Bankruptcy law has been able to bring a behavioural change, feels MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India. In an interview with ET’s Karunjit Singh& Dheeraj Tiwari, he explains as how the best use of the code would be not using it at all. Edited excerpts…
What’s the impact of the Supreme Court order quashing the RBI circular on the IBC?
What has been struck down in the matter of Dharani Sugars is neither a provision of the Banking Regulation Act nor a provision of the code. The statutory legislations remain intact, so do subordinate legislations (rules). The circular, which was struck down, was an initiative of the banking regulator.
That enabled the banks to explore resolution for some time before initiating insolvency proceedings under the code.
However, the right to initiate insolvency proceedings under the code accrues on the day of threshold amount of default…. (A creditor) may initiate the proceeding at a later date when it considers it commercially prudent to do so. But it needs to satisfy itself as also its stakeholders as to why it did not initiate the proceeding on the next day of default, why it did not initiate despite continuing default, and why it initiated in case of a default and did not initiate in case of another default.
The code, thus, makes creditors more responsible for their actions and inactions. Banks, which are sophisticated financial creditors and have the responsibility to take commercial decisions under the code, know what is in their interest and accordingly when to act and when not to.
Do you think this returns discretion to banks?
If one has a right, he has discretion to exercise it. A threshold amount of default entitles a creditor to initiate insolvency proceedings. That does not mean that in every case of default, a proceeding must be initiated.
Acreditor needs to apply its mind whether it is the right time to initiate insolvency proceedings of a defaulting firm after careful analysis of facts and circumstances, particularly after evaluating other options for rescue of the firm and options for recovery of default. That is why the code allows discretion to creditors. Such discretion must be used judiciously and must be explicable. In fact, discretion under the code is a higher order responsibility.
Are you concerned about the number of legal challenges that are slowing down the resolution process in major cases?
When the law is new, it is natural to face legal and other challenges. A law of such a significance takes years to settle down. We have passed through two major phases of economic reforms.
The laws supporting these reforms such as the securities laws and competition law have encountered legal challenges for many years, even though these laws had a long history in India. We are now passing through the third phase of reform that focusses on freedom to exit. We must allow reasonable time to address major challenges in the supporting law.
How is the IBC affecting borrowing and lending behaviour in the country?
The code is a proactive, behavioural law. The inevitable consequence of a resolution process (the control and management of the firm may move away from existing promoters and managers) deters the management and promoter of the firm from operating below the optimum and motivates them to make the best efforts to avoid default. Further, it encourages debtors to settle default with the creditor at the earliest. With the code in place, the defaulter’s paradise is lost. On the other hand, the creditor knows the consequences of default by a firm, if insolvency is not resolved.