Written by Saloni Mathur, pursuing Certificate Course in Insolvency and Bankruptcy Code offered by Lawsikho as part of her coursework. Saloni completed her course in Company Secretary and is currently employed with S R Ashok and Associates Pvt. Ltd. as the Manager of Finance and Legal Department.

Introduction

In the words of the very famous, Lee.J.Colan-“All great things start as one small thing.”

There was indeed a beginning of something great with a positive push when Section 408 of the Indian Companies Act, 2013(hereinafter “The Act”) gave birth to a Quasi-Judicial body or an Adjudicating Authority known as the National Company Law Tribunal (hereinafter the “NCLT”) and its appellate authority, the National Company Law Appellate Tribunal (hereinafter the “NCLAT”) which shall adjudicate and decide upon all the matters pertaining to the Company Law in India.

With the constitution of these adjudication authorities by the Ministry of Corporate Affairs(“MCA”) vide notification dated June 1st, 2016 all matters or proceedings pending before the Company Law Board(“CLB”), the adjudicating Authority constituted under the Erstwhile Act of 1956, shall be transferred to the NCLT which shall become a governing body for all matters under The Act and shall also oversee matters pertaining to winding up, restructuring and other powers which were earlier vested with the High Courts. The Constitution of NCLT was a step in the right direction as it encompassed wider roles, playing in all fields i.e The Tribunal under The Act and the Adjudicating Authority under the Insolvency and the Bankruptcy Code (hereinafter the “IBC, 2016”) and building its position as a highly equipped tribunal handling wide number of corporate cases and providing robust solutions to them.

One can witness an alternating phase of boom and depression gripping the Indian Economy. The Indian Corporate sector is growing with leaps and bounds, with Corporates expanding and diversifying their operations and relying heavily on debt in the form of funds from banks and financial institutions. With the ever-expanding Corporate transactions, Banks and the Financial institutions are under reeling recovery issues making them vulnerable to the Non-performing asset Crisis. This stems the importance of the specialized Tribunals like NCLT purposefully equipped for targeting the weak spots and promoting the interests of the banks, the financial institutions, the stakeholders and the Corporate Sector itself.

The role of the NCLT in promoting the interests of the banks and the financial institutions has become a contemporary issue lately due to the burgeoning NPA crisis. This article is an attempt to throw some light on the powers that the NCLT has been bestowed with while promoting the interests of the banks and the Financial institutions and to analyse the role it has already played so far in resolving the complex issues pertaining to the banks and the financial institutions, while discussing the flip side as well and its scope for betterment.

The Non-performing asset menace: Why is it a tough road ahead for Banks and financial institutions?

The Reserve Bank of India, (“RBI”), the apex regulator for banks and financial institutions, released the Financial Stability Report on June 26, 2018, 17th in the series which envisioned deepening stress in the banking sector whereby Gross non-performing advances of financial institutions reflect a faster growth. According to the Report, In March 2018 the large Corporate borrowers accounted for 54.8 percent of the gross advances and 85.6 percent of the GNPAs. The Non-performing asset is defined in Reserve Bank of India Prudential norms on Income recognition, and asset classification as :

   “A non-performing asset (NPA) is a loan or an advance where;

• interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.

The asset classification norms have specified different classes of non-performing assets based on the severity of their recovery i.e the Sub-standard assets, the doubtful assets, and the loss assets. A provision of ten percent is created on the value of the substandard assets. The loss assets are of no value to the banks and financial institutions which require a provision of a hundred percent in the books of Banks and financial institutions pushing them even to deeper waters.

Insite of a stringent regulatory mechanism of the Reserve Bank of India for Banks and other financial institutions, it has apparently failed to control the ever-growing NPA crisis, and there is no denying of the fact that this evil needs strong vigilance of the specialised tribunals like NCLT.

Why shall the interests of banks and financial Institutions be promoted?

The Banks and the financial institutions are the major sources of funds for the big corporate houses. They are referred to as the ‘financial creditors’ in the IBC 2016. Financial creditors are those creditors to whom any financial debt is owed and which includes money borrowed against the payment of interest. Lately, there have been cases of default by big corporate houses in repayment of debt of the financial institutions, which has shaken the very foundation of the Indian economy. The situation is grave and naming it just a short term trap is an understatement.

