Canara Bank and Gayatri Projects: Breaking the shackles of perennial delays.

[By Nishant Kumar]

The author is a student at the Hidayatullah National Law University, Chhattisgarh.

Introduction:

In the year 2016 Insolvency and Bankruptcy Code (Hereinafter referred to as IBC) was promulgated as the principal legislation to tackle the surging corporate debts and for the timely resolution of corporate insolvencies. The code replaced several legislations including the Industrial Companies Act 1985 with an aim to facilitate a more timebound and efficient method of debt restructuring. However, there have been several instances when the IBC has failed to meet the expectations. Recently, Canara Bank became the second bank to file an insolvency plea against the Gayatri Projects. The first petition was filed by Bank of Baroda in February which is still awaiting the approval of National Company Law Tribunal (Hereinafter referred to as NCLT). According to Section 7(4) of the IBC, the Adjudicating Authority is obligated to give a decision over the insolvency application within 14 days. However, in the instant case the application has been pending before NCLT for months consequently jeopardising the assets of debtor.

In this article, in light of recent developments in dispute between Canara Bank and Gayatri Projects, I attempt to highlight the delays in the resolution procedure and its implications on the stakeholders involved.

Issue:

Canara Bank filed an insolvency petition against the Gayatri Projects for a default of Rs 1,520.75 crore. This insolvency petition is second in row after the initial petition filed by the leading lender Bank of Baroda. It is alleged that the debtor i.e., Gayatri Projects owes almost rupees 6000 crores to its lenders. After a failed structuring plan against the debtor in 2015, lenders had declared the loans as Non-Performing Asset (NPA).  The first petition was initiated by Bank of Baroda in February which has still not received approval from the NCLT. Consequently, the failure to start the resolution process has forced the lenders to sell the pledged shares of the debtor company further deteriorating its condition. Such inordinate delay in the application process destabilizes the complete process. Furthermore, according to a study by Insolvency and Bankruptcy Board of India (IBBI), admission of applications for CIRP takes much longer than the time prescribed in the code. It is to be noted that the delay in application process is just the tip of the iceberg, the study by IBBI highlights several unreasonable delays in almost every stage of the resolution process. These inexplicable delays have serious ramifications on both creditors and debtors. Moreover, it also hampers the ease of doing business in the country.

Legal Analysis of the Problem:

Under Section 7 of the IBC a financial creditor or a group of financial creditors can initiate the Corporate Insolvency Resolution Process (Hereinafter referred to as CIRP) against the debtor. Section 7(4) of the code further says that the adjudicating authority (AA) has to take the decision on such applications within 14 days. In case of any delay the AA should give a written explanation for such delay. Section 12 of the IBC provides time limit for completion of the resolution process. Supreme Court in Arcelor Mittal Pvt. Ltd. v Satish Kumar Gupta has clearly specified that the entire timings prescribed by the Section should be mandatorily followed. Any delay in the process can affect the interest of both debtors and the creditors involved. In Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta, the Supreme Court held that the resolution plan should be completed within 330 days including the time taken in litigation except in certain exceptional cases. The Supreme Court in several rulings time and again has attempted to limit the delays in the process in order to maintain the sanctity of the code.

In a very interesting case of Sharad Sanghi v Vandana Garg NCLT refused to consider the resolution plan approved by the Committee of Creditors after a lot of negotiations because 270 days had lapsed since the initiation of resolution process. The intention of the appellant authority was to curb these unexpectable delays. Further in the landmark case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd Supreme Court conclusively held that a resolution plan once approved by Committee of Creditor cannot be withdrawn or modified or altered in anyway. This ruling by the apex court is a positive step in the direction to establish an efficient insolvency regime.

However, in the recent ruling of Supreme Court in Vidarbha industries limited v. Axis Bank Supreme Court has complicated the application process by the creditors under Section 7 of IBC. Two objective conditions that have been mentioned in the code for admission of resolution application the first condition being the existence of debt and second being the evidence of default by the debtor. The Supreme Court in the above ruling has empowered the AA to reject the application even if the conditions mentioned in the act have been met. The test has now become subjective and susceptible to several conflicts. Supreme Court has put yet another impediment in the path of speedy restructuring of debt.

Inordinate Delays:

In this competitive corporate environment insolvency regime plays a significant role. Any delay in resolution of insolvency can prove detrimental for parties involved. An efficient insolvency regime facilitates a healthy credit culture in the economy. It minimises bad loans and non-performing assets in the market. Furthermore, it helps the creditors in getting beneficial returns on their loans and also aid debtors by maximising their assets. However, India has been witnessing surging delays in insolvency resolution. Time and again the duration prescribed by the IBC is breached. According to IBBI reports 73% of insolvency cases breached the 270 days’ timeline prescribed the IBC.

There can be many reasons that can be attributed to delays in insolvency resolution procedure. The reasons range from inefficient system to unfilled vacancy in the NCLT. It has been reported that manpower shortage in the NCLT is proving to be a significant hindrance in timely resolution of the insolvency. IBBI in its study on countering the delays has highlighted the importance of an efficient insolvency regime. It has also suggested certain steps to minimise these delays. Primarily, IBBI took cognizance of delay in admission of application by adjudicating authority. In its study it took only the case of operational creditors and portrayed the poor status of existing insolvency remediators. It is to be noted that where IBC under Section 9 prescribes only 14 days for admission of application by operational creditors, in 2021 the average number of days taken to admit the application under Section 9 were 650. It is highly surprising to note that out of 207 applications whose data is available from 2021-22 82 applications took more than 2 years for admission by NCLT.

These reports exhibit a really disheartening story. These unwanted delays should be given due consideration in order to tackle the existing problems under CIRP.

Conclusion:

Resolution process under IBC provides for maximisation of debtor’s assets. It also provides opportunity for an efficient exit process to corporate debtors. It is to be understood that the unreasonable delays defeat all these purposes of IBC. In the above case where the application of Bank of Baroda has been unreasonably delayed the debtor’s assets i.e., its pledged was sold to recover the credited loan. It is a known fact that promoters of the firms are mostly against the insolvency process and if timely moratorium under Section 14 is not placed on the debtor then the promoters may try to siphon off the assets of the firm.  In the above case the pledged assets of Gayatri Projects were being sold to retrieve the credit lent to the firm since the application of the lender was not accepted timely. These defaults by the existing authorities under IBC have terrible consequences on the corporate environment and credit culture of the country. Moreover, it paints a really bad picture of our country as far as ease of doing business is concerned. Apart from that; distressed firms, banks and other lenders face negative consequences at individual level. The burgeoning non-performing assets in both public and commercial banks can also be attributed to the inefficient insolvency regime. It is high time that the concerned authorities should take some consequential steps to break the shackles of these delays.

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