The Overhauling of the Stressed Indian Banks With Insolvency And

Bankruptcy Code, 2016

*Dr. Deepak Tandon Professor , International Management Institute , B-10 Qutab Institutional
Area New Delhi -110016. Email : deepaktandon@imi.edu

Abstract:

For the galloping NPAs in the Banks The Insolvency & Bankruptcy Code (IBC), 2016 has been one of the
most ground-breaking Laws . . It has already subsumed the existing Sick and Industrial Company Act, S4A
accounts , revamping the Debt Recovery Tribunals(DRT) and has emerged as a major legislation.
Consequent to the implementation of the Code, there has been a paradigm shift in the debt recovery
scenario in the country. Big assets undergoing Corporate Insolvency Restructuring Process (CIRP) under
Insolvency and Bankruptcy Code, 2016 (IBC) are hot targets. Funds are hoping for big in next round of big
tickets cases which might end up before National Company Law Tribunal Unlike the time consuming and
never-ending process that used to be prevalent earlier, the code aims to attain time bound and effective
bankruptcy resolution, in times to come. The code provides umbrella legislation for the laws relating to
bankruptcy, liquidation and insolvency resolution and aims to boost foreign direct investment in India by
improving India’s score and ranking in the Ease of Doing Business Index and in the ease of Resolving
Insolvency Index. Despite the growing challenges, the new law definitely brings in an invigorating change
and makes it easier for creditors to recover loans faster. The lenders will be very cautious and act before
things go out of hand and pre-empt crisis in future. The paper elaborates as to how the insolvency laws
will work amidst ballooning NPAs, role and identification of resolution professional (RP), National
Company Law Tribunal (NCLT). The laws have been substantiated by case lets and recent judgements by
the authors justifying the research questions.

Keywords: Resolution professional, National Company Law Tribunal, Internal Advisory

Committee, Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professional(IP ), CIRP

1. Introduction
When the Insolvency and Bankruptcy Code, 2016 (IBC) was passed in May 2016, the legal
framework for insolvency resolution in India underwent a structural change. Insolvency and
Bankruptcy Code (IBC) proposes a paradigm shift from the existing ‘Debtor in possession’ to a
‘Creditor in control’ regime. It aims at consolidating all existing insolvency related laws as well as
amending multiple legislation including the Companies Act and would have an overriding effect
on all other laws relating to Insolvency & Bankruptcy. The code aims to resolve insolvencies in a
strict time-bound manner. The first cases of insolvency started being admitted in the National
Company Law Tribunal (NCLT), the quasi-judicial tribunal vested with adjudication powers
under the IBC Insolvency professional to take over the management of the Company, once the
provisions relating to corporate insolvency were notified (November 2016). In the World Bank’s
index on the ease of resolving insolvency, India currently ranks 136 out of the 186 countries.
1
India’s weak insolvency regime, delay in carrying out proceedings timely are few of the reasons
for the distressed state of credit markets and such a ranking globally. According to the World
Bank data, 1.5 years is the average time taken in the U.S. to complete the insolvency proceedings
and it is 4.3 years as in India. As the Code is gaining stature, it is legit to take steps to ensure that
the resolution process is carried out in a time-bound manner and ensuring the value of assets of the
insolvent firms by early identification of the financial failure.

Moreover, a flip side is that, strict timelines of a resolution may have a negative effect on banks as
it may force some companies into liquidation. The strict timelines to resolve a case under IBC are
with a maximum period of 270 days (180 days initially with a 90-day extension –one time).
Company will be automatically liquidated, after this. With the current burgeoning NPA levels,
Banks have limited capacity to absorb losses from a write-down that may need to be taken for a
resolution. Bank’s profitability over the next year would be greatly affected if they need to take
large write-downs for those assets. This will also accent the capital needs of weaker government
banks, which may require from the Indian government, a larger capital infusion. Despite these
challenges, the Insolvency and Bankruptcy Code passed by the Parliament is a welcome overhaul
of the existing framework dealing with insolvency of corporates, individuals, partnerships and
other entities. The unified regime envisages a structured and time-bound process for insolvency
resolution and liquidation, which should significantly improve debt recovery rates and revitalize
the ailing Indian Banking Sector NPA mess and the insolvency of corporates.

1.1 Overview of the Insolvency and Bankruptcy Code(IBC)

The IBC, set to strengthen India’s insolvency framework has overriding effect on all other laws or
any other instrument enacted earlier.

