Suspension of IBC can affect resolution efforts and shift focus to recovery

“A lot can change in a year. The progress under the Insolvency and Bankruptcy Code (IBC), in terms of credit discipline and resolution, could be at risk of being compromised,’’ says Divyanshu Pandey, Partner at J Sagar Associates.

On Wednesday, the Union Cabinet gave approval to the suspension of the IBC for Covid-19-related stress. It was decided to hold in abeyance Sections 7, 9 and 10 of the IBC by introducing Section 10A for six months which could be extended up to a year. While only pandemic-related cases will get the benefit of this reprieve, it will be tough to pinpoint this as the reason for the non-servicing of loans, and worse, borrowers can take lenders to court over this point.

The Insolvency and Bankruptcy Board of India’s data shows that 3,774 cases had been admitted for corporate insolvency resolution processes amounting to Rs 3.84 trillion in FY20. The Reserve Bank of India’s (RBI) Financial Stability Report (FSR: December 2019) had noted that banks’ gross non-performing assets may increase to 9.9 per cent by September 2020 from 9.3 per cent in September 2019. And, all this was before Covid-19 came into the frame; a new edition of the FSR is due next month.

The fact that the IBC’s suspension had not been notified had added to the confusion. Senior bankers are tightlipped ahead of a crucial meeting of the Indian Banks’ Association, but informal consultations involving lawyers to craft new-look inter-creditor agreements (ICAs) and specific restructuring provisions under the Companies Act have started. 

The hunt for options

A way out is to segregate bad-loan cases. Says R K Bansal, managing director, Edelweiss Asset Restructuring Company: “Defau­lts due to the lockdown can get reprieve from IBC reference. Then, you have bad loans, which are three to four years old, but banks did not take them to the bankruptcy court and cases where lenders have filed references, but the tribunal is yet to admit them.” He feels voluntary reference by borrowers to the IBC process should be allowed, and this may need some easing of rules, under Section 29, on promoters. These aspects will still have to be fleshed out and all eyes are on the central bank on the operational parts of it.

 

“As the ICA cannot be binding on every creditor, an alternative approach which is consensual and parties may consider is the restructuring under Section 230-232 of the Companies Act. While used for business restructuring, this route will now become popular even for restructuring initiated purely on account on debt defaults,” says Veena Sivaramakrishnan, Partner at Shardul Amarchand Mangaldas & Co. As for the ICA, it has been a non-starter to begin with. 

The RBI’s December FSR says as of June 30, 2019, an ICA is yet to be signed for exposures amounting to Rs 33,610 crore while the same has been signed with respect to aggregate exposures of Rs 96,075 crore. However, a resolution plan has been implemented only with respect to one borrower with a reported exposure of Rs 1,617 crore. It remains to be seen how the ICA is to be customised, but the suspension of Sections 7, 9, and 10 of the IBC, has led to financial and operational creditors scrambling to recover monies and keep themselves afloat during the pandemic.

 

Another grey area is there has been no suspension of the insolvency process against personal guarantors to a company. 

“Accordingly, if directors or promoters of a company have provided personal guarantees to its lenders, they may still be taken to the insolvency court under Part III of the IBC. Moreover, the present embargo does not extend to legal recourses under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI:2002) and the Negotiable Instruments Act (1881),” observes Sonam Chandwani, founder of K S Legal. “And so, creditors can take possession and sell immovable properties under SARFAESI or file a criminal complaint for dishonoured cheques for recovery of outstanding money”, she adds.

The RBI June 7 circular also has to take into account the new ground realities.

Pandey feels there is a case for giving priority in pay-out to additional finance providers, and for temporarily suspending the applicability of 29A to acquirers where there is a change in ownership or management stipulated. Also, granting longer timelines of up to a year before additional provisioning becomes applicable, and reducing the provisioning by 10 per cent in both cases — at 20 per cent after 180 days from the end of review period; and 15 per cent after a year; or a total additional provisioning of 35 per cent.

It’s now or never for banks on the bad-loan front – all the gains from the clean-up work of the past few years run the risk of being lost.