Lock and key. (Photographer: David Paul Morris/Bloomberg)

IBC: Promoter Participation Cannot Be Allowed At Liquidation Stage, Says Abhishek Manu Singhvi

The Reserve Bank of India’s Feb. 12 circular was “mindless”, Section 29A of the Insolvency and Bankruptcy Code is “inelegant”, “lacks precision” and the cause of majority litigation, and courts taking a “socialist” approach towards operational creditors is hurting the law and the insolvency process—Senior Advocate Abhishek Manu Singhvi, on the sidelines of International Fiscal Association’s recent conference, shared these thoughts while discussing the progress IBC has made.

Here are the highlights from the conversation:

RBI’s Feb. 12 Circular: What Next?

  • RBI’s Feb. 12 circular was “mindless”. Even the government supported our view as far as the power sector is concerned.
  • It was “one size fit all, one pill for all ills” approach. The circular mandates that irrespective of individual fact situation, upon reaching a certain number of days, you would have an automatic move to IBC.
  • The Supreme Court striking down the circular doesn’t mean there is nothing that can be done. One is the formal legal approach — the Supreme Court has left a provision intact which allows the government to direct the RBI to take action in individual cases.
So, if I’m the government and I find that the RBI is doing nothing qua a large debtor or a particular set of banks aren’t doing anything qua a large debtor, the statute gives me the power to direct the RBI to take action. So, in an individual case — where there are deplorable facts — the formal power of the government is intact.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court 
  • But you don’t need the formal power. You don’t need to resort to such things. In egregious cases of NPAs, in the current climate, there is hardly a bank which with a nudge, wink and nod from the RBI will not take requisite action. And that’s the second approach.
We all know how the real system functions. They don’t work on formal directive by the government. If the RBI comes to a considerate opinion that five companies in the power sector or three companies in the cement sector are in bad shape and these banks which are directly under the RBI’s control are not taking action, then a reminder, a letter can do the job.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court 
  • There are so many ways to nudge, wink and nod. It is inconceivable that a bank in India — private, foreign or Indian — will not pay heed to it. So, it is an over-imagined fear. The circular was not a substitute for it.

IBC’s 270-Day Deadline: Over Ambitious?

  • There’s a lot of litigation around Section 29(A). Let me give you an example of a case where I was the successful counselor for ArcelorMittal—the Essar Steel insolvency. Today as Section 29A(c) stands, the law requires that even before I pay Rs 60,000 crore for a corporate debtor, I need to clear the debt of some third entity — another Rs 10,000-20,000 crore — to even be eligible to submit a plan.
I am supposed to clear that debt and then seek eligibility for this big fat cow. And then, I have a full risk of having paid it and not getting certification of eligibility. This is unreal. The court sympathised with this view but said we can’t rewrite the section as it requires a legislative amendment.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court 
  • There are lots of such problems with Section 29A. It is three pages of closely printed statute book. More than that it is the section, proviso, the exception to proviso and the explanation to the exception. It lacks elegance and precision.
  • This cause skirmishes at every level and each skirmish starts at the bottom, goes to National Company Law Tribunal, National Company Law Appellate Tribunal and then the Supreme Court—and that’s why it’s taking 500-600 and more days to complete the process.

Equitable Distribution Between Creditors: Courts’ Approach

  • Courts are taking a socialist approach while considering treatment of operational creditors, unsecured creditors, etc. and that’s hurting the law.
  • This is exactly what’s happening in the IL&FS case where you have a categorisation of senior secured lender, junior secured lender, secured lender, unsecured lender and within that you have two to three categories.
  • In this case, the NCLAT has come with the three categories—red, amber and green. But these are ad-hoc solutions.
They say hard cases made bad law, and that’s what’s happening. IL&FS is not an IBC case. It’s an oppression and mismanagement case under Company Law. And the moratorium that’s been provided is only under the IBC under Section 14. But here, because the government was the petitioner and they wanted a solution, the court said okay.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court 
  • I had appeared for one of the lenders — we raised an objection against this moratorium. The court said the objection will be alive as it hears the matter. Meanwhile, as an interim measure, it gave a moratorium. Without the moratorium, the whole IL&FS case would end.
“I asked my client why not take this to the Supreme Court. But I know the answer— when does a bank not press for an appeal? I got this issue formulated in our favor. The court said it’s a jurisdictional question. The court formulated the issue but the next time onward, we were supposed to take a step back. The reason is obvious. Had the banks pressed this, the entire resettlement plan thought by the government would be stuck. Somewhere the banks are told by the powers that be to not muddy the waters.”

Liquidation Stage: Can Promoters Make An Entry?

  • Liquidation, as a general rule, is like death penalty. Anything which concerns to death penalty, by definition, must apply to rarest of rare cases. I don’t grudge the broad sentiment of courts that liquidation should be a refuge of last resort.
  • In India, the haircut in liquidation is beyond baldness. When in liquidation cases there is 80 percent of haircut, it is not a great joy to do liquidation at 10-20 percent. You might try everything else.
  • NCLTs have to take a common-sense approach. There is one mantra that has become stronger before the NCLAT—the maximisation of value of assets. Maximisation of value versus liquidation is a direct antagonism.
Practically, what is happening is, when everything is settled — the resolution plan has been finalised, approved by the committee of creditors, the NCLT — the NCLAT frequently says that they agree that this is the best plan but ask that how much can you increase. There are court auctions that are happening in an ad-hoc way.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court 
  • As a result, there are cases where applicants are losing interest and walking out. The alternative is liquidation which is 1/10th of value. So, courts must think of commercial reality but they tend to be idealistic.
  • As for allowing promoters to propose a scheme at the liquidation stage, it will require an amendment.
Section 29A prohibits any backdoor entry in letter and spirit. You can’t allow promoters to propose scheme during liquidation.
Abhishek Manu Singhvi, Senior Advocate, Supreme Court