(A) Important changes in the Insolvency and bankruptcy Code (IBC):

 Under a consolidated institutional framework, IBC runs as a summary trial with a

resolution professional (RP) having unlimited liability, who oversees the resolution
process and proceedings can be initiated by financial/operational creditors and as well as
corporates. Earlier, the institutional framework was fragmented.

 For a Insolvency proceedings to be initiated, minimum defaults is of Rs 0.1mn. In earlier

frameworks, criteria were linked to net worth erosion or inability to repay 50% or more
debt of secured creditors.

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  The power to declare transactions void and reverse recent transactions undertaken to
diverge funds out of the corporate has been mandated to IBC.

(B) Key reasons for failure/low recoveries under earlier mechanisms:

 Under BIFR/SICA Act, actions got initiated on erosion of net worth, leaving little and
limited scope for revival and thereby leading to liquidation after a lengthy proceeding.

 To provide a temporary relief to borrowers rather than to make a comprehensive effort to

revive businesses, Corporate Debt Restructuring (CDR) was intended and it ended up
being used as a mechanism for postponing stressed assets recognized as NPAs.

 Challenges, under Strategic Debt Restructuring (SDR), included lack of unified laws to
stop parallel proceedings, multiple headwinds like incomprehensive documentation, banks
being in-charge of preparing a resolution plan without having any sweeping powers and
unfavourable macroeconomic environment and valuation disputes.

 The Scheme for Sustainable Structuring of Stressed Assets (S4A), has been found of
having limited eligibility for the set of stressed cases as it prescribes a short-term cash flow
visibility and does not allow change in repayment terms.

(C) Benefits expected out of IBC:

 Avg. time taken for recovery processes in India stood at 4.3 years with a 26% recovery
rate. With IBC, speedy and time-bound proceedings is expected to lead to higher
recoveries.

 Under IBC, the strict timelines to resolve a case are with a maximum period of 270 days
(180 days initially with a 90-day extension –one time). Company get automatically
liquidated, after this.

 It gets aligned with the International benchmarking standards which stipulates that for
countries having high recovery rates; duration of the resolution process is contained at 12-
18 months, the focus is to ensure that the entity remains a going concern by quickly
ensuring change in management or otherwise and non-lending entities are typically
involved in preparing the resolution plan.

 Efforts among banks towards decision making and willingness to take higher haircuts as
failure to come up with a resolution plan would lead to liquidation of corporates.

 As even operational creditors can initiate insolvency proceedings under the new
3
 framework, financial discipline across corporates is likely to improve. Decisions of NCLT
can be challenged at NCLAT, followed by the Supreme Court, wherein we expect the
judgements to be delivered in a reasonable timeframe.

(D) Challenges in smooth implementation of IBC:

 Actions like changes in capital structure for corporates, selling assets, and reclassifying
promoters as public shareholders, getting shareholder approval is an issue.

 Delays in proceedings vis-à-vis stipulated timelines due to inadequate NCLT

benches/trained RPs to handle large number of cases which are referred under IBC.

 Clarity issues on various aspects of the code such as how to arrive at liquidation value,
priority in claims of house buyers etc.

(E) Expected impact for banks:

 Expected accelerated provisioning on NPA accounts owing to the haircuts that banks may
have to take post resolutions are approved.

 Majority of NPA accounts will require higher provisioning compared with current levels,
based on the residual economic value of the assets.

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Resolution process

Source: Author’s compilation

2 Review of Literature
Kohli RC (2017) in his book titled “Practical guide to NPA resolution” has deliberated that it is a
very healthy sign that the banking industry will be at a more advantageous position to wipe off
their bad debts by implementing new amendments like IBC and he believes that it will help clean
their balance sheets to a large extent in times to come. He says that the IBC has created a line of
action for quick winding up of ailing companies and foster faster recovery of Bank’s Stressed
Assets.

Kaveri V.S. in her paper titled “Ordinance on New NPA Resolution Policy - an Overview”
underlines and evaluates the effectiveness of the various NPA dealing mechanisms like Corporate
Debt Restructuring(CDR) mechanism, framework for monitoring of Special Mention Accounts
5
(SMAs), Flexible Restructuring of Long Term Project (5/25) scheme, Special Debt Restructuring

(SDR) scheme, Scheme for Sustainable Structuring of Stressed Assets (s4a) and latest Insolvency
Bankruptcy Code (IBC) etc. Despite these and many other measures, the level of NPAs is now
unprecedented and is shaking up confidence in the minds of bankers in taking decisions on huge
write off/write downs as part of resolution of mega problematic projects.

