The Government of India introduced the Insolvency and Bankruptcy Code Bill in 2015 which was passed by both houses of Parliament in 2016. The code addressed various problems that cripple the Indian economy today including ever increasing non-performing assets in banks, distressed credit markets, high amount of time taken to wind up an ailing company, overlapping laws and adjudicating forums and dismal ranking of India in World Bank’s ease of doing business index.
This article will highlight how the benefits of the new code will prevent cases like that of Kingfisher in future.
Anybody can initiate the process – early detection
One of the fundamental features of the Code is that it allows creditors to assess the overall distressed position and viability of a debtor as a business decision, and agree upon a plan for its rescue and revival or a speedy liquidation. In contrast to this, under the existing legal framework, the primary onus to initiate a reorganization process lies with the debtor.
In addition to the debtor, the new code allows the creditor (secured and unsecured), shareholders and employees to initiate the insolvency resolution process (IRP) against a corporate debtor at the National Company Law Tribunal (NCLT).
Kingfisher was in losses since 2008 due to downfall in aviation sector worldwide. Although the first restructuring of its loans was carried forward in 2010 and the airline was grounded in 2012, the company was declared a non-performing asset much later making the recovery of money more difficult. Had the new code been in place, this would not have happened as the other stakeholders would have raised the alarm not allowing matters to go this far.
Rescue and revival plan – chance of survival
The code is divided into two independent stages – IRP and liquidation. Under IRP, a creditors committee will be constituted comprising of all the financial creditors and operational creditors above a certain threshold. However, operational creditors will not have any voting powers. The creditor’s committee has to then consider the insolvency resolution for the revival of the debtor and decide whether to proceed with the same or opt for liquidation by a 75% majority voting. However, the code does not clarify the types of revival plans that may be adopted, which may include restructured finance, sale of assets, change of management, etc.
The liquidation shall commence if creditors committee fails to submit the resolution plan within the prescribed period, the plan is rejected, the debtor contravenes, or financial creditors decide to wind down and distribute the assets of the debtor.
The above process ensures that a timely revival plan with the consent of all the financial creditors is enforced without much delay which might save the entire company from dying out. Who knows a proper revival might have saved Kingfisher as well.
Creditor in control
As discussed in the previous point, the first stage is insolvency resolution process, which will be conducted by licensed insolvency professionals (IPs). Their appointment will be made by NCLT and approved by the creditor’s committee by 75% of votes.
IP acts as a liquidator/ bankruptcy trustee and will take over the control of the company’s operations, debtor’s assets and will collect financial information about the debtor from information utilities. The powers of the board of directors will be suspended and vested in the IP who will run the company as a going concern under the broad directions of a committee of creditors.
This is a complete divergence from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime. This is similar to the UK insolvency laws, but distinct from the Chapter 11 of the US bankruptcy code which follows ‘Debtor in possession’ approach.
In the case of Kingfisher, even after a restructuring was carried in 2010, Vijay Mallya allegedly continued withdrawing huge salaries when its employees were left unpaid in 2012. Once, the creditor is made in charge of the management; it will be ensured that the company operates in the interest of all the stakeholders.
Better value to creditors
The banks started identifying Kingfisher and Vijay Mallya a ‘wilful defaulter’ in May 2014. Since then over 500 hearings with top Kingfisher company officials on loan recovery have been conducted by bank officials but in vain. The delay in declaring Kingfisher an NPA further made recovery of money difficult as most of the value of assets had already eroded.
The new code envisages completing the insolvency process in 180 days, which may be extended by maximum 90 days, if a majority of the creditors agree. The strict time bound manner of disposal of the case will help in maximization of value of assets of such persons. The lack of integrated institutional system and legal complexity in resolving the issues does not aid in an effective and timely restructuring of assets. The new code will revitalize the distressed credit system by redeploying the capital speedily which will promote entrepreneurship and economic growth.
Cross-border
The new code empowers the IPs to take control and sell the assets of a debtor located in foreign countries. The code provides a mechanism under which the government of India may enter into bilateral agreements with other countries for the purpose of enforcing the provisions of the Code.
However, there are apprehensions to the success of the same as such agreements will require individual negotiations with each country which will surely not be hassle free. Moreover, experts do suggest that in order to achieve complete ease at solving cross-border insolvency cases, India should opt for the UNCITRAL Model Law on Cross-border Insolvency (Model Law) which was adopted by the United Nations on December 15, 1997. The model law facilitates recognition of foreign insolvency proceedings and further suspension of any transfer of the assets of debtors and enables h anding over of the assets of debtors to the relevant foreign authorities.
None the less, the new code might not be able to solve the issues pertaining to cross-border insolvency completely but will definitely improve the current situation. In the case of Kingfisher, this might aid in getting hold of the assets of directors in foreign countries in case they are held personally liable for the anecdote transactions. However, charges of money laundering may be separately enforced for siphoning off money given as credit by banks to the company.
Single adjudicating authority – no overlap of powers
Presently, India has multiple adjudicating authorities such as the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction and the Debt Recovery Tribunals (“DRTs”) to deal with bankruptcy and insolvency of companies and individuals. They have overlapping jurisdiction resulting in procedural delays and time consuming processes.
Under the new, NCLT will be the adjudicating authority for corporate sector and DRT for individuals and other persons.
Clear cut bifurcation of powers will simplify and speed up the insolvency and liquidation process in India.
Also read: Reforms needed to check generation of black money
Mallya borrowed Rs 6000 crore which totals up to Rs 9000 crore with interest. He offered to settle the Kingfisher loan for Rs 4000 crore one time settlement, but unfortunately, as the case is being investigated by multiple authorities including CBI and IB, multiple stakeholders need to be bought on the same page to take the settlement forward which is surely a cumbersome process.
