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Bankruptcy Law – will it stem the rot?

According to a World Bank study, creditors to defaulting companies in India recover just 25.7 cents to a dollar in 4.3 years, versus 31.8 cents in South Asia in 2.6 years and 80.4 cents a dollar in 1.5 years in the US.

It is widely hoped that this rotten state of affairs is about to change thanks to the Insolvency and Bankruptcy Bill that has just been passed by the Lok Sabha. The bill is very likely to be passed by the Rajya Sabha as well because the parliamentary committee which recommended it comprises members from all parties.

But is it time to celebrate?

The new bill certainly appears to be a water-tight law. It ordains that even if a company defaults in its payment by a day, lenders can file an insolvency petition against the company in the National Company Law tribunal (NCLT). The NCLT will appoint a creditors’ committee and if the majority of creditors is unable to come with more money or a rehabilitation plan in 180 days, the company will go into liquidation. The 180-day deadline can at best be extended to 270 days.

So, is this finally nirvana for banks in India who have long been taken for a ride by borrowers. Not in the next two years is the short answer, and may be not even be in the long-term unless, there is an unprecedented zeal to implement it.

First, the short-term: After the bill is passed in the Rajya Sabha a whole ecosystem of insolvency professionals and an entire network of NCLTs need to be set up. That may well take a couple of years. Also, the law applies only to prospective cases and, hence, the near ‘Rs 4 lakh crore of loans under default currently won’t be resolved by the new law.

Should we assume that after the NCLTs are set up, companies can’t survive more than a year after default given the strict deadline proposed by the new law? It’s tough to be so hopeful going by the past record of insolvency resolution process in India.

The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 which set up the Debt Recovery Tribunals, also had a similar 180-day timeline. Ten years later the SARFAESI Act of 2003 also promised that banks will be allowed to auction residential or commercial properties to recover loans without going to the long-winding procedure of the courts.

Neither Acts have speeded up recovery of loans from defaulting promoters. Today, nearly 40,000 cases are pending before the 33 DRTs with cases taking 5 years to be decided on an average.

How come the DRTs did not adhere to the 180-day deadline?  Partly because tribunals aren’t even appointed on time. Currently, all the four debt appellate  tribunal seats are vacant; appellate tribunals haven’t been appointed by the government for months. 

Do we have any guarantee that the same won’t be repeated with the National Company Law Tribunals.

Far from 180-days for full disposal of petition,  today the DRT registry takes 6 months even to accept all the supporting documents, after an original application is filed. Then, the tribunal hears the cases. On an average a case takes five years thanks to the countless adjournments granted. In fact, tribunals take years to pass orders even in ex-parte matters.

Neither the law nor the government penalises the DRTs for not completing a case within 180 days. Adjudicating officers in the DRT are  appointed by and responsible to the government. They are not part of the judiciary. What has so far prevented the ministry from giving KRAs (key result areas) to the tribunals as to how many cases they should close in a year?

Even when a bank goes to the DRT with an initial application, there are a zillion instances when a borrower has created a tenancy on his property and the tenant has gone to the court to prevent takeover of the property by the bank.

Legal eagles are not sure this won’t happen under the new law. Again, borrowers are known to bribe even a bank’s lawyers, (who are typically paid less than the borrower’s lawyers) so that they don’t push the bank’s case too hard.

Bankers, tribunals, borrowers and their lawyers all know the game too well.

And we haven’t even begun speaking about the judges. On a whole swathe of reasons, courts can grant and have granted stays on banks which are trying to seize property armed with an order from tribunals. Conversely, there are cases where banks have got orders from the High Court to a debt recovery tribunal asking him to close a case within two months, and the orders have been ignored with impunity.

While it is very important for the government to take the judiciary on board for the new Insolvency Law,  it will be wrong to blame the judiciary alone for the mess so far. Government, banks, borrowers and lawyers have all contributed to sabotaging the DRT and the SARFAESI Act.

And all these entities can sabotage the new law as well. This drama of passing newer and newer laws to force defaulting companies to sell assets and pay up, has gone on for too long in India. It’s time we recognize  reform is not rewriting the law, but having the zeal and character to implement it.