Brian,Yap in their paper titled “Indian banks decentivised by insolvency code.” deliberated that
Public lenders have been wary of taking action under the IBC due to the absence of provisioning
benefits in proceedings filed under the insolvency code. Banks may be reluctant to approach the
National Company Law Tribunal (NCLT) under the new bankruptcy regime, and opt to continue
to enjoy the benefits of the joint lenders' forum (JLF) where banks have an option of having a new
or existing creditor provide additional finance for restructuring stressed accounts. Dissenting
lenders refusing to participate in a joint corrective action plan can also sell their NPL exposure to
a new or existing creditor. The RBI needs to incentivise the banks to use the code by extending the
provisioning benefits, which are available under JLF, to proceedings under the new insolvency
regime.

Chaterjee, Shaikh & Zaveri in their article “Watching India’s Insolvency Reforms” have analysed
the IBC in terms of its effectiveness in actually facilitating the debt resolution mechanism and
they are of the view that IBC is still in in nascent stage and a lot many obstacles are there to
address to.

Bhattacharya Arundhati in her Livemint article “Ecosystem not ready for insolvency law”
deliberates that under the Insolvency and Bankruptcy Code the ‘ecosystem’ for rapid dispute
resolution is not ready yet. She said that the sector has got the law it wanted but implementation of
the new code will take time.

3 Objective of the Study

The research study aims to analyse the IBC in terms of its effectiveness, implementation and
evaluates its performance after its implementation. Information was collected from the final orders
published by the NCLT in the first six months of operationalization of the IBC and subsequent
data released till recently by NCLT and RBI. In the paper, we also apply the data illustratively to
answer questions about the economic impact of the IBC and the functioning of the judiciary under
it. Thereafter, the summary statistics on the IBC and our preliminary findings relating to the
working of the IBC has been presented keeping in view economic analysis of the law. Parameters
6
 such as, who are the initial users of the insolvency process under the IBC, the average time taken
by the NCLT to dispose off cases, what kind of evidence are the users using to support their
claims before the NCLT, reason for dismissal of a case, the variation in admission and dismissal
across the nine benches of the NCLT and the outcome of the proceedings. We apply the data to
answer six questions relating to the economic impact and analysis of the law:

(i) To study whether the law improves the balance between rights of the creditors and the firm
debtor during insolvency?
(ii) To study whether the law empowers various types of creditors when the firm defaults?
(iii) To study whether the law empowers only large-sized debt holders?
(iv) To study whether the NCLT functions within the timelines set in the law?
(v) To see the role played by the NCLT as visualised within the IBC?
(vi) To study as to what is the situation in terms of the NPA of Indian Banks and how has IBC
performed . ?
4 Research Methodology

Information collected from the final orders published by the NCLT in the first 6 months
(December 1, 2016 until May 15, 2017) of operationalisation of the IBC and the subsequent
orders and data published by NCLT and RBI on NPA is used in arriving to answers of the
research questions. This includes parameters such as, who are the initial users of the insolvency
process under the IBC, the average time taken by the NCLT to dispose off cases, what kind of
evidence are the users using to support their claims before the NCLT, reason for dismissal of a
case, the variation in admission and dismissal across the nine benches of the NCLT and the
outcome of the proceedings. Also RBI data and CRISIL’s analysis on NPA of Banks has been
used to judge the situation of the NPA in banks and the trends which have then been used to draw
inferences to our research questions.

5 Findings and Inferences

We apply the data to answer six questions relating to the economic impact of the law:

5.1 (A): Does the IBC law improves the balance between rights of the creditors and the firm
debtor during insolvency?

Preceding the IBC, the Indian legal regime conferred weak rights on creditors, especially
unsecured creditors. There was scope for the judiciary to intervene in the commercial matters of
debt re-structuring. The law and the Courts and tribunals enforcing it, also exhibited a
7
rehabilitation and pro-debtor bias. The early data after operationalization of IBC, indicates that
there has been a shift in the enforcement of creditors' rights under the IBC.

