Urgency to fix India’s bankruptcy code

Livemint     28th December 2020     Save    
QEP Pocket Notes

Context: In the backdrop of COVID-19 pandemic, bad loans are expected to show up in hospitality, aviation, real estate and small businesses, and will affect bank exposure on retail loans and microfinance in particular. The recently-announced Insolvency and Bankruptcy Code (IBC) suspension does little contain this.

Challenges in IBC's functioning:

  • COVID-19 effect:
    • Limited consumer demand and access to credit: results in a general loss of appetite among buyers to take over new capacity through stressed asset acquisitions.
    • Absence of key members in online meetings of Committee of Creditors (CoC), delaying its approval.
  • Frivolous claims, most often by promoters:g. Use of the Limitation Act to prevent creditors from acknowledging the past debt and Questioning the credentials of buyout offers.
  • Getting an insolvency petition admitted: There are cases that have been pending for admission for over 12 months. Even once all claims against the resolution are settled, simple court orders take time.
  • The role of resolution professionals (RP) (Coordinates between the CoC, operational lenders, the promoters and prospective buyers):
    • Reduced remuneration over the years resulting in lack of talent in the field.
    • They are like Chief Executive Officers who need entire teams to keep operations smooth and extract maximum value during resolution and to then pitch the asset to the right kind of buyer.
    • Insufficient budget: results in a lack of adequate staff required to handle the above functions.
    • Personal liability for decisions taken in a resolution: RPs become wary of taking on contentious cases.
  • The buyer often losing interest: due to frivolous claims and judicial delays, resulting in a higher proportion of assets now being sent to liquidation than in previous years.
  • Ponderous judicial process: Even for successful resolutions, it has taken much more than prescribed 270 days. Examples: bankruptcy resolution of Jet Airways took more than 18 months.
    • Huge backlog: running in thousands even when the IBC temporarily suspended.

Way forward:

  • Making personal guarantors of corporate debtors liable as a step forward for the IBC.
  • Courts must recognize that IBC is an "Economic legislation": where financial decisions are taken by lenders. Admission of insolvency petition by Bankruptcy courts must be within 14 days of application.
  • Defaulters should be allowed to bring their own solutions, including a pre-pack model where promoters can negotiate with creditors and bring in outside investors.
QEP Pocket Notes