Insolvency and Bankruptcy Code: a legislation mired in controversy
The focus of the Insolvency and Bankruptcy Board of India and the government must shift from tinkering with the law to building proper infrastructure
It is unfortunate that the Insolvency and Bankruptcy Code (IBC) is mired in so much controversy. Part of the problem is that the important players in IBC, namely the committee of creditors (CoC) and the resolution professional (RP), while taking decisions, act in a mechanical manner, disregarding the objective of IBC, which is “an Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons...and balance the interests of all the stakeholders”.
It is the failure to understand the objectives of the IBC by the various players that is resulting in controversies. Many banks treat attendance to the meeting of CoC as a routine process and depute juniors who are not empowered for such meetings. This lack of seriousness adversely impacts decisionmaking, and could be mitigated through training of RP and CoC.
IBC has entrusted an important responsibility on the RP and CoC, which is to maximize the value of assets. It is incomprehensible why the process of opening the bid and its evaluation should be a secret process. Rather it should be transparent, where the resolution applicants are allowed to put forth their opinions for consideration by the CoC and RP and their lawyers. Because of the secrecy of the process, litigation is being invited.
IBC provides for approval of the resolution plan first by the CoC with 75% majority and then by the National Company Law Tribunal (NCLT). It is a misconception that the approval of NCLT must be granted in a routine fashion if the CoC approves the resolution plan. NCLT is bound to consider objections of various stakeholders and if the conduct of CoC is not fair and transparent, NCLT has the right to reject the resolution plan. Now take a situation where, after the announcement of selection of the highest bidder by the CoC but before the approval of the resolution plan by the NCLT, an unsuccessful bidder offers higher price. Is it not logical that the bid with higher price be considered if there is no other negative in the acceptance of the bid?
The two-stage approval process as stated above permits such a situation. Similar was the situation under the Companies Act, 1956, where the liquidator in winding up has the power, with the sanction of the court, to sell the immovable and movable property and actionable claims of the company by public auction or private contract. The Supreme Court (SC) in Divya Manufacturing, and LICA (P.) Ltd cases setdown a different principle altogether while dealing with the auction of certain properties of the company in liquidation as compared to a general auction and for good reasons. The guiding principles laid down by the SC in cases of liquidation are that attempts should be made to get the most remunerative price and that it is the duty of the court to keep openness of the auction so that intending bidders feel free to offer the higher value. Why should the same principles not apply in the context of IBC?
The RP is also a custodian of the assets of the company under insolvency and must ensure price maximization. Once the CoC identifies the best bid, the terms should be made public and thereafter, it would be a good idea to hold a kind of Swiss challenge method of auction under which all the eligible resolution applicants are allowed to improve upon the identified offer terms in an open auction and the best offer is selected in this process. It will be a shame if IBC goes the way of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) and Debts Recovery Tribunals (DRT), where there have been allegations that very low reserve prices are being set by banks for assets in exchange for kickbacks to various stakeholders to the detriment of the banks.
There is a curious case where the promoter of a corporate debtor, undergoing insolvency resolution process, has offered to pay the creditors in full and redeem the assets. Now the question which arises is whether the corporate insolvency resolution process (CIRP) once started can be terminated. The SC has exercised its power under Article 142 to terminate the process. This shows that the process can be terminated under genuine circumstances. Section 60 of the Transfer of Property Act, 1882 allows a mortgagor to redeem the mortgage. The courts have always recognized and accepted the right of the mortgagor to redeem the mortgage by payment to the mortgagee and get back his property. In fact, the SC has categorically held that even before the sale is confirmed, the mortgagor, if ready and willing to pay the mortgaged amount, should be allowed to do so. In an ongoing case, the lenders have issued a letter of intent to the highest bidder but the bid is not final as the approval of NCLT is pending. It fails to reason why a promoter should not be allowed to redeem the security interest and reclaim this asset and, in the process, give a better deal to the stakeholders of the corporate debtor. Clearly, this is a fit case for the CIRP to terminate. However, newspaper reports say that the CoC is reluctant to have a constructive dialogue with the promoter. This is a classic instance of CoC and RP giving importance to technicalities rather than the objective of the code.
The focus of the Insolvency and Bankruptcy Board of India and the government must shift from tinkering with the law to building proper infrastructure in NCLT and National Company Law Appellate Tribunal (NCLAT) and changing the mindset of the stakeholders in the IBC process.
Bomi Daruwala is joint managing partner at Vaish Associates, Advocates. Views are personal.
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