Last month India won the prestigious GRR award for the most improved jurisdiction for debt restructuring and insolvency. The award is given by the global restructuring review (GRR) - an online daily news service and magazine on cross-border restructuring and insolvency law.
Other jurisdictions shortlisted for this award included the European Union and Switzerland.
While shortlisting India for this award in 2018, the GRR said: "It has been all change in India since it enacted its first ever insolvency and bankruptcy code in 2016, bringing in greater empowerment for creditors, registered insolvency professionals and a whole new network of national company law tribunals (NCLTs).”
Awards apart the immediate impact for banks under bad loans has been huge. In the past 12 months nearly Rs 50,000 crores have already been made by banks selling just a couple of steel assets; another Rs 50,000 crores should be in with 2 more cases resolved in the next 2 months. While the Insolvency Board estimates that about Rs 89,000 crores of dues were paid up by companies facing bankruptcy proceedings. That's a fat Rs 2 lakh crores that banks have recovered or will recover in about 12-14 months.
Let us place on record the Country's thanks to the people who have worked tirelessly for this law - Dr TK Vishwanathan who chaired the Bankruptcy Law Reforms Committee. The recommendations of this committee became the insolvency and bankruptcy law of 2016. Susan Thomas, professor at IGIDR, Bahram Vakil, Founding Partner of AZB, MR Umarji Legal Advisor of Indian Banks Association, Sudarshan Sen Executive Director, RBI and above all Ajay Tyagi, who now as Sebi Chairman and earlier as Additional Secretary in the Finance Minsitry was a moving spirit behind this law. MS Sahoo currently chairman of the Insolvency and Bankruptcy Board deserves the pride of place of actually seeing through the implementation of every aspect of it.
With an attempt to celebrate this award, CNBC-TV18 spoke to three out of a dozen people who have ceaselessly worked for this law – MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India, Bahram Vakil and M R Umarji who were members of the Bankruptcy Law Reforms Committee.
Q: Can you name some of the others as well who have contributed to this law, which we may have missed?
Vakil: We were blessed with a very good committee, there were other economists, few more lawyers, representatives from all parts of government including Sebi. The key players have already been mentioned.
Q: Do you think this law could have passed without a buy-in from the government- would you say that there were part of political leadership which nudged this law?
Sahoo: To draw attention to a 1926 novel – The Sun Also Rises by Ernest Hemingway- there is a dialogue that how did you go bankrupt. The answer is gradually and then suddenly. The insolvency bankruptcy reforms has been in the works for the last 25 years since 1993 beginning with report of Omkar Goswami Committee and since then we have all been thinking about economic reforms in terms of freedom of entry, freedom to continue business, freedom to discontinue business, and we have a big several institutions to support economic freedom over the years.
We saw insolvency bankruptcy law reforms committee submitting the report on November 4, 2015 and we saw a bill very quickly on December 21, 2015 and enactment going through the join parliament committee on May 28, 2016. And quickly we saw establishment of entire ecosystem starting with the educating authority on June 1, 2016 and Insolvency and Bankruptcy Board of India on October 1, 2016 and then we prepared the whole host of regulations, so that the corporate insolvency resolution could commence on December 1, 2016 that meant having the insolvency professional agencies (IPAs) and insolvency professionals (IPs) in place. We had first set up IPAs on November 28, 2016 and first set up IPs on November 30, 2016. Corporate insolvency resolution commenced on December 1, 2016 and December 15, 2016, the liquidation provisions started. The examination which we called limited insolvency examination commenced on December 31, 2016.
The first corporate, which was admitted into corporate insolvency resolution process (CIRP) was January 17, 2017, this was involuntary matter. The first voluntary liquidation was admitted on April 7, 2017 and first resolution plan was approved on August 2, 2017. First liquidation commenced on August 2, 2017. The first IU got registered on September 25, 2017.
Today the institutional infrastructure has 12 benches of NCLT, The Insolvency and Bankruptcy Board of India (IBBI), 1800 IPs, 3 IPH and about 100 IPEs (insolvency professional entities), one information utility and we have started the work because the key component of this process was value reference point, which requires starting development and regulation of a professional called registered valuers. Today we have 8 registered valuer organisations.
In fact, today in the morning the honourable minister for Corporate Affairs PP Chaudhary he gave certificates to the very first set of 16 registered valuers.
Nearly 1000 corporates are undergoing resolution, 200 corporates are undergoing voluntary liquidation.
Q: How did the entire ecosystem come to shape – I remember as a cub reporter in 1993 having great hopes on the Debt Recovery Tribunals Act. I had great faith the SARFAESI Act but everything did not fall in place. Now the politicians have risen to the occasion, the judiciary has risen to the occasion, the industry, the legal fraternity has risen to the occasion – what is going so right?
Umarji: There have not been any challenges to the constitutional validity of this law. In other cases like debt recovery, SARFAESI Act the law was challenged saying that it is constitutionally invalid, it is affecting the rights of parties and therefore it should be declared as illegal. No such challenge has come as far as Insolvency Code is concerned. What it is doing is it is only prescribing time limits and specifying that various steps to be taken under the code have to be done within a specified time period.
