Resolution of Stressed Assets amid suspension of Insolvency Laws- “A shot in the dark” – By Saurabh Goswami and Adv. Kanhaiya Maheshwari

Resolution of Stressed Assets amid suspension of Insolvency Laws– “A shot in the dark”

The Insolvency & Bankruptcy Code, 2016 (hereinafter referred as “I&B Code”) has proven impeccable tool for turn around the stressed assets and feed up the ‘Good Bank’ as compared to ‘Bad Bank’ in earlier regime. It is a watershed towards revitalizing the distressed assets and improving the credit culture in India.

I&B Code-A Resuscitation for Good Bank

The IBC provides for a single window, time-bound process for resolution of an asset with an explicit emphasis on promotion of entrepreneurship, maximisation of value of assets, and balancing the interests of all stakeholders.

Reportedly measures taken earlier, it exhibits that the proceedings took 4.3 years on an average and only the amount recovered was 14.5% under the SARFAESI Act whereas the proceedings under the I&B Code takes 340 days on an average resulted in recovery of 42.5% amount which seemed as fictional in earlier regime. Additionally, Model timeline of 330 days has been provided in Code to conclude a Corporate Insolvency Resolution Process which also includes time spent on litigation, in contrast with the previous regime where proceedings took about 4.3 years.

 The Banking Regulation (Amendment) Ordinance, 2017 empowers the RBI to issue directions to banking companies ‘to initiate an insolvency resolution process in respect of a default, under the provisions of the IBC’. It also enables the Reserve Bank to issue directions with respect ‘to stressed assets and specify one or more authorities or committees with such members as the Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.’ It implicates the need of Code in resolution and resuscitation of stressed assets.

Citing data provided in the report on Trend and Progress of Banking in India1 2018-19, the survey reported that the amount recovered as a percentage of amount involved in 2017-18 and 2018-19 has been much higher as compared to Lok Adalat and Debt Recovery Tribunals (DRTs), among others. However, an embargo on initiation of fresh proceedings under the Code accompanied with an increase in threshold of default will deteriorate the value of stressed assets Vis a Vis jeopardize the credit culture across the country.

Resolution without I&B Code- A Constrained Strategy

The size and nature of the NPA problem necessitated concomitant measures to deal with such type of problematic issues which was beyond the approach before I&B Code came into picture. But in absence of efficacious alternative laws amidst suspension of I&B Code, other remedies which may be recourse by lenders as an alternative to I&B Code has been pointed out.  

Scope for Resolution Applicants to opt for Arrangements u/s 230-232 of Companies Act, 2013 during liquidation proceedings ‘as a going concern’- A Pragmatic Approach

In First Global Finance Pvt. Ltd. V/s. IVRCL Ltd. & State Bank of India (Respondents)2, The Hon’ble NCLAT pursuits a novel technique to deal with the resolution of stressed assets in a speedy and plausible mechanism. The Appellate Tribunal propounded that “there is always scope for Resolution Applicants during liquidation proceedings as a going concern to opt for Arrangements under Section 230-232 of the Companies Act, 2013, if they are eligible in accordance with provisions of Insolvency and Bankruptcy Code, 2016 along with relevant Rules.”

Notably, the verdict would be an alternative to dealt with the assets under liquidation proceedings as a going concern. It unfolds and pushes the Corporate Debtors for revitalizing their stressed assets through opt for alternative and fair mechanism. It provides an option to lenders to restructure their outstanding dues through a scheme of arrangement under section 230-232 of the Companies Act, 2013 wherein all the lenders may participate in the restructuring exercise.

Prudential Framework issued by RBI

Under the Prudential Framework issued by RBI on June, 2019 It mandated all accounts to be reviewed by Lenders for a period of 30 days (Review Period) from the date of default and lenders need to sign an inter-creditor agreement and have a period of 180 days after the expiry of Review Period to implement a Resolution Plan. However, the RBI has recently granted the relaxations in these timelines amid pandemic. Further, in respect of accounts where the Review Period was over, but the 180 days resolution period had not expired as on March 1, 2020, the timeline for resolution shall get extended by additional 180 days. The rules, which earlier applied to banks, have been extended to non bank financial companies too. This will offers the opportunities for Reviewing, Restructuring & Resolving of account in the current volatile environment caused by pandemic.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Through SARFAESI Act, the Secured Creditors realizing their security interest by invoking the relevant provision provided in the said Act. But there is need to slightly expedite the matter before the Debt Recovery Tribunal and Appellate Tribunal. The reality is that since the passing of the Act, recovery of bad debts is on the rise. Most banks are showing a much lower level of non-performing assets and a large number of then have planned for even lower NPA levels. But at the same time, the Economic Survey revealed that the amount recovered under the said Act is 14.5% approximately which is far low as compared to I&B Code wherein the recovery exponentially rises. In addition to that the SARFAESI Act also provides a limited scope and a tardy approach resultantly creates obstruction for restructuring of debts and a pitfall to the Unsecured Creditors.

Prior to the I&B Code, There had multiple laws that governed various facets of a corporate rescue and/or insolvency process, without having a comprehensive legal framework that envisages a holistic process applicable to troubled or defaulting companies. The Lenders have been adequately empowered under I&B Code to initiate necessary action upon default. Even under I&B Code, huge responsibility is cast upon the Committee of Creditors to agree to a viable restructuring plan in each admitted case within the prescribed timelines. In light of financial crunch amid lockdown, the enactment of IBC (Amendment) Ordinance, 2020 does not provide the specific measures for MSMEs as proclaimed by the Finance Minister in her press conference. It will defeat the catering of credit availability amongst private sector. 

In conclusion, the vague suspension of I&B Code creates an impediment for revitalizing distressed assets and also slower the resurrection in financial sector. It will have drastic impact on the economy and further may lead to exponentially rise in bad debts. However, the lenders may recourse to other remedies for Reviewing, Revitalizing & Restructuring of stressed assets such as Inter-Creditor Agreement under Prudential Framework, Merger and Amalgamations under the relevant provisions of Companies Act, 2013 and the SARFAESI Act as discussed above. Further, these additional tools assist to deal with the problem assets in the absence of efficacious framework.  Although it must be iterated that the objective of facilitating quick resolution of stressed assets in a time-bound manner is beyond the approach of these laws. Even there is need of sense of urgency which must be imbued in such measures with the intent to not to allow things to drag further. Now, we will have to keep an eye over the situation emerging from suspension of Insolvency Laws in the financial sector or in what ways other laws, frameworks and the Govt. Initiatives like ‘Ease of Doing Business & Self-Reliant India’ will become worthy to  balance the financial sector. 

Views are personal.



Reference-Resolution of Stressed Assets: Towards the Endgame, Mr. Urjit R. Patel


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