The way Punjab National Bank was defrauded of Rs.11, 400 crores by the diamond merchant Mr.Nirav Modi, the way Mr.Vijaya Mallaya became a defaulter in paying the dues of the Indian banks and other financial institutions, everything boils down to just one thing-Banks to reel under severe NPA crisis. Banks and financial institutions play an indispensable role in economic growth, leading to a wide asset-liability mismatch when there is a default on them. Thus it has become a need of the hour to protect their interests.

Analyzing the impact of the role of NCLT in promoting the interests of the banks and the Financial Institutions

The IBC, 2016 has been lauded as a great move in promoting the interests of the stakeholders and the Company itself. The interests of the Code inclines toward promoting resolution over liquidation while working out the best for the stakeholders.

There are four pillars of the IBC, 2016 that play an indispensable role in promoting the interests of the banks and financial institutions. These four pillars are the Resolution professional that takes over the management of the Company as a going concern when a corporate insolvency resolution process (“CIRP”) is initiated against it, the Information utility which records all financial information of the Corporate Debtor and a major source for determination of any debt and default, the Adjudicating authority or the NCLT to whom the application for CIRP is made and last but not the least, the Insolvency and the Bankruptcy Board of India,(“IBBI”).

The dynamism of the IBC, 2016 can be reflected from the fact that the Application to the NCLT for initiating the CIRP can be made by various parties i.e., The Financial Creditors to whom a financial debt is owed under Section 7 of the IBC, 2016, the Operational Creditor under Section 9, and the corporate debtor or the Company itself under Section 10 of the IBC, 2016.

The fate of all Applications for recovery of the financial debt or the operational debt lies solely with the NCLT at the inception, followed by an appeal to the NCLAT in case the judgment is not in the favor of the petitioner and finally the Supreme Court.

As per the Quarterly Newsletter of the IBBI ending 30th September 2018 a total of 1198 applications were admitted by the NCLT for the calendar year 2018, out of which 118 applications were closed on appeal/review, 52 were closed by resolution and 212 were closed by the liquidation and 238 Applications are ongoing CIRP. The notable fact here is that out of 212 applications under CIRP, 238 have already crossed the deadline of 180 days of CIRP process as mentioned in IBC, 2016.

The status of the CIRP at a glance

Figure 1.1

                       Source: IBBI Website, Quarterly Newsletter (30th September 2018)

Do Banks and Financial Institutions have an upper hand?

The above piece of information highlights several dimensions. The contribution of the NCLT in promoting the interests seems more inclined towards the creditors as the number of cases of liquidation of the corporate debtors outnumbers the resolution, reflecting the fading purpose of the IBC, 2016 and its pillars. Following are certain instances from the IBC, 2016 which highlight the importance of secured creditors like banks and financial institutions in recovering their dues.

Dominance over Resolution Plan

Section 30(4) of the IBC, 2016 gives weight to the Committee of the creditors which consists of the financial creditors, and who hold not less than sixty-six percent voting power in approving the resolution plan. With a growing number of applications escaping resolution, one can witness the dominant position of the Banks and the financial institutions in rejecting the resolution plans for their interest and automatically going for liquidation with or without as a going concern entity.

Withdrawal of Application

As per Section 12(A) of the IBC, 2016, the NCLT does not allow for any withdrawal of the application once admitted by it unless not less than ninety percent of the votes for the proposed withdrawal comes from the committee of creditors, again giving them an upper hand.

Actions not be taken without prior approval of Committee of Creditors

Section 28 of the IBC specifies certain actions of the Resolution professional that shall not be taken up without the approval of the committee of Creditors which include creating any security interest over the assets of the corporate debtor, undertaking any related party transaction, record change in the ownership structure of the corporate debtor etc. Lately, the NCLT has passed judgments.

Time-bound process

The most appealing fact about the adjudicating authority in promoting the interests of the Banks and other financial institutions is the time-bound process of Resolution which has breathed a new life into Banks and Financial Institutions who can use the law.

Top level in the waterfall

Section 53 of the IBC(2016) prescribes the waterfall for distribution of the assets of the Company in the event of liquidation. The secured creditors who have a security interest in the assets of the company and other unsecured creditors hold a top hierarchy in the waterfall.

