Inter-creditor agreement: Legal issues may affect operations, say experts

The decision makers under BLRA may have to be given indemnity against any investigation

Barely days after 24 public sector banks signed an inter-creditor agreement (ICA), as part of recently initiated bank-led resolution approach (BLRA) to deal with distressed assets, there appears to be resistance to the move from some asset reconstruction companies and private banks. Bankers and legal experts also anticipate regulatory challenges in making this new mechanism work on the ground.

The ICA is the key to the success of the BLRA mechanism. It ensures the presence of a binding decision-making process for arriving at and implementing resolution plans for distressed borrowers. “The agreement binds only those who sign it,” says Sonali Mahapatra, partner in law firm, Talwar Thakore & Associates. Experts point out that where a borrower has significant debt from creditors who are not party to the agreement — unless they agree to it — the resolution plan is unlikely to have a significant impact.

Sources in the banking sector see a vertical split among asset reconstruction companies on signing the ICA. “Those with large assets under management are in favour of signing, while small ARCs are not game as they apprehend a raw deal,” says a banker.

One executive director with a south India-based public sector bank points out that the effectiveness of the ICA will be tested on a case-by-case basis as each situation is different, depending on the size of loan exposure.

Legal experts point out that under BLRA it is not clear how the interest of unsecured creditors and operational creditors will be addressed. Potential legal disputes among creditors cannot be ruled out, they add.

“The recommendations do not have the force of law. This is not a creation of statute so those banks which do not co-operate or wish to challenge any action on the part of the lead bank will have the right to do so,” says Rajesh N Gupta, managing partner, SNG & Partners, a law firm. 

Unlike the resolution process under the Insol­vency and Bankruptcy Code, the borrower rem­ains in control of the asset under BLRA mechanism. 

“The borrower can turn around and say that without their consent how can they be subjected to a new methodology,” says Gupta. Legal experts say retrospective applicability of BLRA may be a challenge going forward. This is because the borrower was not subjected to fresh conditionality at the time of grant of credit facilities, they add.

Moreover, the government may be required to ensure that the decision makers under BLRA are given indemnity against any investigation, civil or criminal, for having taken certain decisions to turn around the asset. 

Another issue highlighted by Dina Wadia, joint managing partner, J Sagar Associates, is that the ICA does not seem to be in consonance with the terms of the RBI’s February 12 circular, “which seems to indicate unanimity of approval of the resolution plan”. Moreover, unless the circular is amended enabling resolution of the cases under the Project Sashakt, the banks would remain obligated to refer large cases only to the IBC, she adds.

However, there are some like L Viswanathan, partner & chair of finance, projects & insolvency practice at Cyril Amarchand Mangaldas, who feel that the ICA is premised on working within the existing legal framework. “Since the resolution plans are to be prepared in compliance with all applicable legal and regulatory requirements, the individual plans for each account are expected to address all regulatory issues for successful implementation,” he says.

Whether the distressed assets ecosystem will facilitate the success of the new resolution mechanism remains a moot question..

Stress-buster for banks

February 12: The RBI comes out with a revised framework for resolution of stressed assets
 

July 2: The Committee on Resolution of Stressed Assets, led by bankers, recommends a five-pronged strategy — Project ‘Sashakt’ — to deal with NPAs in the banking system. This includes:

• SME Resolution Approach, applicable to smaller assets with exposure up to Rs 500 million

• Bank-led Resolution Approach for mid-sized assets between Rs 500 million and Rs 5 billion

• This is pre-IBC process to find resolution within 180 days. Financial institutions need to enter into an inter-creditors agreement to authorise the lead bank to implement a resolution plan

• AMC /AIF-led resolution process, applicable to large assets with exposure above Rs 5 billion with potential for a turnaround

• NCLT/IBC process applicable to pending cases

• Asset Trading Platform  applicable to performing and non-performing assets

July 23: 24 lenders, led by SBI and PNB, sign an inter-creditor agreement to speed up the resolution of stressed assets in the range of Rs 500 million-Rs 5 billion. According to the plan, the ICA is to be entered into by 22 PSBs, 19 private sector banks and 32 foreign banks. Other signatories to the agreement will include 12 leading financial institutions