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Jayesh H is the co-founder of Juris Corp, which he helped set up in 2000. He is a pre-eminent practitioner for structured finance, bankruptcy and restructuring.
As a Chevening Scholar, Jayesh has gained experience in English and European community laws and regulations by undergoing training at the College of Law at York and working briefly with a London-based firm of Solicitors.
In this interview with Bar & Bench’s Varun Marwah, Jayesh talks about the progress of the Insolvency and Bankruptcy Code (IBC) so far, the issues that he sees in its implementation, and how the law has been diluted in many ways.
How do you think the IBC has performed so far?
It has certainly delivered, but it could have delivered much more. We refuse to learn from our previous experiences. We have experienced a similar set of issues, as we do right now, when the Debt Recovery Tribunals were set up: lack of infrastructure, lack of presiding officers, lack of sensitization of other stakeholders. We continue to function with the same old mindset, that ‘things will get taken care of with a new law’. Laws don’t solve problems, it is how those laws get implemented – which includes education and sensitization – that has been lacking.
One critical mistake in the implementation of the IBC was of choosing the National Company Law Tribunal (NCLT) as the forum. The NCLT was anyway burdened with other matters, and then IBC just added to it. At the least, they should have set up dedicated benches.
Also, how many people in the NCLT actually have a grounding in economics or finance? When I say grounding, I don’t mean qualification in economics or finance, but understanding. The IBC is a law which is hugely driven by finance and economics, so you can’t do justice to the implementation of this law if you don’t have a connect with finance and economics.
Has the judiciary been upholding the spirit of the law?
The key thing missing in the Indian context, across the board, is the lack of accountability. You show me any arm of the executive or judiciary which puts up statistics to measure their effectiveness. They don’t. When the first attempt was made to dilute the 180/270 day timeline, it should have been nipped in the bud. The judgments are effectively saying that Parliament was unaware of ground realities. What you are implying is that Parliament did not take into account the delays which could have happened because of all such reasons.
One of the judges at the Singapore Supreme Court used to be an insolvency practitioner. He once told me that during every quarter, the Chief Justice of Singapore issues a statement measuring the performance of other judges, on certain pre-determined metrics. In India, that cannot be done due to the independence of the judiciary. So they can’t do it at High Court and Supreme Court, but they could have certainly done it to the NCLT.
NCLT appointments are done by the government directly. Even now, they can create a mechanism where during each quarter, the NCLT members get measured on metrics such as time taken to dispose of applications, how many adjournments are granted, the time taken to write an order from last hearing, and so on.
In fact, I have a connected point to make on accountability and measurability. Ultimately, it comes from the fact that people are not appreciating time and value of money. If you are sensitized to time and value of money, you will not talk of principles of natural justice, at least in the context of financial debt. This entire rigmarole that the other side needs to be notified, allowed and be given a say, and principles of natural justice cannot be violated – does not have to apply here.
Look at the laws prior to the IBC. The DRT Act talks of principles of natural justice, but the IBC does not. I think Parliament consciously chose not to include those principles. Somehow that has come in, and since then, the law has been amended twice. But still, this aspect has not been dealt with. So you have this element of time and value of money not being appreciated and that is why you have, what you have.
Should a revision of bids be allowed, as it is currently happening?
I have always said this – I see the IBC as a platform for a hostile takeover, and hostile takeover is a war, so what are you complaining about? People are being wimpish if they argue that processes are not being followed, by allowing revision of bids. The whole objective of the law is to maximize the value of assets. Yes, you need the certainty, so do it within the 180/270 days, and you can draw backwards from there. You may say that once the approved plan has been filed with the NCLT, then revision will not be entertained. But before that, if someone is giving a bid which is significantly higher value, it should not be a problem.
But at the same time, the problem in this country is that you will be able to find enough judgments where after someone has been declared as the winner at an auction sale, the courts allowed fresh bids due to significantly higher value, after having issued a confirmation or compelled the winner to match such post-approved bids. Basically, there is no respect in the system for timelines.
Has there been positive behaviour in terms of enforcement of contracts?
When Arun Jaitley first spoke about needing to amend the bankruptcy laws, it just didn’t make sense to me. What does bankruptcy laws being modernized in India have to do with ease of doing business and enforcement of contracts? But when I saw the IBC come into force and the way it started panning out, I realized the connect.
So if you look at the original law, the way it was worded, you had to prove a dispute raised in case of an operational creditor filing; you file a legal suit or annex the papers. The word ‘and’ under Section 8(2)(a) of the IBC now has been read as ‘or’ by the Supreme Court, which I think is doing it a disservice. And the government has now accepted this interpretation in the recent Ordinance. That means your original objective of improving enforcement of contracts has been thrown out of the window.
