From Crisis to Resolution: Case Studies on the Impact of India's Insolvency and Bankruptcy Code.

AUTHOR: Gunjan Sethia, Institute of Law, Nirma University.

Abstract

This study essentially undertakes an examination of the case law developed under the Insolvency and Bankruptcy Code (IBC), 2016 in the form of case studies of Essar Steel and Amtek Auto. The article also focuses on the effect on different categories of people affected by the IBC and suggests some reforms of the IBC which could improve the situation and add value to the debate on insolvency in India and provide directions for the future.

Key words

Insolvency and Bankruptcy Code (IBC), Corporate insolvency resolution, Stakeholder interests, NCLT (National Company Law Tribunal), Non-performing assets (NPAs).

Introduction

The introduction of the Insolvency and Bankruptcy Code (IBC), 2016 brought about a paradigm shift in the way corporate India and the economy worked since it dealt with the bugs and slow bankruptcy recovery measures in the country. Before the IBC was enacted, India had an entirely chaotic and protracted bankruptcy law which resulted in creditors suffering huge losses which, in turn, inhibited the economy of the country. The envisaged reason for the enactment of the IBC was to consolidate and introduce amendments in the legal regime dealing with the timely restructuring and resolution of insolvent companies, partnerships and individuals so that their assets were preserved in maximum and all the stakeholders were equitably provided. The Indian bankruptcy laws are based on the English legislation. A range of regulatory interventions over time have done a complete overhaul of the insolvent regime in India. Under the Presidency-towns Insolvency Act of 1909, Supreme Court appeals were handled for bankrupt debtors in Bombay, Calcutta, and Madras. The 1920 Act superseded the Provincial Insolvency Act of 1907, which controlled non-presidency areas, prior to the enactment of the Insolvency and Bankruptcy Code (IBC) and the repeal of earlier statutes. In spite of the Companies Act of 1956's comprehensiveness, legal challenges arose from its absence of clearly stated insolvency regulations. Despite some significant modifications in 2013, the Companies (Amendment) Act 2003 retained many of its original features. It has been difficult to implement new corporate insolvency rules while upholding the 1956 Act's requirements. The Companies Act, which was the only corporate insolvency law in place from 1956 to 1985, gave the manufacturing sector investments first priority when it came to loans from development finance institutions (DFIs), which promoted industrial development and were granted board seats in exchange for credit.

However, despite its revolutionary potential and early successes, the IBC's implementation has not been without challenges. The framework has been put to the test and many notable bankruptcies, such as those of Essar Steel, Bhushan Power and Steel, Jet Airways, and Dewan Housing Finance Corporation Limited (DHFL), have highlighted both its strong and weak areas. These illustrations provide a rich context for evaluating the extent to which the IBC achieves its declared goals and addresses the problem of corporate insolvency in India. 

Literature Review

Amtek auto’s bankruptcy case was over as mentioned by Gaurav Noronha in his article “NCLT Approves Amtek Auto Resolution Plan”: The pros and cons of IBC. The recent approval by the NCLT of another complicated fate of commercial bankruptcy by Deccan Value Investors LP (DVIL) proves the IBC as competent in dealing with complex cases of bankruptcy. Many empirical endeavors have raised a calculable doubt about IBC’s objective of offering speedy mediation and possession safeguard for creditors, however, this case took three years to resolve indicating lapses in the system. Some of the issues that have emerged from the Amtek Auto case are that lenders were able to capture a big piece – the Committee of Creditors agreed to an 80% haircut on recoverable debts. This calls into doubt the IBC's recovery framework because prior research has indicated that large cuts could deter lenders from participating in future insolvency cases. The case also highlights the significance of rigorous bidder evaluation procedures, since Liberty House Group's inability to meet its financial obligations caused a delay in the resolution and illustrated the necessity of stronger pre-qualification standards for bidders. 

