The Need to Discipline Market Participants for the Success of the Insolvency & Bankruptcy Code
As India implements its new national vision of creating an affable environment for business, laws governing restructuring and dissolution of companies will be at the core of the economic activity. Insolvency law has been a game changer in resolving the non-performing asset conundrum and played a pivotal role in changing credit behaviours in the country. Even though time has been central to the spirit of this law, delays have become its biggest roadblock. Delays have been attributable to several players such as creditors, resolution professionals, resolution applicants as well as state agencies and courts. Surprisingly, attention of the market has focused only on the delay caused by the adjudicating authorities.
Inordinate delays on the account of adjudicating authority in admissions of applications as well as approvals of resolution plans has become a common knowledge in India. However, our recent study shows that market participants too have contributed immensely to these delays. The study indicates that approximately 80% of total delays happen as part of (i) the appointment of resolution professional, (ii) the issue of final lists of resolution applicants, (iii) the issue of requests for resolution plans, (iv) the issue of expressions of interest, and (v) the final approval of resolution plans. Only 27% of delays are in fact attributable to adjudicating authorities where they play an active role in approving the resolution plan, the rest being caused by other stakeholders, primarily market participants.
At the stage of the appointment of resolution professionals, the average delay is of 24 days. Pursuant to section 22 of the Insolvency & Bankruptcy Code, the first meeting of the committee of creditors should be conducted within seven days of its constitution and the resolution professional must be appointed in the same meeting. Though the first meeting is usually timely, the appointment of resolution professionals is delayed by 24 days on average. This highlights impediments on the part of the committee of creditors in the appointment of a resolution applicant which causes 9.2% of total delays in the corporate insolvency resolution process.
There is significant delay at the stage of invitation of expression of interest which can be attributed to resolution professionals who are key drivers of the insolvency ecosystem. A survey conducted with 431 such professionals suggests that 60% of the time, the committees of creditors ask for an extension while issuing expressions of interest. Further, there are multiple issues of expressions of interest in most of the cases.
There is an almost 30-day delay in the issuance of the provisional list of resolution applicants. A similar delay is noted in the preparation of the final list of resolution applicants, which takes almost an additional 75 days. However, it is important to note that the resolution professional may face hindrance in terms of quality of information or lack thereof. In a survey conducted by us, 83% of resolution professionals stated that companies lack a proper documentation model for both statutory and non-statutory records. 60% of them noted that it is tough to obtain information pertaining to financial and operational aspects of the company.
Non-cooperation by corporate debtors is yet another major cause of concern. 79% of resolution professionals are of the view that there is a general inhibition in the sharing of information. Despite the existence of a remedy under section 19 of the Insolvency & Bankruptcy Code whereby resolution professionals can approach local authorities for a legal action, hardly 3% of such dissident resolution professionals make use of this provision.
Looking at this data, one can only wonder about the future of the Insolvency & Bankruptcy Code. While there is no doubt that the Insolvency & Bankruptcy Code is here to stay, there is a need for reforms giving this law more teeth.
The first aspect is to build up court capacity and efficiency to reduce the delay. The bureaucratic exercise that will be required may take some time. Thus, the second and more achievable goal is to discipline market players and build their capacity and efficiency. For instance, insolvency professionals need to be trained in handling restructuring of stressed assets, as they are the main drivers of the insolvency process. Initially, to meet an immediate need in 2016, India allowed most of the professionals (chartered accountants, company secretaries, lawyers) with minimum required experience to become insolvency professionals upon clearing a basic insolvency exam. There was no focused training. However, given the responsibility of insolvency professionals in recovery proceedings and the colossal responsibility they bear, the government has already started its flagship program to produce top insolvency professionals. Similarly, other stakeholders such as creditors and corporate debtors need to be disciplined by using a carrot-and-stick approach.
The delay caused at stages such as expressions of interest or getting a resolution applicant to bid for the company could be reduced greatly if the market for stressed assets was strengthened. Currently, it is the insolvency professional who has to look for and invite potentially interested bidders to bid for the company. There is a need for an e-platform for stressed assets wherein the market players can explore existing targets and bid. This would also lead to better price discovery.
The efficiency of resolution professionals is yet another challenge that has emerged. The role of a resolution professional is that of a dynamic leader who can resolve issues through strategic leadership, negotiating skills and consensus-building behaviour. Future resolution professionals need to be trained well.
Committees of creditors take their own time to appoint resolution professionals, prepare an evaluation matrix and approve a viable plan. As our study shows, they prefer upfront payment and recovery over rehabilitation of the company. Some scholars have argued that committee of creditors may prefer to liquidate even a merely financially distressed business in certain circumstances, if the present value of their expected returns from continuing the financially distressed business is less than their pay-off in immediate liquidation. Committees of creditors need to be trained to realign their objectives with operation turnarounds whenever possible, so that viable companies are not pushed into liquidation merely on the ground of higher haircuts that the secured creditors receive on their claims. Our study indicated that higher liquidation value and haircut were the most prominent reasons for rejecting the resolution plan.
Instrumental in driving such change is realigning resolution procedures’ objectives towards rehabilitation and creating the right incentives for market participants. For a market-centric reform to succeed, it is imperative that policy barriers be removed and the right incentives be created. Where India is struggling with an amount of 6.8 trillion Indian rupees of non-performing assets, cases like UV ARC, where participation of asset reconstruction companies as resolution applicants was prohibited, set a wrong precedent. Without any cogent evidence of the adequacy of such a method, a law prohibiting entry to all companies due to the wrongdoing of a few is certainly not a good law.
As India has embraced a new economic philosophy embracing market-centric economic reforms, the attitude of the state and its agencies needs to change. Business should be seen with more trust and market players too must act responsibly to ensure that business laws in general and the Insolvency & Bankruptcy Code in particular successfully help India take the path of growth and recovery.
Dr Neeti Shikha and Urvashi Shahi work with the Centre for Insolvency & Bankruptcy, IICA. Views are personal.
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