IBC Making Distressed Asset Landscape Fertile

IBC MAKING DISTRESSED ASSET LANDSCAPE FERTILE

In the last five years, the Code has conquered several challenging stages but the Code is still at a nascent stage with several remaining ambiguities and congenital challenges

The laws appertaining to insolvency, bankruptcy and resolution of stress assets of companies in India has turned out to be an emblem of dynamism with the passageway of the Insolvency and Bankruptcy Code, 2016 ("Code") and is drastically witnessing a new range of vision and outlook. The legal regime after the evolution of the Code has undergone a paradigm shift to secure a level where now, the Code is in a position to facilitate faster resolution of distressed assets while also permitting other boulevards for acquiring businesses as a going concern.

To sustain this velocity, the legislature and the Code has always been proactive in amending the Code and the supporting regulations in order to address the changing needs in the insolvency processes and eventually in the distressed market. It has been a twisting road for India to finally become an attractive and endearing strategy for stressed assets investors, among which the most prime aspect is the emerging clarity on the regulatory landscape and jurisprudence.

The regulatory clarity that the Code provides really gives much-needed push on the resolution of the banks' bad loans and the CRP ultimately luring domestic and global financial investors to the distressed market in India to invest both through the Code and outside the Code. The Code is a path-breaking legislation, welcomed as a game changer. It is revitalizing the staggering debt market in India that was reeling under the massive compression of NPAs, bad debts and banking frauds. It has given way to foreign investors who seek to invest and make their presence in the opportunity-abounding Indian market, as well as domestic acquirers, who are keen to expand their business. Today the Code provides a successful resolution applicant an opportunity to acquire extant businesses and to run on a fresh slate - especially foreign companies wanting to expand in the south Asian economy. While the orthodox principles of acquisition continue to be applicable, the investor is given the liberty to structure the acquisition/distressed asset in a commercially and legally viable manner.

The Code has the macro-objectives of resolution and value maximization in a time bound manner. The impact of the Code cannot be captured in numbers as Elliot Eisner puts, "Not everything that matters can be measured, and, not everything can be measured matters." The systematic gains such as induced resolutions outside the code for example the Air India resolution, liberation of entrepreneurs from deep distress, release of idle resources for productive uses, improved availability of credit, proactive resolution plans that the Code has offered has a major impact.

It is because of the Code's framework that the share of Outbound deal values in mergers and acquisitions i.e., Indian companies acquiring companies outside the country has diminished significantly from 41% in 2007 to 5% in 2018 screening the growth in interest in the domestic markets only. Such indicators are noteworthy of the impact of the Code.

However, these five years have not been a smooth ride – huge haircuts for lenders and lengthy CIRP in some cases have led to intense scrutiny of whether the Code will able to deliver. But at the same time, one has to consider the factors such as the stage at which such entities entered CIRP and with the value left in their assets. By March 2021, a total of 2,653 CIRPs have been completed, out of which only 13% underwent successful resolution while the others have gone into liquidation. This might look discouraging but 74% of these liquidations link to defunct entities, and their asset valued merely 5% of outstanding debt. In successful resolutions, the Code has been able to recover 189% of realizable value, which is higher than any previous recovery mechanism.¹

The growth of the Code in last five years, patent by several landmark decisions of the Apex Court, has been noteworthy in settling certain argumentative issues - commercial wisdom of the creditors in Essar Steel,² the right to proceed against personal guarantors in Lalit Kumar Jain,³ and payment to dissenting financial creditors in Jaypee Infratech,⁴ all of these decisions have provided a much-needed stability to the CIRP process under the Code. This has led to certainty of thought and functioning of stakeholders during CIRP, providing a full-bodied foundation that can aid complex frameworks around complex issues such as personal insolvency, cross-border insolvency and group insolvency.

STRENGTHENING THE CODE:

In spite of all developments and achievements, the Code unquestionably needs a revamp and here are certain suggestions that can further strengthen the Code:

Unequitable balancing of interests of all stakeholders:

The Operational Creditors ("OC") often find themselves in flux as the Code has somewhat failed to consider OCs' rights. The Standing Committee on Finance in its 32nd Report⁵ gave some very practical suggestions regarding consideration of dues of OCs –an amount of 5% of total CIRP cost may be kept aside as a prior payment to small businesses, flexible resolution plans offering proportionate payments or issuance of soft loans to Resolution Applicants or credit availability of MSME on a priority basis so that the small players do not bear the brunt of larger stresses.

Cross-Border Insolvency Regime:

Introduction of this regime on the lines of UNCITRAL Model Law would bring more efficiency in insolvencies involving many jurisdictions. Nevertheless, soon a new section may be incorporated in the Code to facilitate/arm foreign creditor against the personal guarantors. With the legislation such section, these foreign creditors will be able to approach Tribunals in India against the Indian defaulting companies under cross-border bankruptcy resolution framework.

Pre-Packaged Insolvency Framework:

It is yet another good initiative but certainly it is overhauled by the same creditors' discretionary etiquette and granular barriers or extensive checks at every stage of the process simply underlines the Indian presumption of Dishonesty in the Defaulter's mind.

Execution of Bad Banks:

With a view to clean the balance sheets and provide liquidity to public sector banks, in the Union Budget 2021, the finance ministry proposed the creation of a 'bad bank'. The bad bank is expected to take over the existing stressed loans from public sector banks and dispose them off to some potential investors, however the most crucial part will be how these banks may arrive at a valuation to transfer those assets in a time-bound manner.

Never Ending Challenges Even After the Resolution:

The challenges under the Code continue even after the approval of a resolution plan. The handover and transition process are not as smooth as it looks. Challenges such as unpaid creditors (including OCs and government agencies) engaging in activism, promoters' related parties withdrawing support from the business, management void due to attrition and delays in approvals from authorities, cause further hardship.

Mandatory Settlement / Negotiation Before Filing of Applications:

Like promoted in the Commercial Courts Act, a pre-litigation mediation can be made mandatory in insolvency proceedings so as to reduce the workload on the Judicial infrastructure and to weed out the cases which can be settled.

SUMMING UP

Some people have described the acquisition of distressed assets as an art. Hence, this art requires certain special skill sets and a level of risk appetite. As in the last five years, the Code has conquered several challenging stages but the Code is still at a nascent stage with several remaining ambiguities and congenital challenges. The investors have to be careful in assessing the potential risks and liabilities that may arise in the future. Furthermore, to strengthen this entire setup, additional regulatory reforms can be introduced by promoting aggressive distressed asset marketing, extending the per-packaged framework to corporate debtors other than MSMEs and introduction of cross-border insolvency regime on the lines of UNCITRAL Model Law. While these suggestions may certainly be a step forward, the IBC has indisputably been successful so far and has an even more promising future.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.