A thorough examination of the development and implications of India's Insolvency and Bankruptcy Code (IBC) can be found in "Resolution of Stressed Assets and IBC – The Future Road Map" by Swaminathan J. India's insolvency structure was disjointed before the IBC, with several overlapping programs that were frequently ineffectual in handling corporate insolvencies. Introduced to expedite the resolution of insolvencies, the IBC established standardized, time-bound processes via specialized adjudicating bodies such as the NCLT and NCLAT. Transition from the DIC concept to the CIC approach has enhanced credit discipline, checking on the accumulation of NPAs, and finalized recoveries on monetary rights for creditors. It is important to note that the IBC still has some issues even with the improvement on credit culture and faster settlement. It is also among the key complaints of some parties that cases take longer to be heard and determined due to the NCLT and NCLAT. Further, there are more complicated areas which have to be amended, for example, the rules on the cross-border insolvency and business groups regulation. Despite these challenges, the paper underlines that focusing on the business value rather than the recovery and sustainability of the economy is the strength of the IBC.

Case Studies

Analyzing the practical use of the Insolvency and Bankruptcy Code (IBC) requires a close examination of cases involving insolvency. 

I - AMTEK- AUTO: 

A prominent firm in the automobile sector in India, Amtek Auto Limited, suffered serious operational and financial issues that made it one of the largest cases under the Insolvency and Bankruptcy Code (IBC) in India. Amtek Auto Limited started its journey in 1985 when it was recognized as one of the leading auto parts production companies in the global market. However, there are various issues that led the company to its financial crisis during the early years of the 2010s; these include but are not limited to high, sick and inefficient operations, increased debts, and decreased revenues. Amtek Auto failed to manage its debt levels, due to loans and interest, which crossed ₹15,000 crore by 2015. The situation was a shortage of liquidity and the significant decrease in the value of the company’s shares. The process of corporate insolvency resolution was started against Amtek Auto Limited, the corporate debtor, in response to an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016. As a result, the resolution specialist asked potential applicants for resolution to send in a Resolution Plan. The Committee of Creditors of Amtek (COC) reviewed the Resolution Plans that M/s Liberty House Group Private Limited (Liberty) and Deccan Value Investor LP (DVI) presented. But DVI withdrew its Resolution proposal, thus the updated Liberty proposal was taken into consideration. Amtek Auto went to a second round of bidding because Liberty House did not follow the rules. DVI was first disqualified in the ensuing confusion, which resulted in liquidation threats. Stakeholders spoke out, pleading for the company's survival. DVI eventually turned out to be the winning bidder. DVI tried to back out of its plan after COVID-19, but the court intervened and stopped it, demonstrating the determination to end Amtek Auto's bankruptcy. 

The COC filed a contempt petition with the Supreme Court because the DVI's approved resolution plan was not followed. In a similar vein, DVI also submitted a request to correct the earlier order, dated June 18, 2020, in which the Supreme Court denied DVI's request to withdraw the offer. The Supreme Court denied both applications, noting that DVI's desire to rescind its filed settlement plan and escape its commitments was evident in its motion for rectification. The Bench held that the Corporate Debtor also had to fulfill its obligations concurrently in order for the sum of Rs. 500 crores to be transferred to the Corporate Debtor's financial creditors/lenders, taking into account the respective parties' arguments that the obligations be fulfilled mutually and simultaneously. The Bench reminded the parties that, as required by the IBC, the authorized resolution plan must be executed as soon as possible. According to Section 12 of the IBC, subject to sub-section (2), the procedure of resolving a corporate insolvency must be finished within 180 days of the day the application to start the process was admitted. This 180-day term may be extended. The IBC, which is still in its infancy, has a deadline of just under a year to finish the procedures for resolving disputes under Section 12 of the code. This is due to a number of factors, including the need to protect lenders' interests and guarantee that the struggling businesses are resurrected as going concerns. As a result, while the necessity for a prompt settlement has been emphasized previously, this ruling is undoubtedly the most appropriate one at this moment given that Amtek Auto's bankruptcy case may be the longest-running one to date. 

A crucial function of the IBC in the Amtek Auto case was the formation of a Committee of Creditors (CoC), which is composed of the company's financial creditors and has the authority to make decisions collectively about accepting or rejecting resolution options. By establishing the CoC, creditors were able to participate more actively and take responsibility for their actions, which helped to ensure that their interests were fairly represented during the settlement process. The IBC also made it possible for the courts to step in when needed to guarantee that the resolution process is followed and to stop attempts to stall or impede the procedures. For example, the courts stepped in to protect the integrity of the resolution process and stop undue disruption when DVI attempted to withdraw its resolution plan following the start of the COVID-19 outbreak.

