By Anubha Agarwal
It has been five years since Indian parliament enacted one of the biggest reform measures in the country’s history. The Insolvency and Bankruptcy Code (IBC) 2016 brought about a behavioral change in entrepreneurs and creditors. This one stop solution was designed on the lines of the UK insolvency laws with a creditor in control model. There have been six amendments to the IBC law within the six years of its existence. These include the suspension of its operative provisions for one year during the Covid-19 pandemic.
There has been a lot of debate over the efficacy of the IBC, mainly due to the increasing case load that has over-burdened the adjudicating authorities, large haircuts taken by the lenders, and a large number of liquidations since it came into existence. The moot question is if the overhaul via bits and pieces changes will do it more harm than good. Some experts say the policy makers must come up with a vision to consolidate the law and put in place one comprehensive legislation that will address all the flaws of the landmark reform measure.
What led to a staggering number of liquidations that outnumber resolutions? While making an assessment, one needs to keep in mind the timing of the enactment of the IBC. In 2016, the Indian economy was grappling with the impact of demonetisation. The market had lost its bullish fervour and the possibility of a consumer-driven market seemed improbable. The absence of a digital platform for potential buyers and insufficient information for making the choice of assets resulted in very few resolutions.
No straitjacket solution
The low fair market value of the assets against liabilities pushed companies towards liquidation. The emphasis was not on the economic value of the business that included a valuation of the employees, resources, vendors, and the entire value addition chain. The losses caused by the liquidation was huge and this was not limited to the companies in question. There was also a ripple effect on its multiple ancillaries. All this may have led to the shifting of assets to asset reconstruction companies, or a bad bank in the interim period.
Another thought that comes to mind is the requirement to treat certain sectors differently to align the objective of the law with their unique nature of business. Certain sectors require a stronger holdout or stop-gap arrangements like the travel and hospitality industry that was badly affected by the pandemic, but can recover in the long run. Bringing such companies into early liquidation and consolidation will scale up the prices and encourage monopolisation resulting in the lack of a healthy competitive environment.
The government-run companies too need protection from liquidation since they are already protected by the state, and cases against such companies only result in protracted litigation. To avoid flooding of matters before the NCLT, real estate companies may also be kept out of the purview of the IBC. No homebuyer wants a haircut, but wants a home that he has invested in. The focus should be on a sui generis law or amendment in RERA that can cater to the niche requirements of this sector just like is the case with NBFCs that are out of the purview of the IBC.
Huge haircuts in IBC resolutions
As a solution to the enormous haircuts, the government has proposed an upper limit on haircuts, but there is a need for deliberations and consultations before taking a decision that may be more damaging. An upper limit on haircuts may bring in some checks, but may also prevent resolution in certain cases and that can take away from the economic value maximisation of the company. IBC is not responsible for the large haircuts. They are the result of losses in the enterprise value. Nothing except market forces should determine the haircut that creditors must take on their dues.
Further, fixing any benchmark will also incentivise banks to extend riskier loans, as they will be assured of getting a minimum proportion of their dues back. The IBC is not meant for recovery of loans, instead the objective is the revival of business. So, a resolution plan with 100% haircut may also be workable in cases where the possibility of business revival is high and economic value preservation can be more rewarding.
Pre-packs may not lead to resolutions
Another question that begs our attention is extending of pre-packs to other businesses. India has many family owned businesses, and many a times the face value of the person behind such businesses makes or breaks a resolution plan. Moreover, even if a person other than the debtor were to take over such businesses, the chances of its survival would be questionable. Therefore, a pre-packaged insolvency resolution regime could be extended to such niche businesses as has already been recognized and adopted for MSMEs.
We know that the first pillar of strength of the IBC is the insolvency professionals. However, they continue to face intrinsic challenges as an intermediary between the corporate debtor and the resolution applicants because of the lack of a potent database showing the availability of a wide array of assets to choose from. This leads to insufficient bids from potential buyers.
Further, it is worth deliberating to consider a resolution professional entity for providing services in any matter than limiting it to cases where its own directors/partners are resolution professionals. This could then trigger the evolution of expert firms in each area of the resolution process. It could also cater to the specific requirements of industries like power so that issues of such nature would go to the expert resolution professional who can offer tailor-made resolution plans.
A new legislative process takes times to blend into its ecosystem, but multifarious amendments may undermine the efficacy and peoples’ trust in policy makers. It may also make the process of staying updated with the numerous changes a cumbersome task. The IBC could use a rejig or a consolidated overhaul that can address the gaping holes that plague the law. This may help build investor confidence by balancing the interests of the stakeholders, keeping in mind the nuances of the industry and the requirements of businesses.
(Anubha Agarwal is Partner, Corporate Law Group, a New Delhi-based law firm.)