Table 1 shows who used the IBC during the first six months of its operationalisation.
Particulars of petitions filed via IBC Number
Petitions filed by Operational Creditors (OC) 62
Petitions filed by Financial Creditors (FC) 21
Petitions filed by Creditors (Operational + Financial) (O+D) 83
Petitions filed by Debtors (D) 26
Unknown Applicants (UA) 1
Total 110

Figure 1 Operational and Financial Creditors Figure 2 Percentage of Petitions via IBC

Out of the 110 cases that were disposed off during the period, creditors were the triggers for 75
percent of the cases. Of these, Unsecured operational creditors filed 75 percent. This is a clear
indication that operational creditors, who had weak enforcement rights, have taken recourse to the
IBC to enforce their claims. For the relatively low number of financial creditors taking recourse
to the IBC during the first six months, there may be multiple reasons. Evidence suggests that firm
debtors default to financial creditors the last. Financial creditors may choose to enforce their
claim by realising their security. The reason for the divergence in creditor behaviour in triggering
the IBC is unclear, in the absence of data on default or the enforcement of security by financial
creditors in India, however, The behaviour of the debtor is another interesting feature to look at.
In general opinion, the debtor will avoid resorting to insolvency because the IBC moves away
from the debtor-in-possession model to a framework model. Here the debtor’s board is suspended
8
and the affairs of the debtor are run by an independent insolvency professional. However,
contrary to this belief, around 24 percent of the petitions in this early six-month period have been
filed by debtors.

50 percent of the 110 cases that were filed, have been admitted by the NCLT and are now
undergoing a mutually negotiated debt restructuring process. Thus, unlike the previous regime
where the judicial bodies exhibited a pro-debtor bias, there is no explicit admission or dismissal
bias for insolvency cases under the IBC. Also that the Creditors are using the new insolvency and
bankruptcy regime with increasing confidence compared to earlier system.

5.1 (B): Whether the law empowers various types of creditors when the firm defaults?

Table 2 below shows the kind of various operational creditors who took resort to the IBC during
the period. We find that even holders of decrees are taking recourse to the IBC, while majority of
the operational creditors are suppliers to the debtor.
Table 2 Particulars of Operational Creditors using IBC Number
Employees 5
Vendors 43
Others 6
Not Known 8
Total 62

Figure 3 Particulars of Operational Creditors using IBC

The outcomes of the insolvency cases filed by different kinds of creditors is shown in Table 3.
The percentage of dismissal for operational creditors is slightly higher at 58 percent compared to
43 percent of the cases filed by the financial creditors.
Table 3 Admission and Dismissal Across different Kinds of Creditors
9
Particulars No of Petitions Admitted Dismissed
filed
Operational Creditors 62 26 36
Financial Creditors 21 12 9
Debtors 26 23 3
Unknown 1 0 1
Total 110 61 49

We find from the reading of Tables 2 and 3 that that even during the earliest days of its
operationalisation, a wide variety of creditors have shown the ability to trigger insolvency
proceedings under the IBC. Earlier, only a certain number of creditors were able to trigger
insolvency proceedings against firm debtors, and other creditors had to file cases in civil courts.
Thus IBC has truly helped empower the creditors.

5.1 (C): Whether the law empowers only large-sized debt holders?

The size of debt claims that have been used to trigger the IBC is shown in Table 4. The Minimum
and Maximum figures in Cr for different types of stakeholder’s namely corporate debtors,
operational creditors and financial creditors are shown in the table.
Table 4 Debt size litigated under IBC (in CR)
Size of Debt Reported Corporate Debtors Operational Creditors Financial Creditors
Minimum 0.92 0.01 0.3
Maximum 2580.07 131.9 856.52

The smallest claim to trigger the IBC was filed by an operational creditor with a claim of debt
default of Rs 1.09 lakh while the smallest debt against which a financial creditor triggered the
IBC was Rs 30.69 lakh which was 30 times larger. Debt default maximum was claimed by an
operational creditor and was Rs 131.9 crore while the largest default to a financial creditor was
Rs 856.5 crore which was only 8 times larger. Thus, it can be observed that operational creditors,
who had considerably weaker rights under the previous regime, had considerably large debt
repayments due from firm debtors.Thus, we see, most of the cases tend to be triggered using debt
defaults that are almost 10 to 100 times larger than the threshold of Rs. 100,000 set in the law.

5.1 (D): Whether the NCLT function within the timelines set in the law?

The IBC mandates NCLT to dispose off an insolvency petition within 14 calendar days from the
date on which it is filed before it. Based on the data, we have divided the life-cycle of an
insolvency petition: The date on which the case is filed (D1), date on which it first comes up for
10
 hearing (D2) and the date on which it is disposed off (D3). The time that elapses between D1
and D2 could be attributed to the internal processes in scheduling hearings for a case by the
NCLT. Analysis of Data shows that the NCLT exceeds the timeline of 14 days mandated by
statute. Table 5 below shows the detailed time taken.

