Opinion | Bankruptcy cases must account for the time value of money

The IBC’s new 330-day resolution limit may still be breached unless costs are imposed on litigants

There is little doubt that the Insolvency and Bankruptcy Code (IBC) is a vast improvement on the two earlier laws legislated to recover bad loans from failing or defaulting companies—the Sick Industrial Companies (Special Provisions)Act, 1985 (SICA) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993(RDDB).

According to data available up to March 2019 with the Insolvency and Bankruptcy Board of India (IBBI), the institution set up to develop the ecosystem to conduct and support the IBC, resolution processes took an average of six years before the IBC. After the IBC, it is down to 317 days. Recoveries are also higher: 43% after the IBC, against 22% before it.

However, while these numbers do flatter the IBC, contrast this with the reality that of the 12 big default cases referred to the National Company Law Tribunal (NCLT) in early 2017 by the Reserve Bank of India, not even half have been resolved. Many big cases, involving thousands of crores, including Essar Steel and Bhushan Power, have exceeded the 270-day resolution limit by a mile, crossing two years. This has forced the government to bring in another raft of IBC amendments by setting a new 330-day limit, which will include time taken in addressing legal challenges.

This change may be difficult to implement because the courts will not be bound by time limits, and there are inadequate benches to hear and resolve the disputes quickly at the NCLT. In the Indian crony capital era, it was the judiciary that turned out to be the biggest ally of defaulters by allowing resolution processes to drag on, often defeating the very purpose of SICA or RBBD.

If the IBC is not to go the way of the earlier two pieces of legislation, the fundamental thing that needs to change at the judicial end, including the quasi-judicial part of the NCLT appellate processes, is that judgements must be delivered in commercial time and not judicial time. The old saying that justice delayed is justice denied is even truer of IBC cases, where banks are actually recovering less than the headline bid amounts indicate since these numbers do not account for inflation adjustments. If inflation is 4%, every year’s delay effectively reduces the recovery by the same proportion. The time value of delays in the Essar case, assuming an inflation rate of 4%, and where the final bid is worth over 42,000 crore, is close to 5 crore a day.

Judicial systems in democracies are built on the assumption that it is better to let a hundred criminals go unpunished than to convict one innocent man. In other words, they are primed to give every litigant a long rope, even if it takes a long time and delays justice for many more people.

There could be some justification for slow justice when the possibility of rushed proceedings may end up sending the wrong man to jail or death row, but this logic cannot be taken too far in loan default cases that end up in NCLT, or other kinds of commercial litigation, including tax cases. It actually does not matter much if the Ruias did not get full justice in the Essar case, when they were the ones who ran the company into financial trouble. Nor does it matter much whether a legal error was committed in deciding between Dalmia Bharat and the Birlas in the Binani Cement case. Such cases can be decided quickly within IBC timelines with a proviso that if the legal case swings the other way in the Supreme Court, the litigating party, if it loses its case, will compensate for litigation and time costs. For example, let’s assume Dalmia was awarded the company a year ago, and the Birlas won the legal point much later in the Supreme Court, instead of overturning the entire resolution, compensation can be paid to the Birlas for losing out on an opportunity due to bad interpretation of the IBC law earlier by the NCLT or NCLAT. In commercial cases, the real loss is often an opportunity loss, and not a real loss. This can be dealt with through compensation schemes that give primacy to time value of money.

A report in Business Standard suggests that the government may ask the Supreme Court to frame rules to ensure that NCLT judges are accountable for delays, but it is difficult to see the courts entirely agreeing to impose rules that may occasionally require breaching in the interest of correct interpretation of the law and the delivery of justice. The Atal Bihari Vajpayee government made changes to the Code of Civil Procedure in 1999 and 2002 by specifying timelines for certain processes and limiting the number of adjournments in a suit. But the Supreme Court, in the Salem Advocates Bar Association case (2005), ruled that the law cannot prevent a court from granting more time on the merits of each case.

There is a danger that the IBC change that limits the resolution timeline to 330 days will also be interpreted the same way. Perhaps a better way forward would be to populate the NCLT benches with more non-judicial commercial experts, create more benches, and set up a system to evaluate the efficiency of judges in the bankruptcy courts.

At some point, the judiciary needs to understand that in commercial cases, it is commercial time that must decide the law, and not judicial time.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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