It is to the credit of the judiciary that they have ensured that this time limits are adhered to and as far as possible complied with. That is immediately having an impact on all the litigants and all the parties to the proceedings who also have to perforce ensure that the time limits are observed and that has resulting in better implementation of the entire system because the courts are not permitting any adjournment or stay orders or other delaying tactics adapted by litigants are not permitted.
Q: Would you agree that the judiciary has contributed in a big way by giving lot of regards to the time lines?
Vakil: Yes huge, I think that was one of the very important things that have happened right and that is the big challenge going forward as the pipeline, those case load gets heavier, in some ways we have been lucky that there hasn’t been a barrage and it has been a steady stream. Once again in some ways we have tried to achieve that.
In all those fabulous statistics that Mr Sahoo gave us, I would like to highlight one that we have 1800 IPs, in every part of this capacity is a big issue, so UK over 30 years has less than 1800. The regulator deserves huge credit besides all our accountants etc.
On the constitutional challenge, Mr Umarji made a very important point but the key thing is that there is a massive one coming up soon in the Supreme Court, it was heard pre-summer and will not come up again in a week or so. So, a new law has to face this – the constitutional challenge on several sections, it is a very wide one. So in a way we will also get through that hopefully sooner rather than later, so that is not a hanging sword.
Q: Challenges is exactly what we have to discuss – do you think the first challenge of home buyers has been very well met by the law –do you think now it is stabilized that home buyers are included as creditors?
Sahoo: Yes in fact it required clarification under the court, since these are essentially in the nature of commercial borrowing they have now been given the recognition of financial creditors. That means they get a right to trigger and insolvency resolution process, as well as sit in the committee of creditors.
The code read with the regulations now provide complete framework, how the homebuyers would be represented. We have a few cases like JP Infratech --- where the voting power of homebuyers is more than 50 percent. There are several matters which are currently agitated before the Supreme Court including the JP Infra matter.
These homebuyers are now getting a chance for the first time to decide their fate. There are other companies also we have advised the Insolvency professional, where they do not have an authorized representative already or where the homebuyers are not directly represented in committee of creditors, they must quickly work and take the authorized representative into the committee of creditors.
Q: The other issue has been that in some cases we have seen rebidding and people trying to push an open auction method. Do you think we are out of that and the NCLT and the judiciary and Dr Sahoo’s board have safely navigated or does that danger linger?
Vakil: Going forward thanks to the new regulations that board has put out, I hope there should certainly be clarity and host of the litigation that we have already suffered through should come to an end. Ofcourse the current cases will have to be seen through.
Q: Prospectively it will be only by closed bidding?
Vakil: Much smoother that was the idea. Best shot for shot rather than this Swiss auction.
Q: There is still a large number of cases which will challenge the constitutional validity of the law. Do you think we are still in the touch and go sense of success or do you think the judiciary has put its weight behind his law because it has realized that the time value of money and realized the way in which several promoters have taken this system for a ride?
Umarji: There are challenges to the validity of law of many sections as Mr Vakil mentioned and after considering the various provisions and procedures established for taking possession of properties and auctioning them without giving an opportunity to the company itself to submit a resolution plan, such issues will have to be considered by the court and the law may stand modified in the light of the decision of Supreme Court.
But basically the purpose and the objective of the law to ensure that the insolvency process is completed within the given time schedule will not be disturbed. There may be some additional requirements that may be stipulated depending on the view taken by the Supreme Court on various challenges, which are made before them. Essentially, the mindset of the judiciary is to ensure that the timeframes prescribed by the law are observed and complied with. I don’t think that will be disturbed.
Q: What is – one the biggest challenge, one the biggest success or change in behaviour and one the big next step forward?
Vakil: The biggest success is the judiciary right from NCLT all the way to Supreme Court, so many cases have really done in a fantastically speedy way. That was a great success. In terms of biggest challenge the capacity, especially at NCLT and NCLAT level to continue with this speedy progress.Sahoo:
The biggest success is the overall enthusiasm among the stakeholders – everybody has the same vision starting from the professional, debtor, creditor, government and even other regulators like Sebi, the RBI – everybody is on the same wavelength and that has actually contributed to success so far.
With regards to challenge, I do not see any insurmountable challenge. We have come across challenges in the last 18 months and we have been able to get over them but the important point is how quickly we respond to the challenges. The government, IBBI have responded very quickly and judiciary also very quickly they have settled several matters. In fact, in initial 3-4 months’ time the NCLT and NCLAT settled several matters.
Q: I was hoping one of you would say we will never have such a serious NPA problem again- would you say that Mr Umarji, would that be the success?
Umarji: Yes, it would be the success. One, total transformation of the system is going to take place and that is because of the probability of insolvency proceedings started against you, in the event of default, the number of defaults are going to be reduced and the new culture of honouring commitments will develop in the system. It would even go to the extent of ensuring that you take a very careful decision whether to borrow or not to borrow and borrowing will be linked with your capacity to pay. This is going to be the new culture, which has already started setting in and will develop in the coming years.
The other challenge is implementation of the part of the law which is not yet implemented for individuals and partnership firms. Setting up of infrastructure for dealing with these cases and making this law applicable to individuals and partnerships is going to be really a big challenge in the coming months.