The view from a Mumbai building. (Photographer: Dhiraj Singh/Bloomberg)

Cyril Shroff On Large Corporate Insolvencies, Judicial Capacity And Promoter Resistance

“The bankruptcy process is off to a flying start” says Cyril Shroff, leading lawyer and managing partner of Cyril Amarchand Mangaldas. Shroff is commenting on a decision to refer 12 top corporate defaulters to insolvency and bankruptcy proceedings.

This decision was made by an Independent Advisory Committee, set up by Reserve Bank of India, and will amount to a litmus test of both, the new Insolvency And Bankruptcy Act, 2016 (IBC) as well as the National Company Law Tribunal (NCLT) that too began functioning last year.

In a statement on June 13, RBI said loans to these 12 companies, as yet unnamed, amount to 25 percent of the non-performing assets in the banking system. That suggests they are all large companies. This will be the first time since their inception that the law and the tribunal will deal with large corporate insolvency proceedings.

Resolution Professional Vs Promoter And Board

For instance, among the first steps after the NCLT admits a case for insolvency will be for it to appoint an interim resolution professional. This is a newly created category of professionals tasked with

  • managing the affairs of the company
  • taking over the powers of the board that shall stand suspended
  • constituting a committee of creditors

When asked if boards and promoters will easily step aside, Shroff agrees there will be practical challenges but adds that the “legal weaponry required to implement this is there in a fairly robust and clear form”. He says if boards and promoters refuse to hand over possession or resist the exercise of powers by resolution professionals, then NCLT will step in.

The court has been effective for a while and some smaller cases have been filed. And every signal we’ve seen so far is that NCLT and the courts are pretty serious about this implementation. All decisions by and large have gone in favour of the creditors. So I see a seriousness and a determination of making this come alive. The black letter law is almost as good as it gets.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Committee Of Creditors: Why Will It Succeed Where Others Have Failed?

The committee of creditors will include all financial creditors, including foreign, and will decide on a revival plan or liquidation. The law requires that a resolution plan needs 75 percent votes before it is presented to the NCLT for final approval.

But one contributing feature to India’s NPA problem has been the inability of lenders to agree on a valuation for the business because it often requires them to take a steep cut on their loan amounts or outstanding assets. Won’t the same problem bug this commitee of creditors as well?

Shroff points to the strict timelines laid out under the IBC - 180 days for the completion of the full resolution process, with the provision for a maximum 90 day extension - as a compelling feature. Based on that timeline the committee of creditors has 150 days to approve a resolution plan failing which the company goes to liquidation.

The most important reason is - that in none of the other processes there was a definitive end date with a terminal consequence. That is one of the highlights of the IBC. The second is the comprehensive nature of powers available in the IBC. For instance, the balance sheet can be restructured. There were challenges in doing it in the other modalities. You can literally rearrange the capital stack if the proposal is good and approved by the credtors’ committee. That was hard to do under the other routes and the process was far more complicated. So the breadth and depth of the remedies available under the IBC, combined with the end date, makes this, atleast at this point of the journey, more powerful.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Liquidation And Two Types Of Promoters

The IBC provides that if a resolution plan is not approved within the defined timeline of 180-270 days or if the committee of creditors recommends so, the NCLT will order liquidation of the company. That is, its assets are sold to repay creditors.

Shroff points out that regulations accompanying the IBC provide that the liquidation process be completed in two years, a feat rarely accomplished in India in liquidations under previous laws. But it’s a “good deadline” to have he says. When asked if promoters could delay the process via legal challenges Shroff outlined two scenarios.

I think there will be two types of promoters. One who would actually see that this is a good exit, that they are effectively getting rid of a problem, winding up and getting on with the rest of their life. And I think those guys will cooperate in making this happen quickly. The other type of promoters will not be able to drop their emotional atatchment to the company. They will still continue to believe in the past - that the equity and the board really have the control and the creditors don’t. They will resist, they will fight. My expectation is that they will lose.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Is The NCLT Ready For This?

As pointed out earlier in the story, NCLT is as new as IBC. Shroff agrees that in resolving the NPA problem the “infrastructure and judicial capacity is going to be tested to the limits”.

But its only when you test a sytem to its limits that it expands. So I think it will expand to fill the space. But it’s not going to be an easy ride for sure.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

Legal Challenges To Insolvency Proceedings

As India attempts to put large companies on the mat for the very first time it’s not inconceivable that many promoters will fight back - finding cause to legally contest the reference to insolvency proceedings or the resolution plan itself.

Shroff expects promoters and maybe even boards to file all kinds of legal challenges, but with little success.

The judicial posture seems to be “this is a legislation meant for a specific purpose. Its serves a wider public interest. We are going to be hands off unless there is something blatantly wrong in the process”.
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas