The
introduction of the Insolvency and Bankruptcy Code (IBC) marked a structural
change in the resolution architecture in India.
The shift to a time-bound resolution
process — meant to facilitate the quick exit of firms — was a tool to help
tackle the bad loan problem.
The
Supreme Court judgment in the Essar Steel case has restored the primacy of the
committee of creditors (CoC), settling the contentious issue of the
distribution of funds between creditors.
IBC- the preferred option:
1) Unified law: The interest of all
parties i.e. lenders, borrowers and even operational creditors is now addressed
under a unified law under the IBC.
2) Changed behavior of defaulters:
The IBC has given more teeth to lenders and has changed the credit behavior of
borrowers. Now, there is a heartening trend of defaulters paying up dues before
the case is admitted for insolvency under IBC.
3) Shift of control from debtor to
creditor: IBC proposes a paradigm shift from the existing ‘Debtor in possession’
to a ‘Creditor in Control’ regime, as now the Board of Directors is suspended
in case of default and the IP manages the enterprise in the best interest of
all its stakeholders.
4) Resolving the ‘chakravyuh
challenge’:IBC has made possible for struggling companies to ‘exit’ easily
allowing creditors to take the company to the NCLT for winding up.
5) Spurs professionalism in financing
sector: IBC has reduced crony capitalism, under and over invoicing, serial
defaulters and lead to better allocation of capital by limiting the escape
routes for defaulters and water tight frame for disposal of cases.
Measures needed:
1) The provisioning norms for bad
loans should be made more stringent to ensure banks have strong incentives to
take companies through this process and not postpone the decision, hoping to
restructure the loan outside IBC.
2) Relaxing the 330-day deadline will
further dampen enthusiasm. The idea of having a time-bound process was to put
pressure on the CoC to ensure speedy resolution. Delays in either taking the
company to NCLT or in the resolution process destroys enterprise value. This
decision must be reviewed.
3) The government should establish
the supremacy of IBC to ensure that assets are not allowed to be attached once
they have been admitted.
4) Under Section 53 of the law,
amounts due to the central government rank below those of secured and unsecured
creditors. This hierarchy needs to be respected.
5) There also needs to be clarity on
the role of promoters. While barring all promoters from bidding was a harsh
step, there needs to be consistency of approach.
IBC
as a structural reform has demonstrable impact, which is reflected in
behavioural change among debtors, creditors and other stakeholders, it is the
IBC or the insolvency law which has trumped even the GST.