Watching The IBC: Lessons From The RBI-12 Cases
The Insolvency and Bankruptcy Code, 2016 is a major reform for India. It introduces two big changes in the thinking on resolving firm stress. The first is a time bound resolution process. It does so by mandating a 180-day timeline, extendable to 270 days, within which the resolution process has to be completed. The second is that the IBC views both revival and liquidation as means of resolving firm stress. It leaves the revival versus liquidation decision to the commercial judgment of the creditors of the company. To this effect the report of the Bankruptcy Law Reforms Committee states:
The failure of some business plans is integral to the process of the market economy. When business failure takes place, the best outcome for society is to have a rapid renegotiation between the financiers, to finance the going concern using a new arrangement of liabilities and with a new management team. If this cannot be done, the best outcome for society is a rapid liquidation.BLRC Report Volume 1, Executive Summary, Page 16
The IBC focus on timelines and outcome neutrality are a fundamental shift from the thinking that prevailed in the pre-IBC world. Laws like Sick Industrial Companies Act, or Companies Act only provided for one type of outcome, and delays and pendency under both are well documented.
The big test for the IBC has been the entry of twelve large cases identified by the Reserve Bank of India into the process. These are some of the largest companies in the country, which accounted for nearly 25 percent of the non performing assets of the banking system. Their resolution process under the IBC is being closely watched, and is being viewed as a barometer of the success or failure of the IBC. In popular discourse, the measure that has been getting the most attention is the recovery rate.
However, we believe that it is critical to also understand how these cases have adhered to fundamental IBC premises of a time-bound, and outcome neutral process.
This is because recovery rate is an outcome of an efficient bankruptcy process which correctly identifies the best possible resolution outcome in the least possible time.
Time Bound Procedure?
The track record of the RBI-12 cases in terms of timeliness has not been promising.
So far, there has been a final outcome in five of the 12 cases, and the average time to outcome has been 333 days.
- Amtek Auto Ltd. - Acquired by Liberty House
- Bhushan Steel Ltd. - Acquired by Tata Steel. Ltd.
- Electrosteel Steels Ltd. - Acquired by Vedanta Ltd.
- Lanco Infrastructure Ltd. - Headed for liquidation
- Monnet Ispat Ltd. - Acquired by JSW Steel Ltd.
In the remaining seven, on an average more than 415 days have passed since these cases came to IBC, and so far there is no end in sight. The timeline has far exceeded even the extended time of 270 days that the IBC prescribes. The IBC envisaged that at the end of this 270-day period, if creditors could not agree on a resolution plan, the company would enter liquidation. However, this has not been the case. In fact, in many of the cases which are still ongoing, the process of submission of resolution plan and their evaluation is still ongoing.
Where Are The Delays Happening?
The IBC framework not just prescribes the overall timeline of 180/270 days, it also defines timelines for sub processes that have to be completed within this time frame. In the below table, we show the key procedural milestones, and compare prescribed versus actual time taken by the RBI-12 cases for reaching these.
This clearly shows that delays in the RBI-12 cases started at the point of submission of resolution plans by potential resolution applicants. For the RBI-12 cases, which came to IBC in July or August 2017, this process ought to have been completed by November 2017.
Section 29A created a list of exclusion criteria for resolution applicants. At this time, in almost all the RBI-12 cases, a National Company Law Tribunal approval for a 90-day extension to the process was sought and granted.
Section 29A created two sources of delay for the IBC process.
- First, the resolution professional had to ensure that resolution applicants were compliant with this provision of this section.
- Second, resolution applicants started filing cases in NCLT questioning the 29A eligibility of competing bids.
This shows up in the table, where we see that, on an average, against a prescribed timeline of 135 days for receipt of plans, the actual time taken was 263 days. Subsequently, more time was taken up by the 29A litigation that resolution applicants had launched against each other.
In four of the five companies that have seen a final outcome, there has been Section 29A related litigation.
- For instance, in the case of Electrosteel Steels, competing resolution applicant, Renaissance Steel, raised 29A objections during and after completion of the resolution process.
- In the case of Amtek Auto, where there was just one final resolution applicant, a competing applicant who had dropped out of the process filed a 29A challenge.
During the course of these litigations, the NCLT settled on a precedent that time consumed by interim litigation would be excluded from overall process time. This, in our view, has created adverse incentives against timely completion of the resolution process within the prescribed time.
The problem of delays is not specific only to the RBI-12 cases.
