Welcome to INSOL India Newsletter Volume 29, Issue FEB/MARCH | Mar 24, 2021

The last time I wrote an editorial was in May 2020 with the pandemic and lockdown commencing and the IBC suspended. Is this “project restart”? The Government has stuck to its promise and looks set to lift the suspension of the IBC. There is much to be done in the quarters ahead.

Bad Bank a Good Idea?

Probably the worst kept secret - the Indian Government announced the setting up of a Bad Bank. With the pandemic lead moratorium on asset classification downgrades also lifted, there is expected to be a significant rise in NPLs. The idea of the Bad Bank is not a new one, and both the US and EU have already implemented it in the aftermath of Lehman Brothers. The public-private participation model is the need of the hour as it spreads risk and reward. If the US TARP success is anything to go by, this could be an opportunity to clean up bank balance sheets and for investors to make good returns. However, the details for the moment are sketchy and the devil will lie in that detail. Some unanswered questions include – Who will manage the bad bank? Will the government provide a back stop? How will price discovery happen? What will be the capital size of the Bad Bank?

While these questions will be answered in due course, I hope this is also seen as an opportunity to revamp the ARC regime in India. Remember there have been no serious reforms in this space since 2015. Better late than never and what better time than now, else the Bad Bank will have a negative regulatory arbitrage on the ARC industry.

Unboxing Pre-packs?

A sub-committee of the insolvency regulator in India has placed for public comments a report on pre-packaged insolvencies. A pre-pack is quintessentially “debtor-in-possession” while the IBC has been a “creditor-in-control” remedy. There are several encouraging signs in this report, for eg the emphasis on less prescription and more market creativity, the continuance of a NCLT blessing, and the rights of creditors to provide a check and balance on “debtor-in-possession”. However, relaxations in Section 29A may still be required. In fact, it is interesting to note that the committee could not come to a unanimous decision on this. Keep an eye out for this space. If pre-packs are introduced, it could have as much an impact on the landscape as the introduction of the IBC itself.

I dearly hope this is project restart in more ways than just for the economy and insolvency laws.

COVID pandemic is still talk of the town. Newer and newer variants with more potency to kill are being identified. Injections and infections are competing in a parallel pattern. Medical scientists are anxiously awaiting results that will tell how good new jabs are at reducing asymptomatic infections and infectiousness.

Suspension of the IBC is till the end of this month (March 31, 2021). Let us see how the situation will react once the suspension is revoked. Predictably, there could be an influx of resolution applications as is the case with the release of accumulated force.

There is nothing wrong in hailing IBC as the single most pathbreaking economic reform of the recent past in the country. As introduction of anything new can slowly show some ramifications in the behavioural pattern, be it human beings or corporate entities, the same has shown up in insolvency resolutions also. The latest Economic Survey (2020-21) portrays that about 83% of corporate debts could get resolved even before commencement of the resolution process under the Code! What more is required to tell a success story? The hands behind writing this story are that of the Insolvency Professional, upon whom the resolution squarely rests. However, the recently passed two disciplinary orders and the resultant arrests by CBI/Anti-Corruption Bureau are instances that blacken the virtue and virtuosity of CIRP. The matter is sub judice before the Hon’ble High Court of Delhi and a plethora of questions regarding jurisdiction, interpretation of statutes etc., are likely to surface. As butter emerges from churning the curd, churning of facts, circumstances and statutes may bring forth newer codes.

IBC’s inactive mode will complete a year with the end of this month. And, contrary to that, Corona’s active and disruptive play also crosses a year. We need to think aloud whether we can invent a mechanism to course through pandemics and epidemics in the times to come, with adequate legal infrastructure, providing befitting economic back-up as well. During this period, resolution/ settlement outside the IBC have emerged, which is an important factor to note and pursue. Mediation is becoming a viable alternative in resolving insolvency.

During this interregnum of one year, insolvency jurisprudence continued to grow. Mediation could take a decisive role in relation to liquidation of the corporate debtor, even after approval of the resolution plan. Committee of Creditors has been provided with more teeth while considering the viability and feasibility of the Resolution Plan. A petition under the IBC is independent and could be filed and entertained even when winding up petition is pending!

As usual, interesting articles, news etc. are in the following pages.

This is the first issue of this year, which follows an unprecedently disturbing year. As written in my last column, whatever may be the circumstances, we have to stay hopeful and grateful. So hope our future issues will be with you regularly.

Enjoy reading, stay safe and take care.

My Best,

A.S. Chandhiok