Bankruptcy Code: The God that is failing…

By PN Vijay

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The Insolvency and Bankruptcy Code (IBC) was hailed as one of the most transformational reforms in India of modern times. It was meant to revive businesses, ensure preservation of assets and capital, and be fair to all the stakeholders. It was supposed to make doing business in India much easier; such was the hope and hype that the world applauded us and we catapulted from 108th rank in 2018 to 52nd in 2019 in the Ease of Doing Business Index.
Now, after three years, most of us are less convinced; opinion is now swinging from the most charitable “it is still evolving” to a more blunt “a good law spoilt by terrible implementation”.

The numbers are disappointing. In terms of reviving and saving businesses, up to December 2019, of the 3,312 cases referred for the CIRP (Corporate Insolvency Resolution Process), only 190 were closed by resolution and a whopping 780 firms were liquidated. Balance cases are either work in progress or were withdrawn by mutual consent. This is a mortality rate of 80%. In terms of lenders getting back their money, of the total 970 cases closed by liquidation or resolution, lenders recovered only Rs 1.73 lakh crore and took a haircut of a huge Rs 8.19 lakh crore.

Much was made about reviving a Bhushan Steel or a Monnet Ispat. However, these seven ‘poster boy’ cases of the 970 listed above account for just 1% of the total cases, though in terms of value they are considerably higher. In terms of time taken, the 180-day period is seldom followed, and in fact the National Company Law Appellate Tribunal (NCLAT) and the Insolvency and Bankruptcy Board of India (IBBI) have had very harsh things to say about the inordinate and unacceptable delays.

Last but not the least, in terms of jobs lost and recovered, the figures are difficult to arrive at, but estimates are that about 1 million jobs have been lost due to the closure of companies. So, in a nutshell, anecdotally, the Code has substantially failed in all the objectives it had set out for itself—to revive companies, protect public money and preserve jobs.

Unsurprisingly, few ministers and officials talk about it these days, but surprisingly there is very little angst about the God that is failing.

Let us dive a bit deeper and analyse why “in spite of good intentions, the IBC has been the way to Hell”. In my view, the primary reason is the mindset of the lenders who are mainly government-owned banks, and in a few cases the private ones. These bankers have already written-off these loans and, hence, they are most reluctant to participate in a complex revival plan that calls for patience and often commitment of some working capital; in short, their attitude is “the quicker we kill this one and bury the corpse, the better”. The negative risk-averse attitude of banks is, in my view, the most important reason for the failure of the IBC to deliver.

The second reason is the lack of expertise amongst the resolution professionals to perform what is surely a very complex task of reviving a firm that has gone sick. Even for industry experts and management gurus, reviving sick companies is a challenge. And these gentlemen—RPs, as we call them—are mostly company secretaries with no or little knowledge of how companies run and make money, leave alone how to revive them; the result has been a disaster. There is very little trust between the existing owners and the RPs, and the CIRP period degenerates into a period when the ‘sick’ company is made sicker and sicker by the day.

It is pathetic to see how relatively good companies are ‘killed’ by the RPs who have no clue how to deal with the situation. It is said “war is too important a matter to be left to the generals”. Likewise, reviving companies is too important a matter to be left to the RPs whose only claim to fame has been to faithfully make agendas and minutes of Board meetings.

As if this was not enough to ‘get rid’ of a company, there is the legal system which makes sure that even if a company has some chance of revival, the inordinate delays make that almost impossible. The lawmakers, in their infinite wisdom, decided that 180 days was adequate to complete a resolution process and in extreme case it can be 270 days. But, in actual practice, it is found that the CIRP hardly ever ends in 180 days, and routinely goes beyond even 270 days. But who are we ‘lesser mortals’ to question the honourable judges who sit in the National Company Law Tribunal and routinely give adjournments?

The former Chief Justice, in his very first speech after joining the Rajya Sabha, lamented that the judicial system in India has collapsed. This is one more example of that collapse. No wonder, every investor who overflies India and lands in China or Vietnam has only one lament—the Indian judicial system can never enforce contracts. The IBC is a victim of this malaise.

Is there is a solution or do we philosophically accept this failure as one of the several malaises of a system that cannot implement its own laws? I am an optimist and believe that things can be done to achieve the mission that the IBC set for itself.

We need to get the lenders to commit to the revival process. The Ministry of Finance and the Reserve Bank of India (RBI) should haul up bank chiefs and tell them that their performance is going to be judged on their capacity to revive companies in the CIRP and bring back public money and jobs; in short “read the Riot Act to the Bank CEOs”.
Secondly, we need to enormously strengthen the RP system; we could—where the loans involved are more than Rs 5 crore—have a team of RPs appointed which could include management consultants, technical experts etc.

Thirdly, we must get the Supreme Court to set very well-defined timelines to the judges who sit in the NCLT to decide issues within the 180-day time-frame set by law. We all were clamouring for a bankruptcy law for many years in seminar halls; we got one but have messed up with the implementation. Let us try and set it right.

The author is an investment banker and ex-convenor of the BJP Central Economic Cell. Views are personal