Table 5 Average Time taken for disposal of Insolvency Petitions by the NCLT
Stage No of cases for which Data is Avg Time (in Days)
Available
D1 to D2 12 18
D2 to D3 52 16
D1 to D3 24 24

Thus, the average time taken from the date of filing the insolvency petition to the date on which it
first comes up for hearing, is 18 days. The average time taken between the date on which it first
came up for hearing and the date on which it is finally disposed off, is 16 days. Finally, the
average time taken for disposal is 24 days (D1 to D3). This is way more than the stipulated
timeline of 14 days prescribed under the IBC.

5.1 (E): Whether the role played by the NCLT is as visualised within the IBC?

While IBC law allows an insolvency to be triggered if the debtor has committed a default in
repayment of an undisputed debt and enumerates specific grounds for dismissing an insolvency
case, the NCLT has dismissed petitions on considerations beyond specific grounds as well.
Table 6 below shows the various grounds of dismissal of the insolvency petitions.
Table 6 Reasons for Dismissal of Insolvency Petitions
Grounds for Dismissal No. of Insolvency Petitions Dismissed
Existing Dispute 8
Applicant was not a Creditor as defined in IBC 7
Settled out of Court 5
Debt Recovery Barred by Limitation 3
Incomplete Application 2
Operational Creditor failed to issue statutory 2
demand notice prior to filing the case
Others 22
Total 49

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Figure 4 Industry Wise distribution of cases at IBC

In an insolvency petition filed in the Mumbai bench, the NCLT extended the inquiry scope to the
balance sheet of the debtor. It said that since the debtor had sufficient assets on its balance sheet,
it would be not be fair for the debtor if the petition were admitted, thus it ignored the creditor's
argument that the provisions of the IBC scope did not include balance sheet analysis. This
indicates that the NCLT seems to be viewing the admission of an insolvency case against a debtor
as a harsh step. The data, thus, shows that the working of the NCLT is not always in accordance
to the letter and spirit of the IBC.

As a corollary we found that the non-availability of basic information about the case hindered the
ability of the NCLT to monitor the efficiency of its own benches and the ability to identify
systemic lapses in the functioning of tribunals and in designing appropriate interventions.
Efficiency of the adjudicator of the law, strengthens the legal framework and is especially so for a
procedural law like the bankruptcy law. Lapses in the NCLT are likely to hinder the working of
the legal framework, reducing the efficiency of resolution and leave the bankruptcy reforms
process undone. As these are early days yet, and there is wide scope for correction. As the
insolvency cases increase and as more data gets published, relevant fields, such as recovery rates
and expenses associated with the recovery process, can potentially be integrated for analysis.

5.1 (E) – I Relevant Judgments by NCLT, Under IBC.

(A) Jaypee Infratech – Case showing swift adaptations by institutions under IBC

Case background: Insolvency application of IDBI Bank against Jaypee Infratech was admitted by
NCLT, Allahabad Bench for defaulting on Rs 5.3 billion of loan outstanding as it had not
completed its residential projects.

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Issues:

 Neither a financial nor an operational creditor, as per IBC, Flat owners being consumers
expressed fears that their flats for which 80- 90% of payments had been made, would be
treated as assets of the company and be sold off during liquidation.

 There was a contention because as per section 36 of IBC, the properties held by the
insolvent entity in trust should get protection from liquidation by creditors, while section
18 suggests that IRP cannot take control and custody of these assets.

Actions:

 A third category of creditors for home buyers was introduced who can neither be
financial or operational creditors and cannot trigger the Corporate Insolvency Resolution
Process.

 Supreme Court (SC) later instructed the resolution professional to keep the interests of
home buyers in mind and come up with a resolution plan within 45 days vs. 180+90 days
allowed under IBC. It refused to lift stay on Real Estate Regulation Act (RERA) ,
indicating priority of proceedings under IBC over other laws.

(B) Innoventive Industries Ltd. Vs. ICICI Bank

Case background: Under (NCLT), ICICI Bank had filed a case to initiate corporate insolvency
resolution process on Innoventive Industries. Innoventive Industries filed an appeal and claimed
relief under a state law under which no action for recovery of loans or dues can be taken against
the company.

Issues and Implications:

 For a financial debt which is disputed, non-payment, even when due, would constitute a
default under the Code and it does not matter if the same is disputed.

