With the coming of Bad Bank and persisting problem of bad loans, the need for NCLT cannot be denied
Image: Shutterstock Just over a month after the National Company Law Tribunal (NCLT)-approved Piramal Capital and Housing Finance’s resolution plan to acquire the bankrupt and debt-ridden mortgage firm Dewan Housing Finance Corporation (DHFL), the matter is back in litigation. Technology firm 63 moons, a debenture holder of DHFL, has challenged the order saying it was ‘contrary to law’ and against the interest of DHFL’s creditors.
Talks have emerged that the Department of Telecommunications may not renew RCom’s telecom license later this month, due to unpaid statutory dues. This will hurt the complete insolvency resolution process further and only mean erosion in the value of assets, forcing banks to take more haircuts.
The NCLT, which was seen as one of the mega reforms to tackle bad loan recovery, has completed just over five years of operation. Its success can be measured with two different matrixes: Recovery rate (what banks and other financial institutions recover as a percentage of the amounts claimed) and average number of days taken for the resolution process to be completed.
Recovery Rates Falling; Litigations Lengthening
Banks and financial institutions have been able to recover only 39.26 percent of admitted claims, according to the latest January-March 2021 data from the Insolvency and Bankruptcy Board of India. This recovery rate is the lowest in three years, since the July to September 2018 rate of 26.28 percent (see chart ‘NCLT Resolution Recovery Rate).
The NCLT is however, still, the most effective mechanism, compared to other channels to recover bad loans. In 2019-20, Reserve Bank of India (RBI) data showed the IBC to have a recovery rate of 45.5 percent, compared to 26.7 under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act), 6.2 percent for Lok Adalats and just 4.1 percent for debt recovery tribunals.
These include delays in admission of cases where it often takes 6-12 months to admit a case, tribunal delays in releasing orders, filing of multiple applications by creditors, lack of consensus within the committee of creditors, inadequate bench strength of NCLT judges to hear cases, which results in the pressure of multiple jurisdictions, and delay in infusion of funds by investors as envisaged by the plan.
“There has been a significant amount of frustration that has crept into the system currently, as delays cause creditors, investors and other stakeholders to wonder if this is a worthwhile mechanism to quickly resolve stressed companies. As at December 2020, a total of 21,259 cases were pending before NCLT of which 9,549 pertained to IBC,” says Nikhil Shah, managing director of Alvarez & Marsal (A&M), who leads the firm’s restructuring, turnaround and corporate finance practice.
Some of the data relating to resolutions at the NCLT is not impressive. Until FY21, 4,376 cases have admitted for insolvency resolution in NCLT, of which about 2,653 cases (60 percent) have been closed. Of this 60 percent, for 1,277 cases, an order of liquidation has been passed but the final report of liquidation has been received only for 19 percent of these cases.
Of the 348 cases resolved in NCLT as of March 2021, the average time for resolution, including litigation time, is 459 days. This is way beyond the revised time limit of 330 days prescribed by the government in July 2019. Prior to this, the expected time frame for a resolution was pegged at 270 days.
“At the current pace of disposal of cases and the backlog, it is likely to be cleared in 4 to 5 years,” Shah, says, who has advised the Bankruptcy Law Reform Committee and the Insolvency Law Committee in strengthening bankruptcy laws in India.
“Resolutions are not becoming efficient because while there may be settled precedents, the discipline of the law is not being adhered to in full. Same or similar issues consume the time of tribunals, “says Suhail Nathani, managing partner at law firm ELP.
“In the pandemic, creditors have been providing stressed companies more time to either climb out of the crisis or allowing them to access government-backed credit lines, which have managed to keep the them standard,” Shah says.
There is a similar trend in the United States, where the number of large corporate bankruptcy filings have slowed dramatically in the April to June quarter this year, based on Bloomberg data (see table ‘US Bankruptcy Filings’).
Creditors do not want to be seen as blood-sucking villains at a time when most businesses have collapsed due to the pandemic. Even if they are to enforce resolution proceedings against a company, there is not much clarity on what creditors could recover.
NCLT’s Problems; Alternatives
At times, creditors have been unable to resolve their disputes and work for a collective resolution. Since the IBC does not distinguish different security rights for the purpose of the CoC (Committee of Creditors), unsecured creditors or creditors that have subservient charge tend to challenge the claim and distribution under the resolution plan at each stage, the A&M report says.
In many cases, the successful resolution applicant has delayed the infusion of the funds either for business purpose or for upfront payment to creditors as envisaged in the plan, either due to ongoing litigation or disputes emerging during the implementation stage.
One of the other problems is the lack of adequate bench strength of NCLT judges. “This needs to be done on a war footing. The bench strength was budgeted for a total of 63, now there are only around 30 judges, whose schedules are extremely stretched. They are often handling as many as three or four different NCLT jurisdictions like Mumbai, Pune, Delhi,” says A&M’s Shah.
Pain for Banks: Videocon, Jet Airways
Plaguing the NCLT process is the fact that bankers know if a resolution is difficult, liquidation is not an option. “When a case goes into liquidation, the recovery suffers massively. If a matter is not resolved and it goes for liquidation, the assets will be sold piece-by-piece,” says Vivek Kaul, an independent economic commentator. This is the reason why banks have in the past chosen to accept resolutions even if they get a raw deal along the way.
The same has happened in the case of bankrupt and grounded Jet Airways, where the resolution—in favour of new buyer UK-headquartered Kalrock Capital and UAE-based Murari Lal Jalan—has taken over two years. The Kalrock-Jalan combine has agreed to pay financial creditors just Rs 1,183 crore over the next five years, against the admitted claims of over Rs 15,000 crore.
Even as the concerns over the NCLT’s success persist, the coming of the Bad Bank will “be a good plug-in” into the entire system to help in recovery of bad loans, says Kaul, the author of Bad Money: Inside the NPA Mess and How It Threatens the Indian Banking System.
Essar, Bhushan Steel: New parents and Healthy Again
Not everything spelt bad news for the NCLT. There have been some real success stories, through the resolution of Essar Steel and Bhushan Steel. Steel companies, then, were the low-hanging fruit and the asset quality of the companies was good. “Steel was in an upcycle and everyone wanted steel assets,” Kaul says.
India will embark on a fresh chapter of reform when the Bad Bank commences. The fact that India’s pace of growth contracted 7.3 percent in FY21 indicates that business activity and growth was not healthy. Banks may have then merely kicked the bad loan can down the road, without necessarily recognising bad loans immediately. In that scenario, NPA levels are likely to remain high in FY22, with the RBI forecasting Gross NPA level to rise to 9.48 percent by March 2022 from 7.48 percent a year earlier. In a severe stress scenario, the figure could rise to 11.22 percent.
The NCLT has ensured that a promoter cannot have a free ride or continue to master control over their company fraudulently. For too long, India has seen a corporate history where companies have failed but promoters have not. That gap will only narrow with the NCLT process.