Where Are We Heading For In Implementation Of IBC ?

The saga of Essar is well summarised by the following quotes from famous book of Jim Collins – How The Mighty Fall.

"When those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4"

"When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching—reactive behaviour absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise.. "

^[2] The Saga began with the classification of debt of Rs. 550 crores as NPA by HDFC Bank and thereafter its sale to Edelweiss Assets Reconstruction Company [EARC]. Bank of India too classified debt of Rs 500 crore as NPA. Federal Bank, ICICI Bank and Axis Bank sold their respective debt of Rs 70 crore, Rs 1,600 and Rs. 2000 crore to EARC.

^[3]

True to the theory propounded by Jim Collins

^[4], instead of stabilising their business operations after CDR, the promoters of the group went on spree of expansion and acquisitions. They acquired Algoma Steel, mine in Minnesota, with huge commitment for investment and went on for expansion of Hazira plant. The 2015 report of House of Debt Revisited, Credit Suisse^[5] noted that three years since first 'House of Debt' report, they found that despite attempts at deleveraging, financial stress at these groups (which included Essar among others) had intensified further. All the groups saw further rises in debt in FY15, which was up 7x over past eight years to ~12% of system loans. Their interest cover dropped to 0.8x vs 0.9x in FY14 and debt/EBITDA rose to 7x.

^[6] to Banks to take the first twelve cases (also known as dirty dozen which included Essar Steel) to NCLT under Insolvency and Bankruptcy Code, 2016 (IBC/Code). This attitude of Essar promoters continued as they tried each and every trick in the books to stall CIRP process and to wrest control of the Company. The proceedings which started with NCLT, Ahmedabad admitting application filed by SBI and SCB on August 03, 2017, are still going on after several rounds of litigations, applications, challenges, appeals by various parties. The resolution plan submitted by Arcellor Mittal and accepted by CoC has not seen finality yet and as the things stand, is most likely to end up before the highest Court. The process, which under the Scheme of the Code, was to be completed within a maximum period of 270 days has now crossed more than 550 days and end is nowhere to be seen. At each stage every party, whatever may be its position under IBC, has tried to put the system to test.

NCLT Ahmedabad started well while admitting application of SBI and SCB and observing that technical barriers must not come in the way of speedy recovery under the Code, however, the momentum got lost in complexities of issues and cross litigations and matter going to Higher Courts on several occasions.

^[7]

^[8] observed that "Actus curiae neminem gravabit - the act of the court shall prejudice no one - is a maxim firmly rooted in our jurisprudence. But the time taken by a Tribunal should not set at naught the time limits within which the CIRP must take place. Where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation ought to be excluded. This is not to say that the NCLT and NCLAT will be tardy in decision making

. [Emphasis supplied]

^[9] while observing that "With modesty I put my view that a golden rule of interpretation of such statute is to subscribe a 'creative interpretation'. However, hastened to add that a "Laxman Rekha" is to be drawn while interpreting the provisions of a Law so that the main Legislative intent be not disturbed. A purposeful interpretation, also termed as "purposive interpretation" is sometimes more helpful to redress the grievance, so therefore preferred from literal interpretation. With all humility it is to be added that a Court must have recourse to the purpose, object, text and context of a particular provision before arriving at a judicial result. My attempt herein below is also in this direction

." [Emphasis supplied]

This breach of "Laxman Rekha" is resulting in more pressure on and confusion in the role of other authorities more specifically Committee of Creditors (CoC). Bankers, who initially were not very sure about functioning of the system, are now finding themselves in unique position of being pushed from all corners. On one hand, they have to face pressures of internal scrutiny which get triggered on an account becoming Non Performing (NPA) including scrutiny by internal teams and regulatory body and sometimes by outside investigating agencies, but also to maintain the strict timeline set up under IBC while guiding CIRP process and examining and evaluating the resolution plans and also to minimise losses to Banks while taking care of interest of all stakeholders. Expectations from CoC are too high but its discretion and authority is getting challenged and limited with each case.

^[10] that NCLTs cannot interfere with the commercial wisdom of CoC, NCLTs are going into detailed scrutiny of resolution plans and approvals are held up for months. The procedure under IBC is slowly turning into civil litigation with lengthy pleadings and arguments by litigants and still lengthy orders by NCLTs. Admission of fresh application itself takes months putting timely revival to peril. Thus, the spirit of the Code and strict timeline set under IBC appears to be going for a toss. While focus of IBBI appears to be on setting code of conduct for RPs and CoC, the process followed by NCLTs and time consumed at each and every stage of proceedings has practically gone unnoticed.

"It is settled law that a statute is designed to be workable, and the interpretation thereof should be designed to make it so workable. Given the timeline and given the fact that RA has no vested right that his resolution plan be considered, it is clear that no challenge can be preferred to the AA at threshold. A writ petition under Article 226 filed before a High Court would also be turned down on the ground that no right, much less a fundamental right, is affected at this stage. Aggrieved RA can approach the NCLT for relief only after a resolution plan has been considered by the CoC via voting and not prior to that. [Justice R Fali Nariman in ArcelorMittal India Private Limited Vs. Satish Kumar Gupta & Ors.]

^[11] to the effect that:

"The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, 'trial' having led to repeated errors, ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster." [Emphasis supplied]

This judgement gives enough authority to NCLTs to take command of the cases without getting bothered about the fancy arguments and civil law doctrines which travel beyond the scope and purpose of the Code. The Authorities needs to move with time and meet need of the hour.

^[12]. ] is not diluted while applying principles and practices of civil law. The concern expressed by Justice

S J Mukhopadhaya needs to be taken into account by all the stakeholders be it RPs, CoC, Tribunals and professionals who have greater responsibilities to see that this challenging phase of development of jurisprudence does not lose track. Development and progress of IBC and its unique timeline is being keenly observed by the world and it is duty of each and every authority associated with implementation of the Code to seize this opportunity and show to the world that "

we can".