There is no sanctity of contracts in India. This was one law that could have altered it. Earlier, if you supplied some services to me and I don’t pay you, there was nothing you could do to me. If you took me to court, you would have spent more than 20 years to get a decree. There is a century old Privy Council judgment which says the woes of an Indian litigant begin when he gets a decree. It has only become worse after one century.
Here was a law which actually altered the situation, because an operational creditor could just go and take you to the cleaners. And that is why so many initial petitions which were getting filed before the Reserve Bank of India (RBI) started giving diktats, were by operational creditors, and settlements were happening. So what is wrong in that?
Even in case of a time barred debt, if I have taken services from you five years back and not paid you, and now if you’re using this law against me, what is wrong in that? And if that was the approach this new law was taking, it was a valid approach, because the mess in this country has become so rotten as regards lack of sanctity of contracts, that we have actually created a huge incentive for being dishonest.
Is there a resolution bias that has crept in?
The other thing the government has diluted is that we now need to put a value on a resolution. According to me, that is where the historical mistake has been, that was the undoing of Sick Industrial Companies Act (SICA). We were so hung up on not wanting assets to lie idle, that we forgot that by actually allowing liquidation, we can put the assets back in.
How many successful cases were there in SICA? Only a handful in 30 years, and now we’re saying liquidation should not be allowed that easily and that we should work towards resolution. It’s only when the rotten cases are really liquidated on an expedited basis that others step up and take notice.
By now emphasizing resolution at any cost, and giving it another chance, they’re actually doing a bigger disservice. Most of the current cases are basket cases and they should ideally have been dealt with much earlier. Banks were evergreening their books and helping promoters in that process. And that’s why you have such a huge gap in the realizable value and what is owed, because many of the banks have actually helped promoters evergreen. In that process, you had the debt bloat without corresponding increase in assets or earning capacity. So that’s why there was a huge gap. You can’t really judge the efficacy of this law on the basis of recovery values using historical cases.
What are your views on Section 29A?
While I have some views on 29A, the bigger point is how can you make it retrospective. And I think that has created the biggest problem. By bringing 29A, you’re saying that neither the Bankruptcy Law Reforms Committee (BLRC) nor the Parliament had thought through these things. If your focus was on realization of value, then how does it matter who’s getting the value? So you were looking at historical cases where anyway there is a huge gap between the value and the debt, and suddenly you bar the promoter from coming in and bidding for that.
My counter to that is why did the banks not declare such promoters as wilful defaulters in the first place? Look at the duplicity. A politician accused of the gravest of crimes gets to be elected and enact laws till his conviction is not finally upheld. On the other hand, a person who is previewed as having contributed to a financial default but not accused of any crime, leave alone found guilty even by a lower court, is barred (‘for life’?).
How has the behaviour of banks changed?
I’ll speak about how the behaviour of foreign and private banks has changed because they react to market forces. It is beyond me to understand which tune the Public Sector Banks (PSBs) are following. It is clear that the private banks, foreign banks and even NBFCs etc. are clearly driven by risk mitigation abilities and taking advantage of what comes along their way in maximizing recoveries. So yes, foreign credit has been looking at India more positively. They have seen this law work and deliver, so that has helped.
From a behavioural perspective, some of the acquisitions which are happening, which are heavily leveraged, are getting funded for it. So there are leveraged buyouts happening in India, and there is a fair amount of foreign creditors available. Some of the big foreign players are wanting to get a piece of the action and actually being part of these bids. However, I’ve had quite a few clients complain to us about the way PSBs behave. In many cases, bids have been cancelled after winning the auction for sale of NPAs and confirming the term sheet. And no action is taken, so you wonder, as I said, which tune they are following.
In fact, if you look at the statistics, while we jumped on ease of doing business, the needle hardly moved on enforcement of contracts. And we are still not doing anything about it. Whether it’s the IBC or courts in general, we need to start imposing realistic costs on frivolous defences. When I say realistic costs, I mean the actual costs the other side has to pay for having to fight it out.
How are the creditors’ committees adapting to the new regime?
Well, if you send people who used to attend CDR meetings to CoC meetings, then you can’t blame them for having an old mindset; they have not been trained for this. Blame the guys who are sending them, blame the institutions, the government. What training have they provided to the bankers to deal with this new law? There is also a huge difference between the approaches followed by foreign and private creditors and PSBs.
What are your views on the treatment of home buyers as financial creditors?
As regards the amended law, from an appearance perspective, it appears that we have done something. I don’t think the Supreme Court has realized how this has made it worse. Financial creditors need to take a haircut. If you’re a real estate purchaser and now a financial creditor, how do you take a haircut? By saying for the 40 lakh you paid you will take 30% less area now for a 1000 sq. feet flat you booked, or you will pay 52 lakh instead of 40 lakh? Has anybody even thought through that or argued that?
If only banks/financial institutions take a haircut, and real estate purchasers don’t, then why will anyone as a financial lender, be in favour of a plan? Unless the PSBs are directed to do it, because it is good politics.