Changes to Insolvency Code: Banks likely to face legal tangle

A lot of hope was built at banks around benefits from prompt resolution under the IBC from the fourth quarter of FY18

With legal issues thrown up by the recent changes to the Insolvency and Bankruptcy Code (IBC), any benefits to banks from resolution of the stressed assets in question might now get postponed to the next financial year. Banks would also be forced to expand their legal teams. 

The head of legal operations at a public sector bank said it has been only a year into dealing of cases under this new law. The jurisprudence (court and tribunal verdicts) on IBC is evolving; there is little to fall back on for guidance. The scene is cloudy.

A lot of hope was built at banks around benefits from prompt resolution under the IBC from the fourth quarter of the current financial year (FY18). This could get postponed to FY19, said the source.

The new amendments intend to curb certain types of defaulting borrowers from bidding for stressed assets. However, the language is open to interpretation. Many promoters might prefer to approach legal forums for redressal and fight for their rights. This is going to increase the legal work.

A senior Bank of India executive said after the amendments were announced, many promoters in cases referred for insolvency were approaching the banks to discuss implications and solutions. Such activity could push the timeline for resolution by one or two quarters.

Beside banks thinking of larger and stronger legal teams, there is a move to approach the government with a plea for expand the legal infrastructure at both the National Company Law Tribunal and the Debt Recovery Tribunal, the bank executive added.

Somesekhar Sundaresan, a practising counsel, said the new ban on guarantor of a debt from bidding was a serious mistake. A guarantor of a promise is one who believes in the person making the promise. 

By keeping the guarantor out, the dynamics in a bidding process that could be tapped by participation from a committed party seeking to bid — as opposed to running away from a sinking ship — would be lost. 

Instead, one should have, he said, waited to see Resolution Professionals perform. It is the RP’s role to weed out anything undesirable or inappropriate. Without waiting for an empirical basis to see if legislative prohibition is needed, the ban was imposed. This is populist and sounds politically right but lacks a rational economic basis, he added.