 NCLT ruled that provisions of individual states will not prevail over IBC. Financial
Creditors doesn’t require any consent from JLF in filing an application under IBC code

5.1 (F) What is the situation in terms of the NPA of Indian Banks and how has the IBC

13
 fared?

With Insolvency and Bankruptcy Code (IBC) formalising in Dec 2016, bankers were of the view
that they could finally show some tough face to the borrowers misusing the system. The general
perception, earlier, among bankers and RBI was that because of absence of a strong bankruptcy
code NPA’s have periled the banking system. With the Code which became effective in
December 2016, in less than a year, banks seem to have lost interest in the new framework.
Bankers now don’t want to invoke the Code to all companies. The first case that clearly spooked
the banks saw under the Code was of Synergies Dooray. Here the (NCLT) ruled in favour of a 95
per cent haircut. This came as a great blow to Banks and bankers now say haircuts could be as
large as 75 per cent in many cases. Even CRISIL says Potential write-downs could be in the 25
per cent to 75 per cent range. To make matters worse, RBI has mandated banks to provide 50 per
cent provision if a case is referred to the NCLT and 100 per cent if liquidation order is set.
CRISIL estimates that banks would need to set aside close to Rs 3.3 lakh crore this financial year,
or 50 per cent more than the Rs 2.2 lakh crore they provided for last year.

Recognition of NPA: Significant progress can be seen here. The Asset quality review of RBI has
shown that the gross non-performing asset (NPA) ratio of both public and private sector banks is
higher than was earlier thought, but in the PSU (public sector undertaking) banks, it is highly
alarming. Table 7 shows the NPA and NPA ratio figures of Indian Scheduled Commercial Banks
(SCB’s). It shows a clear uptrend even when the IBC has been fully functional from Dec
2016.Also, this is an underestimate, because it does not include assets that are “stressed” but not
yet NPAs.

Table 7
NPA NPA NPA (In CR)
(In CR) Ratio
1200000
Mar-16 571841 7.69 1000000
Jun-16 618109 8.42 800000
600000
Sep-16 651792 8.81 400000
Dec-16 677443 9.18 200000
Mar-17 711312 9.06 0
Jun-17 829338 10.21
Sep-17 971104 11.62

Figure 5 Chart Showing NPA of Indian SCB’s

14
 Figure 6 Gross NPA and Restructured Loans to Gross Advances % of PSB’s

Bank’s concern: Faced with shortage of capital and a huge burden to set aside money for bad
loans, commercial banks now want the RBI to relax provisioning norms. For the first batch of 12
cases referred for insolvency in June, Banks have been making provision for these for many
quarters. However, there is severe pressure on balance sheets when they have to decide on cases
from the second batch and beyond. Also concern is to locate money when interest income is
already weak. Even invoking of personal guarantees of companies by Banks is not possible till a
resolution of cases is concluded. In many cases, thus, Banks have a clear disincentive to head for
insolvency proceedings where promoters have given personal guarantees for loans.

With auditors running steel companies, another concern is the falling production. And with banks
refusing to lend more funds, production at the NCLT-referred companies are falling, compared to
a rise in production just before these companies were referred by the RBI to the NCLT, their
suppliers and customers have also withdrawn support, thus impacting their flows and lowering
the valuation of their assets.

Over the next 12 months or so, the IBC process is expected to clean up the books of the banks,
but it will also mean depletion of capital and corresponding acceptance of large losses. Synergies
Dooray Automotive Ltd case under NCLT ended up with a haircut of 94%! The lenders (Banks)
want an amendment to the Insolvency and Bankruptcy Code (IBC) to remove certain
inconsistencies so that promoters of defaulting companies can be completely kept out of the
resolution process. When some of the large companies are involved, any resolution plan won’t
end at the National Company Law Tribunal (NCLT), but will ultimately end up at the Supreme
Court. And Resolution plans are likely to be challenged and ultimately, the SC will have to come
15
in and lay down the ground rules which will further complicate things and linger proceedings and
final resolution and recovery. On September1, 2017, the SC court ruled in favour of ICICI Bank
after Innoventive Industries appealed an NCLT verdict and said that if dues are not paid, the
management cannot continue and a central law should prevail over state law whenever the two
are contradictory.