Given the extensive role that the IBC played in resolving Amtek Auto Limited's financial crisis, it is necessary to address some of the gaps and difficulties that arose during the resolution process. According to Pratyush Miglani, managing partner at Miglani Varma & Co., the Amtek Auto case brought to light the necessity of a code of conduct for both resolution seekers and the CoC in order to avoid a recurrence of the same circumstances. In its discussion paper, the Insolvency and Bankruptcy Board of India (IBBI) noted that while the CoC performs some public functions, its operations are primarily uncontrolled by the Insolvency and Bankruptcy Board of India (IBC). He stated that a code of conduct would be very helpful in guaranteeing that the IBC's mandate is followed and that bankruptcy procedures like Amtek's do not happen again. In my opinion, one of the most significant flaws in the IBC that comes out of the back and forth between Amtek Auto's bidders is that it does not impose any obligation on a resolution application that is selected to proceed with the resolution process all the way through. In actuality, the code is silent on this point. According to DSK Legal partner Ajay Shaw, "this (the judgment) should ensure that there are no backouts by successful resolution applicants whose plans have been approved by the committee of creditors." In addition to setting a precedent, the top court highlighted a factor that significantly contributed to the delay in Amtek Auto's resolution: systemic and regular delays in putting resolution plans into action are a problem that should be taken seriously and judicial delays should be avoided. 

Aside from the length of time it took to resolve, Amtek Autos was a unique case that unluckily encountered every obstacle a corporate bankruptcy resolution could ever encounter. It is better to see the company's insolvency as an anomaly in and of itself rather than as a standard for the effectiveness of the IBC, given that its extensive operations both domestically and internationally made the insolvency process particularly challenging. 

II - ESSAR-STEEL:

Due to a combination of excessive debt, inefficient operations, and unfavorable market conditions, Essar Steel India Limited—a significant participant in the Indian steel industry and a member of the Essar Group—faced severe financial trouble by the mid-2010s. As a result of the company's worsening financial problems, it accumulated debt totaling about ₹54,000 crore, ranking among the biggest non-performing assets (NPAs) in the Indian banking industry. On August 2, 2017, the Ahmedabad Bench of the National Company Law Tribunal (NCLT) issued an order to begin the bankruptcy proceedings against Essar Steel. Under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, which permits financial creditors to start insolvency proceedings against a corporate debtor, Standard Chartered Bank and the State Bank of India filed the application for insolvency. When this application was accepted, Essar Steel's corporate insolvency resolution procedure (CIRP) got underway. Resolution plans from prospective bidders were requested as part of the insolvency resolution process. At the beginning, the resolution proposals were filed by two significant companies: Numetal Limited (Numetal) and ArcelorMittal India Private Limited (ArcelorMittal). Nevertheless, the resolution professional determined that ArcelorMittal and Numerical were ineligible under Section 29A of the IBC. Resolution plans submitted by certain related parties of the defaulting debtor, including those with outstanding non-performing assets (NPAs), are prohibited by Section 29A. The purpose of this provision was to keep dishonest promoters from taking back control of their insolvent businesses. 

However, after ArcelorMittal and Numetal were disqualified, a new announcement regarding the resolution plans was made. This phase also saw Vedanta Limited filing their resolution plan which was aimed at rescuing Agra solar plant. In this case, there were protracted legal questions, particularly regarding the admissibility of those seeking to resolve their disputes under Section 29A. These contentious issues have been settled to a significant extent by the Indian Supreme Court. In another landmark ruling on October 4, 2018, the Supreme Court of India held that neither ArcelorMittal nor Numetal could act as resolution petitioner under Section 29A. However, they were allowed a two-week window to correct their ineligibility by clearing the NPAs of their linked corporate creditors. ArcelorMittal, Numetal, and Vedanta were the suitors that were in-charge of presenting the resolution plans before the main Creditors that included the State Bank of India (SBI), ICICI Bank as well as the Standard Chartered Bank. The decision of CoC was crucial because in absence of any plan being approved by the majority, Essar Steel would have gone bust. 

