so they need to assimilate its intent and see how it impinges upon the existing law, banking practices and policies of banks.

The credit, recovery and monitoring policy needs to be revised so that the threat of insolvency emanating from default to operational creditor is factored in the appraisal, monitored and ways are found to respond to it as part of recovery policy. Decision will have to be taken about the invocation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), at a time when insolvency can also be invoked. The implication of moratorium on acts under SARFAESI and on the recovery of default from guarantor and/or through their assets has to be understood. Currently, there are conflicting views on the matter. The judgment hereunder is a pointer:

“NCLT, in the CIRP matter of Schweitzer Systemtek India Pvt Ltd, judged that Phoenix ARC can continue enforcement against collaterals provided by the personal guarantors.”

On the other end, the Allahabad High Court, in the CIRP matter of Lohia Machinery Ltd, directed the Debt Recovery Tribunal Mumbai to stay all proceedings against personal guarantors pending finalisation of CIRP.

Internal guidelines about participation and decision-making on broad spectrum of issues like voting on resolution placed for consideration for expenses, interim finance, resolution plan, liquidation, appointment of RP, participation of operational creditor, etc, in the Committee of Creditors (CoC) have to be defined. The meeting of the CoC is different from any consortium meeting that bankers hold and attend. The authority tasked with the exercise of such power has to be identified and delegation of board of directors obtained. Deliberation and voting in the CoC is akin to proceedings of the management committee of the board of directors (MCBOD) as far as content of deliberation and its consequences are concerned. They have to take informed decisions and anticipate the consequences in the shortest possible time.

With law relating to personal insolvency being on the anvil, banks will be flooded with such cases and decision-making will suffer unless policy matters are decided now. Other issues that need to be addressed are the fate of action under Section 138 of the Negotiable Instruments Act whether contemplated or in progress; and strategy to take time-barred accounts for resolution under the IBC as it’s a resolution process, not a recovery method. The judgment in the case of Black Pearl Hotels Pvt Ltd vs Planet M Retail Ltd is important. This Appellate Tribunal by judgment dated August 11, 2017, observed and held as follows: “There is nothing on the record that Limitation Act is applicable to I&B Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of I&B Code to suggest that the Law of Limitation Act, 1963, is applicable. The I&B Code, 2016, is not an Act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process…”

Importantly, banks need to have forensic audit done to ascertain the end use of funds and deny, in case of diversion, any resolution other than liquidation unless corporate debtor brings the money back into the system. For diversion of funds, it is imperative that criminal action be initiated and cases of wilful defaults can, therefore, be entrusted to the SFIO to investigate. Wilful default be made a crime as is the law in other countries. An interesting development recently reported is regarding ABG Shipyard having allegedly siphoned `794 crore to its other group companies, including Western India Shipyard, PFS Shipping India and ABG Resources. Strangely, the EOW intended to close the investigation, citing the “civil dispute” nature of the case. But the bank approached the 71st Metropolitan Magistrate’s Court, Bandra, Mumbai, and sought the registration of an FIR against ABG Shipyard, which is now going through insolvency proceedings at the Mumbai National Company Law Tribunal. “The company management may be arrested once court papers reach the police station,” said Parvez Memon, senior partner at a legal firm.

That’s exactly the way of tackling errant borrowers. Banks should show courage and determination in doing so. How many big corporates have been spared the misery and adverse consequences of such a declaration is anybody’s guess. The impact of declaring KFA and Vijay Mallya as wilful defaulters is there for everyone to see and this author was the first to declare him so. In the case of a corporate that may be going through insolvency, it is just possible that company may propose a resolution plan in cahoots with another financial services firm in India or abroad to buy back the assets at a huge discount after having diverted humongous amounts of bank loan. They would, in a legitimate way, get a discharge from the liability through NCLT, unless, of course, banks invoke personal guarantee (if they have obtained one) to recover the loss. Guarantors too may get discharged. Banks need to be wary of such attempts of the borrowers, big or small, to safeguard against misuse of the process of law, which otherwise is a remarkable piece of legislation for recovery after the SARFAESI Act as far as banks and financial institutions are concerned.

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