The real success for Insolvency and Bankruptcy Code would be in successful bad loan resolution and not in their liquidation, says Shardul Shroff of Shardul Amarchand Mangaldas, which is representing SBI against Essar Steel in Gujarat HC
Mumbai: It will take a minimum of two years for a new law like the Insolvency and Bankruptcy Code (IBC) to overcome teething problems, said Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas. The real success for the bankruptcy code will be in the successful resolution of bad loan cases and not in their liquidation, he said. Shardul Amarchand is representing State Bank of India in the case where Essar Steel Ltd has dragged its lenders and the Reserve Bank of India (RBI) to court over the central bank directive to trigger bankruptcy proceedings for 12 large defaulters. Edited excerpts:
Are mere technicalities derailing the IBC like in the case of Essar taking RBI to court?
I personally don’t believe so because the matter has been reserved for judgement. Ultimately, the judge will deal with the issue as it is a judicial process. In a democratic setting, people will challenge, but I don’t believe this will be enough to derail the entire law. It’s not the final word in any case; it’s not the final process.
But the fact is the IBC was meant to be a quick and time-bound process...
Only seven days have been lost and they will be excluded from any limitation. So what has happened is that the judge has intervened and given a stay. The stay period will be excluded. Therefore, we haven’t really lost out on major time because this is not a process that will go on forever. He has reserved it for orders, so he is also cognizant of that fact that he has to decide this quickly. Maybe he just decides the operative order and the judgement will follow later; anything can happen.
The judiciary has its own ways of resolving issues and we must give it that right.
That right is not being disputed but the reason the IBC was formed was to overcome these issues...
This issue has risen from something outside the IBC because the claimant has taken up a position asking how a statutory body like the RBI is directing a quasi-judicial authority to do something with urgency.
I think the judge was right in intervening and directing the RBI to remove that language, which they have done. Therefore, the main nub of the challenge, even during the course of the hearing, has been answered. But the judge may want, for his own peace of mind, to understand why the challenge was there. These issues have been argued and one must give the judiciary the freedom of deciding without any pressure.
That’s fair. Let us leave aside that one line where it seems like the RBI is directing the NCLT...
That’s the main challenge.
But Essar is questioning the authority of the RBI in issuing the press release...
The authority is in the RBI Act, amended by an ordinance. That has been argued, so the judge has to deal with it because if the procedural aspects are informal, then it doesn’t matter if it’s a press note or a notification. Nobody is disclaiming this.
Let’s assume this notification was not there at all. Then was there anything from preventing the SBI from filing? So how does it matter? This is a process in which the RBI indicates to the banks not to delay. If there is a default that nobody can dispute, then it is the right of any secured or financial creditor to file.
So, dehors the RBI and dehors the notification, there is nothing wrong with my filing. Nobody has the right to say that I shouldn’t initiate it.
Do you think the RBI stepping into the picture has made the process messier than it otherwise might have been?
Here is a situation in which we have lakhs of crores outstanding as NPAs (non-performing assets), so if the process is being optionally decided by the banks, it is valid for the government and the RBI to step in and say they don’t want this option but want to have a direction to resolve the larger bad accounts first.
This is a perfectly legitimate option; it is not arbitrary but sensible as the priority should be to sue the bigger bad loan first. I don’t think it is complicated. The RBI is the banking regulator so it is legally empowered to do so.
The RBI press release doesn’t stand as a legal document. What is the implication on the other 11 cases?
I don’t think there is any implication because like I said before, even in the absence of an RBI press release or notification, there was no bar to the banks filing. They need not have issued a press release at all. They have enough control over the banks to ask them to litigate. The RBI can easily change the accounting norms and say that your debt levels are too high, and thus ask the banks to make a 100% provision. The banks obviously wouldn’t want that. Therefore, they are also equally vulnerable when they don’t file.
From a purely speculative point of view, the RBI seems to work on the footing that the bigger bad accounts should be resolved first, to set a precedent. If they tackled the smaller ones first, they may not have the precedence to support the decisions.
Because the bigger banks can take the risk of litigation, I look at it positively as one way or another, the issue is thrown up and that is the most important. In the current situation, the resolution of NPAs is very important. It is not something that can be kept away on a shelf. Fortunately, everybody understands that now.
The incidents we are seeing now, are they just teething problems? And were they expected to happen?
They are teething problems, yes. And they were expected too. Normally, when a law of this magnitude comes in, one should assume uncertainty for two years because in India, individuals are ingenious and will always dig up more issues. There will be a process of trial and error and of decisions by the NCLT, the Appellate Tribunal and even the Supreme Court.
If you take the old SARFAESI law, it went to the Supreme Court finally and got decided in a two-year time frame. The past is also proof of the time frame by which judgements of the courts bring to bear in terms of how the process happens.
But to say a law will not be challenged is not right; somebody or the other is bound to challenge it. Nobody should proceed with the footing that a law will not be subject to challenge. But somebody will draw the final line beyond which nothing can change, and that is the Supreme Court.
What is the true test of the IBC? When can we say that it is a success?
That is when a few schemes have been approved. The proof of concept is when you are able to get a resolution plan, not if the process results in only liquidation. That has to happen in 270 days; there’s no choice. The urgency that needs to be demonstrated now is to come up with a resolution plan and get it approved by the CoC (Committee of Creditors), seeing that it is lawfully framed, taking care of the interests of the operational and dissension creditors, the workmen.
In terms of the infrastructure of the NCLT, even that seems a little hazy as of now. Would you say the present number of benches are adequate?
We don’t have that many cases to deal with as of now that 10 benches cannot handle. The infrastructure is not inadequate.
There may be 100 active cases. Operational creditor cases are not getting a much serious attention as financial creditor cases. But if 500 cases are there, it could be a serious infrastructure dearth. As of now, obtaining a date happens expeditiously. No tribunal is saying it doesn’t have time up to two months; they know that the 180-day mandate is meaningless.
They are also responsive enough to understand this is a time-bound process.
We have seen many board members of these defaulters re-designate themselves to become part of management...
It’s subterfuge. It’s similar to what happened in the managerial remuneration cases years ago in which there was a salary ceiling for directors, so they made themselves managers.
This is not going to fly; it’s a short-sighted approach. If a director is a defaulter and is undeserving, he can’t appoint himself the manager because the shareholders will question it. What was the process by which he was appointed, who appointed him, did he go through the nominations committee that comprises independent directors, under company law, etc.
A manager and managing director could have equivalent powers but the appointment process for the two are very different. If the RP (Resolution Professional) is properly instructed and surmises mischief, he can dismiss them. You can’t subvert the law.
A company can have a board with no managing director but it must have a manager. It must have a KMP (Key Managerial Personnel), whose appointment goes through the nominations committee.
The same goes for the CEO...
Yes, the CEO is the director unless he is a non-board member. Even then, if he is entrusted with managerial powers, he must go through the nominations and remuneration’s committee, which comprises primarily independent directors who are responsible to the Sebi, the stock exchanges, even on a suspended board. If the RP is appointed and yet this has happened, then the RP will take action. This is not a permanent answer. Just because I shift from the board to a manager, my bad conduct that created bad management and assets has not gone away.
Technically speaking, they would have to take the consent of the RP to become a manager and why would the RP grant it? If they changed their designation before, their decisions would be checked.
Ultimately, the RP is in control of the company and hence the management as well. He can dismiss them. The RP must exercise that power by himself or via the CoC instructing him to do so. This is ultimately to protect the company.