The Supreme Court's decision to give ArcelorMittal authority over Essar is a significant improvement for the Code's functionality. The ruling rendered by Judge Rohinton Nariman upholds the validity of the Code's provisions. Additionally, it grants the CoC the authority to decide exactly how the resolution process will be carried out and how the proceeds will be divided among the creditors. It was anticipated that the banks would recoup over ninety-two percent of the INR 40,000 crore in debt that Essar owed them, with State Bank of India standing to gain the most, estimated to get INR 12,000 crore. The Code is making progress toward its stated objectives of encouraging the quick redistribution of profitable assets held in bankrupt enterprises and dispelling the myth that large loans are the fault of lenders rather than borrowers. The overall outcome for India's credit discipline is noticeably better. 

This instance, in my opinion, demonstrated the IBC's ability to draw in reliable investors and maintain strict adherence to legal obligations. This resolution proved the IBC's efficacy in handling bankruptcy and insolvency proceedings in India since it not only preserved a troubled asset but also collected sizable debts for creditors.

3 -  Achievements, Challenges, and the Way Forward: 

The IBC, in my opinion, satisfies the three main requirements of an effective resolution regime, which are as follows: First and foremost, ‘going concern status’ should take precedence over liquidation in the resolution system. In general, a resolution that maintains the entity's viability is preferable to entity liquidation. Second, it needs to compel the creditors to cooperate and devise a resolution strategy that considers ways to maintain the business as a ‘going concern’ in an effort to protect its value. Thirdly, in order to stop value degradation for creditors of an insolvent exposure, the resolution mechanism should provide a time-bound resolution. Thus far, the Code's results have also turned out rather good. As a result, the resolution process is now much more efficient, and financial creditors' recovery rates have increased. Among the many enhancements introduced by the IBC, one of the most significant from the standpoint of bankers and supervisors is probably the basic change from a "debtor in possession" to a "creditor in control" model. An increasing amount of evidence points to debtors avoiding defaults as a result of a real risk of losing control of their companies. I think that among other things, this enhanced credit discipline has also played a role in the notable decrease in bank non-performing assets that has been observed in recent years. 

Despite profoundly changing the insolvency landscape, IBC has run into difficulties and criticism. One of the IBC's main objectives is timely resolution, but there are potential roadblocks in the form of operational inefficiencies that cause delays in the process. The effectiveness of the settlement process has been impacted by concerns expressed regarding the NCLT and NCLAT's general capacity, staffing, and infrastructure. Developing rules for international bankruptcy is another factor contributing to the challenges the IBC has encountered. Additionally, it is noted that certain conversations are taking place regarding the recovery rate with the IBC procedure. It is important to remember that the IBC is a framework for resolution rather than recovery, and any analysis that relies just on recovery percentages risks missing the larger goals and accomplishments of this revolutionary law. Although recovery is undoubtedly important, the IBC's real strength is found in its goal of resolving corporate financial stress, maintaining firm value, safeguarding the interests of different stakeholders, and so promoting economic stability as a whole. Consequently, a thorough assessment is necessary to fully comprehend the success and efficacy of the IBC.

The 2022 Insolvency Law Committee Report offers a number of suggestions for improving India's insolvency resolution procedure, taking into account not just the length of the procedures and the successful realization of claims but also the system's larger features. First, in an effort to speed up the procedure and prevent delays in admitting CIRP applications, it proposes requiring the establishment of defaults through the use of information utilities (IUs). Second, the study suggests amending Section 26 of the IBC to provide clarification regarding the continuation of procedures for unnecessary transactions and unlawful trading following the conclusion of a CIRP. The filing date of the CIRP application, which includes transactions from, should be the new threshold date for the unnecessary transactions look-back period. Concerns about balancing the rights of creditors and debtors are raised by the declining rate of realization relative to both the liquidation value and the total allowed claim. The code is far from accomplishing its goals and matching the efficiency of its overseas counterparts, even though it may be thought to be better than its predecessors in terms of expediting the procedure and length of time required to resolve the insolvency.