Our analysis shows that of the 483 cases that came to IBC till December 2017, only a third have seen an outcome, and for these the time to outcome, on an average, has been 243 days.
For the remaining two thirds of cases, around 370 days elapsed with no outcome in sight.
This suggests that a general problem of delays has crept up in the IBC process. There could be two reasons for this. The first, and the obvious one, is that there are capacity constraints in the IBC system, and it is unable to deal with the volume of case flow, and the quantum of litigation being generated in the timelines that the law prescribes.
The second reason could be that the IBC is a nascent law with evolving jurisprudence, and the initial crop of cases are taking more time as substantive issues are being settled by courts.
Once this phase is completed, timelines may revert to the ones prescribed. However, it is likely that both reasons that are causing delays, may gain acceptance by parties and the courts, and despite IBC prescription on timelines, get entrenched in the system over time.
In our analysis, we observe that a bias against liquidation, and in favor of only one type of resolution, one that involves the buy-out of the company by a bidder in as-is form, is taking root across the board.
This manifests itself in the belief that the objective of the IBC is to resolve stressed companies by reviving them, and liquidation represents a failure of the IBC process. This belief is gradually gaining popularity with policymakers, the judiciary, and the public. The recent IBC amendment lowering the vote threshold required to approve a resolution plan also suggests this bias amongst policymakers. Many orders passed by the NCLT, NCLAT as well as the Supreme Court, also conform to this bias.
For example, in the case of Alok Industries the NCLT noted that:
...in the interest of the company as well as its employees in view of main object of the IBC as also the very intent of legislature is for the revival of the company and its welfare.NCLT Ahmedabad Bench
This was surprising because Alok Industries had received only one resolution plan, which did not get the approval of the creditors. Ordinarily, under the IBC design, the company case should have gone into liquidation. However, around this time the IBC Ordinance (second) reducing the voting threshold for approving a resolution plan was promulgated.
Similarly, in the case of ABG Shipyard Ltd., even as the 270-day timeline approached, the process of seeking resolution plans was undertaken afresh.
In Lanco Infratech, a case that is finally under liquidation, the NCLT gave an extension beyond the 270-day timeline, for creditors to consider the resolution plans.
In the Bhushan Power and Steel Ltd. case, the NCLAT allowed resolution applicants to revise their resolution plans, even after one year had passed since the admission of the case to IBC.
In Essar Steel Ltd., the NCLAT allowed the resolution applicants time to cure their 29A ineligibility.
In the case of Jyoti Structures Ltd., the NCLAT prevented the NCLT from passing a liquidation order.
In the case of Jaypee Infratech Ltd., despite no resolution plan being approved in the first round, the Supreme Court ordered the resolution process to be conducted afresh.
The bias in favor of the resolution, and against liquidation, has also been a source of procedural delays in the RBI-12 cases.
In seven of the 12 cases, only one resolution plan was finally considered by creditors. So far, of these seven cases, only Monnet Ispat and Amtek Auto have been finally resolved, and liquidation has been an outcome only in Lanco Infratech.
In the remaining five, despite more than 400 days have passed, and no resolution in sight, a final liquidation order has not been made. This, as pointed out earlier, is not the intent of the IBC, for which liquidation was as much a resolution outcome for stressed companies, as revival or restructuring. The only concern for the IBC was timelines, and procedural sanctity.
The RBI-12 cases have had a troubled 15 months under the IBC. This was expected as these are some of the largest companies in the country, which have been in distress for quite some time. Many of these have gone through several rounds of restructuring with banks before they came to IBC. From a policy perspective, bringing the largest, most complex stressed accounts of the banking system to the IBC was a risky strategy. It wasn’t clear whether the new law, with its nascent jurisprudence and its fledgling institutional set-up, would be able to deal with these cases in the manner that the IBC envisaged.
With the benefit of hindsight, we observe that the two fundamental elements of the IBC design, that is of time-bound resolution and outcome neutrality, have been largely eroded. The discourse around these large cases has also triggered responses from policymakers which may be counterproductive from the perspective of long-term reform of bankruptcy processes and of credit markets. It is, however, not too late to fix these issues. Strengthening of capacity at the adjudication level, training of the judiciary and appropriate intervention by policymakers could reinstate the fundamental principles envisaged under the IBC.
Varun Marwah and Anjali Sharma are research consultants at the Finance Research Group at IGIDR. Anjali Sharma was a member of the research secretariat for the Bankruptcy Law Reforms Committee. This article comes from the authors’ ongoing research on the RBI-12. Initial findings of this research can be accessed here.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.