There have been a number of cases and applications where one can see that NCLT has passed judgments in the interests of the secured creditors like banks and other financial institutions. The NCLT so far has been successful in taming the shrew and bringing the situation to an acceptable level which cannot be denied.

The Underside of the NCLT Glory: Is it really on a right track in cleaning the Banks’ Balance Sheets?

There is always a flip side to everything, and NCLT is no exception. The IBC 2016 brought out the Insolvency and the Bankruptcy Code( Second Amendment) Act, 2018 on 17th August 2018 with a view to balancing the interests of all the stakeholders, and not only the Banks and the financial institutions.

In the matter of Synergies-Dooray Automotive Limited (Corporate Debtor), where an application was filed under Section 10 of the IBC, the case clearly spooked bankers after the NCLT ruled in favour of a 95 percent haircut in the dues to the banks.

The Ordinance brought about the interests of the home buyers at par with those of the financial creditors and their right to vote as a part of the Committee of Creditors. A reference can be cited of the insolvency hit Jaypee Infratech Limited where the home buyers were allowed a voting percentage of more than sixty percent in the Committee of Creditors. The passing of such ordinances has affected the interests of the financial institutions as there is always a tussle between resolution and liquidation.

One Major blow to the banks comes from the enforcement of Section 29A in the IBC 2016 with effect from 23rd November 2017 stating persons not eligible to be resolution applicants. It says that the promoters of the company are barred from bidding for the assets of the company. Its consequences are dire for the banks as the absence of the promoter bids would potentially increase losses for the banks.

The RBI has been pressurizing the Banks and the Financial Institutions to approach the NCLT under the umbrella of the IBC, 2016 for recovering their dues in a hope for a speedy resolution. However the extension of the CIRP due to various loopholes and laxities in the IBC, 2016 has faded its aura. Further, the Banks are being pressurized by others in the waterfall like the trade creditors to not to gloss over the interests of the other stakeholders in the IBC, 2016.

It cannot be denied, that whether it is a resolution or liquidation of the company, the Banks are always between the devil and the deep sea. The resolution plans and the liquidation of the corporate debtor are not maximizing the asset recovery for the Banks, due to large haircuts in the loans posed in the resolution plans. The corporate debtors are taking advantage of 180 days’ timeline as a defense mechanism from going into resolution. If the resolution plan is not accepted by the Committee of Creditors within that period, the company automatically goes into liquidation, consequently to which it becomes a tough row to hoe for the banks to find a buyer which gives them the maximum value for the assets. If we see the other side of the coin neither of the two i.e the resolution and the liquidation is maximizing the interests of the banks and the financial institutions, thereby putting them between a rock and a hard place.

A glimpse of the Rulings of the NCLT favouring banks and financial institutions

In one of the significant ruling by the Honourable Supreme Court on August 14th, 2018 in its judgement in the case of the State Bank of India v/s Ramakrishnan and Anr(Civil Appeal No.3595 of 2018) passed stated that no moratorium would be enforced on the personal guarantors or surety to a contract of a Corporate debtor. Thus, a legal proceeding can now be initiated by the banks against the personal guarantors of the Corporate Debtor.

Again, in one of historic ruling of the National Company Law Tribunal, Chandigarh Bench, in matter of the Punjab National Bank(Petitioner) and M/s Rishi Ganga Power Corporation Limited(respondent) order dated 25.01.2018, after back to back allegations by each party, opposing their claims, the judgment finally ruled in favour of the bank, that any General Power of Attorney made in favour of its officers for initiating any legal proceedings would tantamount to a ‘Power of Attorney for initiating CIRP’.

Conclusion

In none of the judgments we may see that the NCLT has made a win-win situation for the banks. There has always been some form of compromise that the secured creditors like the banks and financial institutions have made in the form of major haircut in their dues. The NCLT, one of the strong pillar of the IBC, 2016 is approaching more towards protecting the basic purpose of the code, i.e balancing the interests of all the stakeholders. Rulings are being made in the large interest of the company as a whole, rather than emphasizing on one single stakeholder like Banks and financial institutions.

Considering the current situation, one cannot call NCLT a panacea for removing all corporate evils on banks and financial institutions. One cannot envisage what turn the situation will take in the near future which shall be inclined more towards their interests.

One can only hope against hope that if there is really a start of something great, things will improve.

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