As things stand today, wilful defaulters have got a bitter taste of their own medicine. Thanks to the Insolvency and Bankruptcy Code, banks cannot be taken for a ride by dishonest promoters
The Insolvency and Bankruptcy Code (IBC) of 2016, that rebalances rights of promoters, banks, vendors and employees, is unarguably one of the stellar achievements of the Narendra Modi dispensation. It seeks to tackle the mountain of over Rs 10 lakh crore of non-performing assets (NPAs) in the banking system through a resolution that includes liquidation and change in management/ownership. That companies cannot stall recovery action has only added teeth to the IBC, ensuring not only quicker turnaround of bankrupt firms in less than a year, but also improving the asset quality of banks in a time-bound manner.
On May 18, 2018, Tata Steel Ltd acquired 72.65 per cent stake in Bhushan Steel Ltd, one of the 12 large wilful defaulters for Rs 35,200 crore in a historic move, with lenders getting back nearly two-third of the money owed to them by Bhushan Steel, thereby showcasing that the strength of IBC lies in the fact that resolution can be achieved without any major haircut to banks. The desperate attempt by Neeraj Singhal, Bhushan Steel's erstwhile promoter, to prevent the said takeover was dismissed by the National Company Law Tribunal (NCLT) and the Singhals were simply reclassified as “public category shareholders” from being promoters post the deal.
Apart from the Bhushan Steel takeover, the litmus test in a manner of speaking has been passed, given that as much as 270 per cent of the ‘liquidation value’ has been received in the 32 significant cases that were resolved under the aegis of the IBC in the last two years. The fact that IBC maximises value for all stakeholders, including employees, can be best guaged by the stay given in August 2018 by the National Company Law Appellate Tribunal (NCLAT), in response to a petition filed by over 800 employees of Jyoti Structures, a defaulting Mumbai-based engineering, procurement and construction (EPC) company. As per Section 33 (1) of IBC, in the event a resolution plan is not approved by Committee of Creditors (CoC) and presented to the adjudicating authority for approval under Section 31 within the Corporate Insolvency Resolution Process (CIRP) period of 270 days, the adjudicating authority is mandated to pass an order liquidating the corporate debtor. Since a buyer could not be finalised for Jyoti within the mandatory 270 days, it was heading for liquidation, as mandated under the IBC Act.
However, disallowing the liquidation proceedings temporarily and giving the Interim Resolution Professional (IRP) a little more time, keeping in mind the interests of the employees, is a classic case of how IBC seeks to marry the interests of both financial creditors/lenders, with that of operational creditors/employees. The Jyoti Structures’ case also establishes that the ultimate authority vests with the NCLAT and that is how it should be so as to ensure there is no confusion in the adjudication process.
Again, in the Era Infra Engineering case, the NCLT admitted insolvency plea by Union Bank against Era, despite several winding up petitions pending against it in other courts, ruling that unless a winding up order had been passed by another court, Era will have to face insolvency proceedings under IBC. Basically, wilful defaulters can no longer take refuge, giving the lame excuse of multiple litigations in multiple courts, something that the Vijay Mallyas and Jatin Mehtas of the world did wantonly.
Further upholding the integrity of IBC and NCLT is the Chitra Sharma judgement, where the Supreme Court ruled that the CIRP is a market-driven process that requires “expert determination” and, therefore, courts must not intervene or supervise its intricacies. The apex court also confirmed that strict adherence to Section 29A of IBC is mandated wherein errant promoter/holding company, JP Associates Ltd in this case, will not be permitted to participate in the bidding/CIRP process of its defaulting subsidiary company, JP Infratech Ltd.
The apex court also ruled that there cannot be any preferential payments made under IBC to any class of creditors, including home buyers, who now come under the purview of ‘financial creditors’. Needless to add, IBC has fair play and ‘resolution’ rather than mere ‘recovery’ at its core.
To cut to the chase, the NPA mess under the erstwhile Congress-led coalition was never Rs 2.43 lakh crore to start with. The NPAs were more than 3x the amount reportedly in March 2014, but were fraudulently evergreened through repeated restructurings in gross violation of prudential banking norms. In effect, the Congress-led Government hid from the honest taxpayer the fact that while the total loans given by banks between 1947 and 2004 were only Rs 18 lakh crore, the overall loans given by banks between 2004 and March 2014, under the Congress-led coalition, stood at more than Rs 34 lakh crore.
Suffice to say, therefore, that the staggering Rs 52,000 crore offered for mega acquisition of chronic defaulter Essar Steel by Luxembourg-based global behemoth Arcelor Mittal, by edging out Numetal in a bidding war, with zero haircut to Indian lenders, is arguably the biggest vindication of how IBC has uprooted crony capitalism, lock, stock and barrel. The Ruias of Essar Group on October 25, 2018, to thwart the takeover of Essar Steel, decided to pay Rs 54,389 crore to settle full claims of all financial and operational creditors, including the staff, by making upfront cash payment of Rs 45,559 crore. The Gujarat High Court dismissed the plea of Ruias and Essar Steel was brought under the purview of IBC.
But on October 25, 2018, the CoC ruled in favour of Arcelor Mittal, which has now won the bankrupt Essar Steel. Also, under Section 12A of the IBC, any withdrawl process under IBC can happen only before issuance of Expression of Interest, which in this case was issued way back in October 2017. If the Ruias indeed had the money, why did they not offer to pay earlier? Was it because of their scant regard for creditors, bankers, lenders and the law of the land? Today wilful defaulters have got a bitter taste of their own medicine. Thanks to the IBC, banks cannot be taken for a royal ride by dishonest promoters anymore.
The war for Essar Steel has undeniably been lost by the Ruias and any attempt to get the Supreme Court to use its extraordinary jurisdiction under Article 142 of the Constitution will not work, if the Binani Cement takeover issue in the past is anything to go by. Contrary to the strappings of xenophobia that the decrepit Nehru-Gandhi dynasty under a decadent Congress foisted upon the Indian economy, Modinomics is refreshingly both liberal and progressive, and an idea whose time has resoundingly arrived. IBC is a giant leap towards that.
(The writer is an economist and chief spokesperson for the BJP, Mumbai)