India’s Parliament passed the Insolvency and Bankruptcy Code (IBC) Amendment Bill in January 2018. The IBC amendment has inserted a new section in the insolvency code. The section bars wilful defaulters, whose dues are classified as non-performing assets for more than a year, and all related entities of these firms from participating in the resolution process. The amendment allows defaulting promoters to participate in the debt resolution process, provided they repay their dues in a month to make their loan account operational and the resolution happens within the overall time frame specified in the code. The section also allows asset reconstruction companies, alternative investment funds (AIFs) such as private equity fund and banks to participate in the bidding process.

India enacted the Insolvency and Bankruptcy code in 2016 to address the issue of bad debts (approximately Rs.9tn or AU$180bn) plaguing its banking sector by finding a time bound (within 270 days) resolution either through a revival plan or closure of the indebted company, while protecting the interests of the creditors. The objective of the code was to consolidate and amend the laws relating to re-organisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such entities and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.

Once a defaulting company is referred to the proceedings with regards to the provisioning of the IBC by any financial or operational creditor on debt default, an Insolvency Professional (IP) is appointed by the regulator and approved by a committee of the creditors. The IP takes over the running of the company and the power of the Board of Directors is suspended and vested in IP. The key focus of the IP is to run the company as an ongoing concern for a specified moratorium period decided by the adjudicating authority, the National Company Law Tribunal (NCLT). A resolution plan would have to be prepared and approved by the committee of creditors. In case, if there is no satisfactory resolution within the specified days (outer limit 270 days), defaulting company will go into liquidation with the lP acting as the liquidator. The debtor also can opt for voluntary liquidation.

The successful completion of the resolution process was expected to aid in reducing the bad loans issue in the banking system. The drawback of the initial code was that some errant founders of defaulting companies used this route to take back control of their companies at a steep discount, resulting in a significant haircut for lenders on their outstanding loans. This prompted the Government to bring in the new amendment to IBC that now bar wilful and errant founders of defaulting companies and their related and connected parties from either taking part in the resolution process or bidding for the stressed assets.

From the time IBC was enacted, approximately 2450 fresh cases have been filed before the National Company Law Tribunal and 2,300 cases seeking the winding up of companies have been transferred from various courts in India to NCLT. Of the above, 2,750 cases have been disposed of due to the enactment of the IBC code. The Reserve Bank of India (RBI) had identified 12 high profiles cases comprising about 25% of India’s bad debt for early resolution using the IBC framework. The progress of these cases is shown below:

Exhibit: Resolution Process Status Update

A good outcome from some of the above cases will enhance confidence of the bidders in the system and once all these 12 cases get settled the speed of resolution will go up. Nevertheless, the IBC code will remain a work in progress as there are still some grey areas (like assignment of loans to third parties). A Government Committee is reviewing the IBC code to identify issues impending the efficiency of the IBC resolution and liquidation framework.

Our View

The Insolvency and Bankruptcy Code marks, a significant change in the power equation between creditors and debtors in India. The erstwhile legislative framework to resolve stressed assets resulted in inordinate delays in the courts. On an average it used to take 4.3 years to resolve a bad loan account and again with very high haircut. A lender on an average recovered only about 26.4% of the outstanding bad loan amount. IBC code changes this and accords a time bound (within 270 days) process to resolve bad loan account.

The plugging of the loop hole that existed in the earlier version of the IBC code, wherein founders were making a back-door entry at a steep discount is a very strong positive. The fear of losing management control of their businesses will go a long way with Indian founders in improving the credit culture of the country. This will also improve the recoveries of strained loan accounts, improve the health of India’s banking sector and eventually help in improving the ease of doing business in India. The competition in bidding for the assets of Binani Cement, one of the defaulting companies referred to the IBC recently suggests that potentially the lenders will be able to recover their dues fully at least in some of the cases.