If a resolution is not found Almost about 30 companies with Rs 1.25 lakh crore loans amounting
are set to be referred to bankruptcy courts by December 31, 2017, Bankers are expected not to try
the defaulters under the Insolvency and Bankruptcy Code (IBC) since that would lead to potential
acquirers putting in low bids and there are instances that portray that the value of the assets drops
dramatically once an account reaches the bankruptcy courts.

6 Conclusion

This Paper throws light onto the aspects relating to the economic impacts of the Insolvency and
Bankruptcy Code. The Research questions that the paper analyses provide a wholesome coverage
of the law substantiated by Data from the Insolvency and Bankruptcy Board of India (IBBI). One
common analysis that emerged was that the IBC is still in its early stage of implementation and a
lot more changes, incorporations and additions needs to be done for the law to emerge as a
successful one with emphasis on recovery of bad debts.

With Banks NPA’s at an all-time high and continuous pressure from the RBI, Bankruptcy proceedings keep
away potential bidders which leads to very low bids. This ultimately erodes banks’ loan value, leaving the
promoter in a position to keep the asset. Banks are in a serious dilemma to use IBC for recovery of their
loans which can be very well seen from the past data presented in the paper. It is difficult to get investors,
due to the slowdown, even in cases that are outside bankruptcy court, thus making things tougher
for the Banks’s after cases are taken to NCLT.

There are grey areas in interpreting the Code and new situations and arguments will continue to
test IBC’s application. At present, the system lends itself to those with the fastest march on their
counterparties. Creditors who commence the insolvency process sooner rather than later limit the
potential of defences by debtors. Debtors on the other hand may seek to side-step the insolvency
process by pre-emptively raising disputes or commencing legal actions on frivolous grounds to
frustrate creditors. With the stakes so high, there is a real likelihood of multiple legal proceedings

16
with more showdowns expected at the NCLT.

The new Insolvency and Bankruptcy Code has been lauded as a game changer for the bad debt
problem in India. When triggered, a company is funnelled at breakneck speed into an insolvency
resolution process with only two possible outcomes -- restructure or liquidate. The ultimate
objective -to get bad debt off banks' books and jumpstart the credit environment -- is an appealing
one. But with the stakes of losing control of a company, creditors and debtors have wrestled with
each other to avoid its application. Creditors have turned to the Code as a means of gaining
leverage in the hope of securing quicker repayment while savvy debtors have been quick to pre-
emptively dispute debts owed by triggering other court or arbitration proceedings to halt and linger
the insolvency process.

A well-planned, coordinated and deliberate plan of action is needed for successful resolution of
banks’ distressed debts. IBC throws up effective recovery possibilities for banks if they build
requisite capabilities and successfully leverage IBC provisions. Banks that act effectively and are
willing to deploy adequate resources, including capital and specialised external experts, will
benefit from the bankruptcy regime and successfully navigate their way out of NPA problem

7. Impact & Future suggestions :

(i) The banks have been allowed to file the Insolvency proceedings on their own for best value of
the stressed assets . This will rectify the balance sheets The role of the corporate debtors has to be
clarified more . The amendments to the Act will stop wilful defaulters from buying stressed assets
that they previously owned. The proposed amendment in IBC will support the financial creditors
who form part of the Committee of Creditors to take a calculative decision to handover stressed
assets/ accounts to promoters/directors who are not wilful defaulters.”

(ii) The absence of the bids can increase the losses in the Banks balance sheets and hamper the
recovery processes in the long run . The honest promoters will also be in the rope of gullible
defaulters . The Bids have to be tempered . and must allow the promoters to bid for their assets
which is not there in IBC Code provisions It is seen that in most of the initial dozen resolutions
carried out under the IBC provisions involve companies who have defaulted for over a year and
hence it is “highly unlikely” that promoters in any of these companies can bid for their assets.
(iii) Of the 12 companies with collectively owe Rs2.5 trillion or a quarter of total of bad loans of

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Rs 10 trillion are under bankruptcy resolutions . Almost a year since the NCLT started
adjudicating corporate insolvency cases the pace of cases admitted to the IBC has picked up with
operational creditors being the most aggressive in the initiation of insolvency proceedings. RBI
data shows that number of corporates undergoing resolution under IBC increased to 353 during
July to September 2017 against 151 during April June 2017 and 36 between January - March. But
resolutions on these cases have been negligible in the past six months. So the Banks have to gear
up and file more cases ^1
^Source: www. economictimes.indiatimes.com/articleshow/62206604.cm

(iv) The this IBC Code 2016 is accepted in totality , the companies with their investments in

factories , furnaces , trucks , textile looms , heavy equipment and land will be placed in their

supervision of the creditors in time of six months , failing which they will be liquidated gives an

alarming scenario . More Monitoring , Compliances have to be made and Surprise checks have to

be implemented .

