The Insolvency and Bankruptcy Code (IBC), rolled out in 2016 by the central government to fight the rising pile of bad debt, has started to falter in its aim because of various challenges mounted by its own agencies and regulators. At least a dozen big-ticket cases with total debt in excess of Rs 99,700 crore have been stuck for up to three years now due to legal challenges.
The Enforcement Directorate (ED) has been the most proactive, attaching properties of companies despite orders from adjudicating authorities against doing so.
Consider the case of Bhushan Power and Steel.
The debt-laden company, admitted into insolvency in 2017, owes more than Rs 47,000 crore to banks and other financial institutions, and another Rs 780 crore to its operational creditors.
After a prolonged bidding battle, JSW Steel won the rights to take over Bhushan Power with a bid of Rs 19,700 crore. However, before the Sajjan Jindal-led company could move to take over Bhushan Power, the ED swooped in, and attached assets worth Rs 4,000 crore citing alleged fraud in a bank loan taken by the company’s former owners and other cases under the Prevention of Money Laundering Act (PMLA). JSW Steel approached the National Company Law Appellate Tribunal (NCLAT), which ruled against the ED, and provided it immunity from the actions of former promoters. In March this year, Parliament cleared amendments to the insolvency law, providing a security ring to new owners of insolvent companies from the actions of old promoters.
But the ED would not back off. Last month, it raided the office and other premises of Bhushan Power’s resolution professional Mahender Kumar Khandelwal, and claimed to have uncovered “clandestine” removal of goods worth Rs 700 crore.
JSW Steel is now on tenterhooks, and has told the Supreme Court that it must decide if the ED’s powers to probe and attach properties bought under insolvency code override the provisions of the IBC – only then could it go ahead with the completion of the insolvency process for Bhushan Power.
The Central Bureau of Investigation (CBI), too, has spooked bidders. Consider the delay in the insolvency process of Educomp Solutions.
The company, which has a total debt of Rs 3,000 crore, was admitted into insolvency on May 30, 2017. After nearly going into liquidation, Singapore-based Ebix won the bid to take over the company. However, even as Ebix was progressing towards acquisition of the company, it was spooked by a raid by the CBI in February this year, and the subsequent attachment of some of the properties.
Although IBC provides immunity against probe to new bidders, Ebix Singapore first went slow, and then filed a plea before the National Company Law Tribunal (NCLT) seeking withdrawal of its resolution plan. The NCLT allowed the plea, and allowed Ebix to withdraw. However, on July 29, 2020, NCLAT set aside the NCLT order, and ruled that Ebix Singapore could not exit as the bidder. Legal experts, however, say it remains to be seen as to how the courts can force an unwilling resolution applicant to implement a bid.
The probe agencies are not the only ones contributing to the inordinate delays in insolvency resolution processes. Regulators such as the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), and the Department of Telecommunications (DoT) too have made interventions in ongoing insolvency cases to claim superiority in payment under IBC.
Take for example, Sebi.
In 2015, the markets regulator asked HBN Dairies and Allied Limited to refund Rs 1,100 crore as it had collected money from investors without any regulatory approval. However, frustrated by delays in getting their refunds, a group of investors approached the NCLT, which admitted an insolvency case against the company.
The insolvency order meant a complete moratorium, including on sale of assets. This irked Sebi, which wanted to sell the assets of HBN Dairies to and pay back the money of investors. In 2019, the markets regulator moved the Supreme Court against an order by an NCLT bench, upheld by NCLAT, which said that IBC laws would reign over the rules laid down by the markets regulator. The case remains pending in the top court.
Among the latest are the objections raised by the RBI and the DoT in the insolvency process of Aircel Limited. The telco, which then had debt of more Rs 26,000 crore, had filed for bankruptcy in 2018. More than two years later, in June 2020, the NCLT approved a Rs 6,630 crore UV Asset Reconstruction Company plan.
However, both the RBI and DoT have objected to the resolution plan. While the banking sector regulator is reported to have rejected the plan as it did not adhere to guidelines laid down for asset reconstruction companies, the DoT has moved the NCLAT contending that Aircel’s IBC process could not sell the spectrum as it was only leased to the company.
A third issue that has stalled some insolvency processes leading to inordinate delays is the lack of clarity on offer documents and information provided to prospective bidders.
Consider the case of Liberty House. The UK-based company bid for Amtek Auto based on the documents and information it was provided by the resolution professional of the company. Although the plan was approved by the NCLT and the NCLAT, the company withdrew its bid at the last moment, alleging that the ground reality of factories and units of Amtek Auto was very different from what was presented to it on paper.
Liberty House is not alone. In the second round of bidding after it backed out, lenders to Amtek Auto approved US-based Deccan Value Investors’ (DVI’s) resolution plan. But unclear documents have once again blocked the resolution of Amtek Auto, which has a debt of more than Rs 12,700 crore.
DVI has now threatened to pull the plug on the resolution process unless the conditions of the plan, as told to it before the bidding process, were met. DVI’s contention is that it has a crucial land parcel, which was promised to it in the offer documents, is now being rescinded. “Unless the government or the apex court once and for all decides on these issues, these aspects will remain. No regulator or agency wants to be accused of lacking in compliance retrospectively,” an insolvency expert said.