IBC vs RERA: Should insolvency proceedings be the first option?

4th December 2019

The IBC should not be the first resort for a lender for handling a default, given that there are other fora.

In the challenging scenario that the Indian economy finds itself in, the resolution of debt recovery is a sensitive issue. Over the years, we have witnessed various changes and amendments to the legal framework to make the system fair and just for both sides in any such dispute.

The perception gaining ground amongst India Inc is that the attempt to bring in fair play and have a balanced approach tends to have gone a bit in favour of those seeking recovery—at times, leading to a situation where a dispute, instead of being resolved, ends up in the debtor company having to ‘close shop’. The reality of this situation, as different from the perception, is that small debts taken up under bankruptcy laws have the potential to have a company that may have solved the problem, end up downing shutters.

The insolvency regime has seen a majority applications as having been filed by operational creditors—such as vendors, suppliers and employees. This is a situation where such ‘operational creditors’ can potentially force the company into liquidation for a default, at times as low as Rs 1 lakh.

The impact will be felt in sectors where there are not many bidders, as invoking the bankruptcy code creates a potential scenario where the debtor may end up in liquidation rather than a revival. This is a scenario that is not ideal.

The ideal scenario would be the one where lenders should not end up opting on invoking the Insolvency and Bankruptcy Code (IBC) as the step of first choice—I would look at medical treatment for illness as an apt example: oral medicines, injections always are the first option—an operation, to give an example, would be a later option. With different options available to a debtor, the recent trend has been the one where lenders have been seen preferring the option of invoking the IBC. It is like opting for an operation at the very initial stage, where injections or oral medicines might just work out.

If we take the example of real estate, among the options available to an aggrieved person in a real estate transaction, appealing before a criminal court, approaching a consumer forum, approaching RERA Conciliation Tribunal, and then filing an application under RERA—as also invoking the IBC.

Logically, since RERA is the regulatory body for real estate, one would expect aggrieved lenders to first move courts, consumer fora and RERA Conciliation Forum, before approaching RERA—but what if even lenders with small amounts outstanding opt to invoke the IBC? Effectively, lenders can take an unrelenting position on debt recovery by invoking the IBC.

Given this situation, India Inc hopes that the government will come up with measures that will reduce lenders’ selection of taking debtor companies to bankruptcy courts even at the slightest delay in loan repayments. This can be done through a change in the insolvency code, which is necessary given the rising strain on balance sheets as a result of the slowdown in the Indian economy.

It is not prevention, rather the option would be preventing the aggressive use of the IBC as a recovery tool by lenders, effectively by rebalancing rights of lenders and loan defaulters. The IBC should not be the first resort for a lender for handling a default, given that there are other fora. India Inc hopes for some changes in the code to ensure this happens, and the government needs to be cognisant of what is all-too-apparent—aggressive use of the IBC as a first option rather than as a last alternative.

Click for the Article