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Friday, June 05, 2020

No divine right

Upholding of bankruptcy law by SC is welcome, will help entrench a key structural reform.

By: Editorial | Published: January 28, 2019 1:43:24 am
Insolvency and Bankruptcy Code, IBC supreme court, Bankruptcy code Supreme court, Insolvency code, IBC, Good and services tax, GST, Express editorial, Indian express The endorsement of the law and its provisions by the Supreme Court would come as a boost to the government which pushed for a modern bankruptcy law in the first half of its term.

On Friday, the Supreme Court upheld the Insolvency and Bankruptcy Code (IBC), rejecting the challenges mounted by some promoters who had defaulted, saying that the insolvency law was working, with the recovery of bad debt marking what it termed as the end of “defaulters’ paradise”. In the working of the code, the flow of resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid, the Supreme Court said. The endorsement of the law and its provisions by the Supreme Court would come as a boost to the government which pushed for a modern bankruptcy law in the first half of its term and managed to get an exit mechanism which would help the reallocation of capital and ease the huge debt burden of banks in India.

The Modi government is credited with three significant structural reforms — the Goods and Services Tax (GST), the monetary policy framework with an inflation targeting mandate for the central bank and the insolvency law. The fact is that in terms of demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders, it is the IBC or the insolvency law which has trumped even the GST. The two-year law has been an effective tool for creditors, with a threat to refer a case under the insolvency law helping force many debtors to come to the negotiating table and reinforcing what former RBI Governor, Raghuram Rajan, had famously said about promoters having no divine right. With the challenge to the institutional structure of the IBC and the NCLT having been rejected, the balance has now shifted even more in favour of creditors, compared to the past.

While it is still work in progress, the early evidence shows that of about 1,500 cases admitted until end-December 2018, only 79 ended in an approval of the resolution plans and liquidation in a little over 300 cases. A measure of the success of this law will be a rising graph of cases of corporate debtors being resolved. The major worry, however, is the failure in many cases to stick to the prescribed timeline of 180 to 270 days to firm up a resolution plan with elaborate hearings at NCLT benches. Such delay goes against the very raison d’étre of the law which is to ensure a swift resolution or closure and thus lower the risk for banks and the government arising from a rising pile of bad debts and the subsequent need to recapitalise state-owned lenders. It is important that these timelines are adhered to. Over time, the NCLT may be better tuned to these kind of summary proceedings with capacity building and training of professionals. It will help that the Court has directed the government to set up circuit benches within six months. Attempts to game the system and to hold out by some of the bigger corporate defaulters may have been stymied now but the challenge still lies in how quickly some of the dozen large accounts referred to the insolvency court by the RBI, featuring huge outstanding claims, are resolved.

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