NCLT should be empowered to impose hefty fines: EY India's Shailendra Ajmera

The Insolvency and Bankruptcy Code (IBC) continues to strengthen corporate governance standards and the credit market, says Shailendra Ajmera, Partner, Transaction, Advisory Services at EY India, and an insolvency professional (IP). In an interview, he tells BT that IPs are expected to maintain the highest levels of integrity and accountability to ensure stakeholder trust in them and the underlying Corporate Insolvency Resolution Process (CIRP). This should also extend to other stakeholders, he says. Edited excerpts:

What are your views on how the IBC is doing?

It remains one of the most path-breaking legislations and has transformed India’s insolvency resolution landscape. Recent data from the IBBI reflects that the Code has rescued 1,194 corporate debtors through CIRPs and resolution plans have on an average yielded a recovery of 93.4% of the fair value of the assets. The Code continues to strengthen corporate governance standards and the credit market.

Admittedly, there have been instances wherein investor and creditor confidence has been adversely impacted due to delays in timelines or unexpected judicial rulings. However, the IBC remains the primary legislation for resolution of distressed companies. To ensure its continued effectiveness, all relevant stakeholders—including IPs and the Committee of Creditors (CoC) —must work in tandem both effectively and efficiently to ensure that the objectives of the Code and investor and creditor expectations are met.

While cases are expected to be resolved in 180 days, extendable by 90 days, most continue for much longer. What according to you are the reasons for these delays?

Ideally yes, cases are expected to be resolved within a fixed period envisaged under its provisions. However, we witness significant delays in resolution for various reasons. Non-cooperation by the erstwhile management is a primary reason that leads to substantial delays. The erstwhile management tends to delay on several grounds as they lose control over the company. There are instances where the management does not fully cooperate with the IPs, because of which IPs are forced to lean on the NCLT to get the necessary information and cooperation. Litigations by various parties (be it the erstwhile promoter, creditors or even resolution applicants) causes significant delays, which impacts the viability of the assets that are already stressed. While there has been a significant capacity expansion of NCLT benches to enable swifter adjudication, the time taken in adjudication on various issues arising during the CIRP, including approval of resolution plans, also lead to delays.

There are also often questions on the role and accountability of IPs. Could you share your thoughts on this?

The IP is appointed by the NCLT and undertakes to conduct the CIRP in the interest of the stakeholders. The IP is tasked to ensure value maximisation. In most situations, the insolvency resolution involves large amounts of public money advanced to companies who have defaulted on their loan obligations. Therefore, IPs are expected to maintain the highest levels of integrity and accountability to ensure stakeholder trust. However, that obligation should not only be the sole responsibility of the IP, but should extend to the other stakeholders, including the CoC.

The IBBI recently notified amendments to the IBC to streamline resolutions. Will these help improve recoveries and cut down delays?

The recent amendment is a welcome step and is evidence that the regulator is proactive and considers the requirement of the market by way of regular consultations. The decision to empower IPs, with the CoC’s advice, to invite EOIs for the company as well as for individual assets is particularly beneficial for medium and large enterprises that have multiple verticals. This enables IPs to assess the profitability and viability of a particular vertical and invite EOI for that vertical/segment, which would lead to value maximisation. We have seen cases where due to some non-viable verticals, potential resolution applicants are hesitant in submitting resolution plans.

Do you think further amendments are needed in the IBC?

In a short span of time, the Code and regulations have undergone significant amendments in addition to the ever-developing jurisprudence. For the IBC to remain relevant and effective, it will have to continuously evolve based on market expectations. Some of the amendments may include creditor lead resolution process. The insolvency regulator had constituted an expert committee to examine the feasibility of a regulatory framework on creditor-led resolution approach (CLRP).

The committee, in its report, envisioned that the CLRP will infuse greater efficiency into resolution processes, ultimately fulfilling its fundamental objectives of ‘time-bound reorganisation’ and ‘maximisation of value.’ The CLRP as a process envisages that in the event of a default, a financial creditor may inform the company of its intention to commence CLRP. The initiation of CLRP is followed by the appointment of an IP and formation of CoC. But, the management continues to retain control of the firm.

The CLRP contemplates that the requests made to the NCLT during the CLRP will be minimal and as such the process remains ‘out-of-court’. Only after the CoC approves the resolution plan will the NCLT’s main role of approving the plan come into effect. The CLRP is yet to be incorporated in the legal framework. At present, pre-packaged insolvency resolution is applicable only to MSMEs. However, its applicability to large corporates may allow faster resolution, specifically in niche sectors such as IT, electric mobility, aviation and other specialised services. Many companies operating in India have global operations. A cross-border insolvency framework may enable insolvency professionals to navigate this already complex framework with a certain degree of certainty. Further, the NCLT should be empowered to impose hefty fines and penalties on persons contravening the insolvency law and those initiating frivolous litigations with the sole objective of frustrating the proceedings. Lastly, many firms are interdependent of their subsidiaries and parent companies. A comprehensive group insolvency framework would allow simultaneous resolution of such companies.

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