The successful sale of Bhushan Steel to Tata Steel on Friday was the first big case to be resolved under the new bankruptcy framework. Among the National Democratic Alliance government’s most important acts of economic reform is the introduction of the Insolvency and Bankruptcy Code (IBC). The IBC holds out hope that the current non-performing asset (NPA) crisis, which has caused banks to be heavily burdened by unproductive loans on their books, will be resolved cleanly and swiftly enough that banks will be able to resume normal functioning – thus stimulating investment and growth. Even aside from these business cycle-related concerns, the new IBC has the potential to increase the flexibility of capital, allowing exit for lenders and promoters from unsatisfactory investments in a timely and orderly manner. One part of this mechanism, thus, is to ensure that the revenue potential of assets is, by and large, preserved. By all accounts, the IBC so far has made considerable progress towards this ideal. But work towards the other goal of ensuring timely action on NPAs may not be showing such success as yet.
As currently in force, the IBC has a 270-day deadline for settling disputes over NPAs that are referred to the National Company Law Tribunal or NCLT. But, as this newspaper reported on Monday, in 11 of the 12 path-breaking cases referred to the NCLT, the 270-day deadline has, in fact, passed with no action. The cases are at different points in the process. In some of them, a resolution plan has been filed with the NCLT. In others, operational creditors are objecting to decisions. In yet others, the National Company Law Appellate Tribunal (NCLAT) is hearing appeals from rejected bidders. It is worth remembering that the 270-day deadline is itself longer than was originally planned for the IBC. The chairperson of the Insolvency and Bankruptcy Board of India, M S Sahoo, in fact, argued in June last year that even 180 days was too long a period for truly efficient functioning of bankruptcy proceedings.
It can and has been argued by some participants that since the current 12 cases set many precedents for the subsequent wide use of the IBC, it is important to go slowly and carefully. This is not a particularly persuasive argument. In fact, if anything, the agenda-setting nature of the current cases argues in the opposite direction – speed and timeliness should also be part of the precedent being set. Blatantly ignoring the letter of the law in this manner hardly contributes to a law-abiding atmosphere. In some cases, the problem has been that the attempt to maximise the value of the assets for the big creditors — usually banks — has been prioritised over streamlining and simplifying the process. This is a mistake. Bids should all follow a clear and pre-set formula for evaluation, and no bids not subject to the IBC’s internal timeline should have been considered. Instead, in some cases — such as the high-profile Bhushan Power and Steel case — one bid came in well after the deadline but the NCLT nevertheless directed the committee of creditors to consider it. This threw a spanner in the works as another bidder took the case to the NCLAT. Such self-goals should have been avoided at this stage of the IBC’s operation.