The Insolvency and Bankruptcy Code (IBC) has resolved 167 cases amounting to Rs 3.68 lakh crore unpaid loans/dues of banks and vendors until November 2019 in its three years of existence. Out of Rs 3.68 lakh crore, the insolvency law helped recover Rs 1.57 lakh crore, or 42 per cent of the total dues. This is much more than 24 per cent recovery rate witnessed earlier.
These are the cases admitted under IBC that saw resolution. A resolution under IBC means a corporate debtor being successfully acquired by a new company. Thousands of cases were brought to the National Company Law Tribunal (NCLT), the adjudicating authority under the IBC, and were settled even before being admitted by it. If these recoveries are also accounted for, IBC might have helped resolve cases involving over Rs 5 lakh crore unpaid dues.
Out of 167 cases resolved till November this year, 81 were done in 2019 alone. The year also saw some of the most path-breaking judgments and amendments that have helped bring more clarity in the law. These clarifications will help make the law more effective in the long run.
As we get closer to the end of the year, an amendment in the law through a presidential ordinance removed one of the biggest hurdles in the IBC. The amendment gives immunity to the insolvent company and its assets from prosecution for offences committed prior to the insolvency process, if it is acquired by a company controlled by someone unconnected with the previous management or offences.
Judgements that shaped IBC
This was preceded by another important judgement by the Supreme Court, which established the primacy of financial creditors and also gave the Committee of Creditors (CoC) control over the resolution process. Even before SC's order in November this year, the National Company Law Appellate Tribunal (NCLAT) had passed an order on the similar lines.
As an immediate effect of verdict by the country's apex court, the Essar Steel default case, which was dragging on for over 2.5 years, saw a closure with ArcelorMittal finally buying the ailing steel manufacturer. With the closure of Essar Steel, IBC saw one of the biggest resolutions involving a payment of Rs 42,000 crore, which many see as a testimony of the success of the IBC.
Saumil Shah, Partner, Dhruva Advisors LLP, says: The country saw one of the largest FDI inflows due to resolution of Essar Steel case through IBC. "FDI worth $7 billion was received by the country on the Essar deal which took 2.5 years to resolve," says Shah.
But even before the Supreme Court verdict in the Essar case, the apex court had, in a benchmark order in the Swiss Ribbons case, set the tone for new approach adopted by the courts while dealing with economic matters. The order came on January 25 this year. The court admitted that laws concerning economic and commercial matters should not be influenced too much by the principles of equity, reasonableness and fairness of the traditional laws.
Mayur Shetty, Associate Partner, Rajani Associates, says: "If we were to look at the highlights of 2019, it has to be the upholding of the constitutionality validity of the IBC in its entirety, by the Apex Court in case of Swiss Ribbons."
L Viswanathan, Partner, Cyril Amarchand Mangaldas, says that in the Swiss Ribbons case, the SC upheld the constitutionality of the primacy provided to financial creditors under the IBC.
Aside from a couple of important SC judgements in 2019 that shaped the IBC, the government also tried to fix the loopholes by making important amendments to make the IBC effective and time-bound.
"The Amendment Act of August 6, 2019 further clarified that a resolution plan could distinguish between different financial creditors on the basis of the priority and value of their security, and such a distribution was also upheld by the Supreme Court in its judgement in Essar Steel. Dissenting creditors too were given protection to the extent of the liquidation value due to them under the aforementioned amendment," says L Viswanathan of Cyril Amarchand Mangaldas.
The August amendments also established that decisions by a class of creditors (such as homebuyers) would be calculated on the basis of the decision of the majority of that class which actually voted. This is a departure from the general rule for voting under the IBC, and had become necessary in light of difficulties faced in large homebuyer cases.
Even as delays marred resolutions under the IBC, the government approved amendments in the law will factor in the time taken in litigations by increasing the threshold time for resolution from 270 days to 330 days. It means experts may put pressure on the courts to finish the cases within 330 days no matter what happens.
The unresolved issues
One of the failures of the IBC has been in not being able to give closure to homebuyers looking for delivery of their homes stuck in IBC rigmarole. The case in point is Jaypee Infratech and Amrapali group companies. These cases are still pending and homebuyers are waiting for redressal as they are stuck with incomplete housing projects.
Even as homebuyers look for credible solution through IBC, there are rising number of cases of misuse of the law by unscrupulous homebuyers. There is a feeling among the authorities that a single homebuyer, who could be a speculative buyer, is trying to arm-twist otherwise well-run real estate companies by threatening them with IBC proceedings. In order to stop such misuse, the government is now looking to put a threshold - 10 per cent of the aggrieved homebuyers or 100, whichever is higher - for them to initiate IBC proceedings against the company.
"Although a lot can be done in putting an end to frivolous litigation, the next wave of disputes and uncertainty can be seen coming from cross-border insolvency matters. One such case underway in foreign courts is that of Jet Airways. Just as it was cumbersome for a foreign arbitration award to be successfully executed and honoured in India, only time will tell how things will shape up in foreign courts on an Indian insolvent company," says Shah of Dhruva Advisors LLP.
In 2019, the government took another step towards expanding the ambit of the insolvency law by putting out laws with regards to financial services companies. The insolvency laws covering personal guarantors have also come into existence in 2019 even as the government is looking to roll out cross-border and group company insolvency laws.
"In 2020, IBC is likely to see a lot happening over the cases of personal guarantors of Corporate Debtors, the relevant provisions for which have come into force since December 1, 2019. The IBC Amendment Bill 2019, also gives a glimpse of developments expected in 2020. The provisions on interim finance, setting of threshold limit on application by homebuyers and providing immunity to corporate debtor post successful resolution plan are some of the interesting aspects covered under the bill," says Shetty of Rajani Associates.