As the 12 big cases referred under the Insolvency and Bankruptcy Code (IBC) to the National Companies Law Tribunal (NCLT) approach the 180 day deadline for resolution (though it can be increased by another 90 days), both the loopholes that need to be plugged and the infirmities in the Code are becoming clearer.
While the team drafting the IBC had taken care to leave as little ambiguity as possible in the wordings, it was always known that the clauses and practicality of the code would be tested once the cases actually came up before the NCLT. About a year and a half after the IBC became a law, the government came out with an ordinance in November 2017 to make it difficult for defaulting promoters and their related parties from bidding for their companies without first forking out the payments they had defaulted on. Since then, the clauses have been tweaked further, but the major issues that need resolution are now becoming clear. The Insolvency Law Committee, which was constituted in November 17 has almost completed its work and many of the loopholes are expected to be addressed in the committee report.
The first big one is of course who is eligible for bidding. The question crops up because of the Essar Steel case, where a question mark arose on the eligibility of the only two bidders. The bid by Arcelor Mittal came under a cloud because the company had previously invested in Uttam Galva Steel, which is an NPA (though Arcelor Mittal sold of the majority of its stake before it submitted its bid). Arcelor also had a stake in KazStroy Services of Kazakstan, which in turn was the promoter of KSS Petron which had again turned into an NPA. On the other hand, the other bid by Numetal is also under a cloud because one of the consortium members is a trust with Rewant Ruia, a scion of the promoter family, as a beneficiary.
But this is only one of the issues that is to be resolved. There are others. For example, is the Insolvency Resolution Professional supposed to give details to bidders whose bids have been rejected? This crops up because each bid is different in terms of the mix of conditions it offers, and scores are assigned for different parameters of the bid. But while some of these are straightforward quantitative factors, there are also qualitative factors and therefore some element of judgement comes into play.
Then there are cases where the second highest bidder has offered to bid again after coming to know of the final bid by the winner. Does the IRP allow it? It might be better for lenders but it could cross the deadline set for resolution - and that in turn could lead to issues. Also, there is the case of unsecured lenders going on appeal against a winning bid, because all things being equal, a bid which offers to pay back more to lenders will be preferred over a bid which offers slightly less to the lender even if it offers to pay back operational creditors in full. The case of how defaulting real estate projects should be treated and how home buyers should be treated is also a contentious issue. (One recommendation is to treat them on par with unsecured lenders). There are other complaints against the IRPs as well - including what happens if the IRP leaves a professional firm mid way and joins another professional firm.
The fact is that like earlier cases (like the Sarfesi Act), many of the current cases could head for the court after they have been disposed off by the NCLT and then appealed to the NCLAT. But the big cases under resolution are already throwing up the issues that need to be tackled, and the sooner the government fixes these issues the faster the resolution process will work.