IBC may need tweaks in provisions to iron out operational issues: Experts

A slew of petitions from a clutch of aggrieved operational creditors is currently before the Supreme Court. Arguments for and against the RBI circular that pushed several power companies into the insolvency process are being heard by the apex court. Questions are also being raised on how to maintain the legal sanctity of the bidding process, while at the same time maximise value for lenders. 

Two years after coming into force, the Insolvency and Bankruptcy Code may need some tweaks in its provisions to iron out operational issues, say experts. In the past, the legislature has taken a cue from judgments of the courts and amended the Code accordingly.

“The glaring dark hole is the absence of adequate provisions in respect to the implementation of a resolution plan,” says Sumant Batra, managing partner & head — insolvency practice, Kesar Dass B & Associates. If a resolution applicant decides to take liberties with a plan approved by the National Company Law Tribunal (NCLT), the law must go after such renegades “hammer and tongs”, says Batra.

Experts point out that the law prescribes criminal prosecution of such bidders but the company will be liquidated if a resolution plan fails. “The law should require the resolution professional and lenders to do a thorough check on the antecedents of the bidder before considering bids,” says Suharsh Sinha, partner, AZB & Partners.

Dhananjay Kumar, partner, Cyril Amarchand Mangladas, says the recent judgements have brought to the fore the need for clarity on the rights of dissenting financial creditors and the treatment of operational creditors during the resolution process. The effect of an approved resolution plan on creditors and their rights may need to be spelt out, he adds.

“The IBC has failed the operational creditors,” says Punit Dutt Tyagi, executive partner, Lakshmikumaran and Sridharan. In multiple cases, resolution plans which make no provision for repayment to the operational creditors are being upheld by the courts, he adds. Operational creditors allege that the financial creditors of the companies under insolvency resolution are biased against them. “The financial creditors who sit in the committee of creditors allocate the lion's share of the value realised from a resolution process to themselves,” claims another lawyer. 

Batra, too, agrees that one critical area where legislative intervention is required relates to the rights and priorities of creditors. “Creditors in different classes cannot be treated alike as that leads to distortion of the secured transactions law which compliments, and not contradicts, the insolvency law,” he adds.

Experts point out that there seems to be a tendency for losing bidders to submit substantially higher bids once the winning bid has been disclosed. If a bidder is declared as the highest, lawyers question if fresh bids should be allowed afterwards where rival bidders have prior knowledge of the bidding price. However, the courts have prioritised value maximisation for lenders and allowed acceptance of late bids as long as they are of much higher value. “In the long run, this could depress bid values in the first instance and erode the confidence of bidders in the IBC process,” says Sinha. As a way out, the regulator, the Insolvency and Bankruptcy Board of India (IBBI), could consider hardcoding the principle that in the IBC process once the highest bidder has emerged, no further bids would be entertained, he suggests.

In a recent case, the NCLT held that a bidder cannot cherry pick assets of the corporate debtor and must provide a resolution plan that takes over the entire entity as a going concern. Many experts feel that this ruling causes hurdles in resolving large companies with several verticals which effectively function as standalone businesses. If a single bidder is unable to acquire the entire diversified entity, then the law should allow the sale of various undertakings of the company, instead of pushing the company into liquidation, experts suggest.

One provision under the Code that has contributed to a maximum number of litigation relates to the ambit of Section 29A that disqualifies defaulting promoters and their connected persons and related parties from bidding. The provision’s overarching reach has been a pain for big-ticket resolutions and the smaller ones, alike. Legal experts point out that a bidder could be disqualified even if the promoter’s relatives have suffered from a disability regardless of whether the bidder is acting in concert with such relative. “This could debar some bona fide bidders from submitting valuable bids,” says Sinha.

Most legal experts feel that the breach of the 270-days deadline does not affect the sanctity of the resolution process. “The IBC is in an evolution phase and many important areas of the law are being settled. Therefore, I do not find the delays surprising or threatening for the future,” says Kumar.

However, most legal experts feel, going by the experience of the last two years, that it is important to maintain the independence of the resolution professional. Abizer Diwanji, head, financial services, restructuring services at EY India, is of the view that instead of relying on individual resolution professionals, the companies under the IBC process should be handled by resolution entities. This will enhance the bandwidth of the professionals handling such cases, he adds.

Bone of contention

• Maintaining the balance between preserving the sanctity of the bidding process versus maximisation of value for the lenders
• Position and rights of dissenting creditors in a resolution plan
• Treatment of operational creditors in the resolution process 
• The idea of “related parties” under Section 29 A of the IBC being too arbitrary and wide
• Breach of the 270-day deadline for insolvency resolution

What is causing concern among stakeholders
 

• The absence of adequate provisions in respect of the implementation of a resolution plan
• The tendency for losing bidders to submit substantially higher bids once the winning bid has been disclosed
• Winning bidders reneging on their bids after NCLT approvals

In the spotlight

• Arguments for and against the RBI’s February 12th circular, which has aggrieved the power sector, are being heard by the Supreme Court
• Several operational creditors have taken their grievances before the apex court in a hope to get some relief

What experts suggest
 

• The provisions for the implementation of a resolution plan need strengthening
• Introduction of pre-packs could help expedite the resolution process
• The rights of creditors need to be spelt out in detail
• Prioritise the introduction of cross-border and personal insolvency provisions 
• Make the NCLT a forum only for bankruptcy matters, appoint more judges