(v) Evaluating stressed/distressed accounts, and filing for bankruptcy at the appropriate time to

retain/recover maximum value. In most stressed companies, value erosion is rapid and severe, and

by filing for bankruptcy at an opportune time, banks can arrest or minimise the value erosion.

Waiting for too long may result in loss of value and tilting of negotiating power away from banks.

(vi) Identifying insolvency professionals, investment bankers and interim managers with relevant

industry experience to manage the bankruptcy process to execute the chosen strategy. The ability

to develop, assess and execute restructuring strategies will be critical for banks to successfully

manage bankruptcies. The process requires banks to allocate substantial and skilled resources to

achieve recovery in a short time. Banks may need assistance of external advisers/consultants to

bolster internal resources, and to fully utilise the IBC process and maximise their recovery.

(viii) Value creation under IBC can be through multiple routes such as debt restructuring, debt sell-
out/buy-out, converting part/full debt to equity, or by buying debt of others to gain CoC control,

18
etc. Banks need skills for debt buy-outs/sell-outs, negotiations, corporate/operating/financial

restructuring, taking controlling stake in companies, etc, to effectively manoeuvre IBC process

8 Acknowledgement

The authors are grateful to anonymous referees of the journal for their extremely useful
suggestions for improving the quality of the paper. The usual disclaimers apply

. References

1. Kohli RC (2017), Practical Guide to NPA Resolution, Taxmann Publications New Delhi

2. EY (August 2017), Insolvency & Bankruptcy Code - 2016, Experiencing the Code

3. Kaveri V.S. (2017), Ordinance on New NPA Resolution Policy - an Overview, Journal of
Commerce and Management Thoight, Vol 8 Issue 4

4. Sreyan Chatterjee,Gausia Shaikh and Bhargavi Zaveri, Watching India’s Insolvency Reforms,
Quint

5. Brian,Yap (Sept 2017), Indian banks decentivised by insolvency code, International Financial
Law Review

6. Bhinder, Baldev (Sept 2017), India overhauls insolvency framework, International Financial
Law Review

7. Stern, Nicholas (May 2016), Proposed India Bankruptcy Update Would Establish Needed
Improvements, Business Credit, Vol. 118 Issue 5

8. Mondol Dipak (2016), The Last Mile, Business Today Vol. 25 Issue 11

9. Insolvency and Bankruptcy Board of India, Press Release, website-http://www.ibbi.gov.in/

webfront/press.php

10. Insolvency and Bankruptcy Board of India, Orders, website-http://www.ibbi.gov.in/webfront/

allorder_tab.php

11. Reserve Bank of India, website https://www.rbi.org.in.

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12. Insolvency and Bankruptcy Board of India, Newsletter, website http://www.ibbi.gov.in/
IBBI_Newsletter_Web.pdf

13. CRISIL (Oct 2017), Operating Profits of Banks to Stabilise by Year End, Press Release

14. Care Ratings (Jun 2017), NPAs in Banks - June 2017, Publication

APPENDIX :

Exhibit 1 Corporate Insolvency Resolution Transactions

Quarter Number of Admitted Closure Number of

Corporates corporates
undergoing undergoing
resolution at resolution at
the the end of
beginning quarter
of quarter

Appeal/ Approval Commencement

Review of of liquidation
Resolution
plan

Jan- Mar 0 37 1 -- -- 36
17

April- 36 125 10 -- -- 151

June 17

July-Sep 151 214 3 2 7 353

2017

Oct- NA 376 14 2 7 353

Tilldate

Source : ibbi
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II. Initiation of Corporate Insolvency Transactions:

Quarter Number of Corporate resolutions initiated by TOTAL

Financial Creditors Operational Creditors Corporate Debtor

Jan- Mar 17 9 7 21 37

April- June 17 31 59 35 125

July-Sep 2017 182 101 31 214

Oct- Tilldate 22 167 87 376

Source : ibbi

Exhibit 3 NPA MOVEMENTS

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Exhibit 4 Bank NPAs & Sectoral Exposure

Source ; Kotak Bank

Bank-wise fund and non-fund based exposure in steel sector has been between 2% -
9% whereas in power sector it has been between 2% - 11%

Exhibit 5 :

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