Skip to main content

Small creditors use bankruptcy rules to squeeze big players

Small creditors use bankruptcy rules to squeeze big players
In late June, one of India's top wind power equipment makers, Inox Wind Ltd, was dragged into insolvency courts by a logistics handler over unpaid dues of Rs 88,000. Two weeks on, the matter was settled, with dues paid off.

The case illustrates how small creditors and vendors, previously at the mercy of large debtors, are now using India's new bankruptcy code as a pressure ploy to secure payment of dues that would earlier have been all but impossible to recover.

India overhauled bankruptcy laws last year with the main goal of helping banks tackle a Rs 150-billion bad loan issue that is crimping growth in the economy.

Less than a year on, insolvency professionals say it is vendors and small suppliers, also referred to as operational creditors, who are using the new rules as leverage to recover dues much more effectively than banks owed far larger sums.

"It is not necessarily a negative thing, but it was not the objective of the new code," said Ashish Chhawchharia, a partner at Grant Thornton who works on insolvency cases. The new rules give any creditor owed 100,000 rupees (Rs 1,560) the right to drag a multi-billion dollar company to court.

They layout a stringent timeline for resolution, or force debtors into automatic liquidation, giving out size influence to vendors and suppliers who would normally rank well below secured financial creditors, such as lender banks, in any bankruptcy process.

But they have also stirred fears of a tsunami of cases jeopardising the plans of banks with billions of dollars at stake, and which are forced to join such proceedings.

"If an operational creditor initiates a process, that basically brings in unwilling financial creditors, even if they do not deem it the right time or course of action," said leading insolvency lawyer Sumant Batra.

The court that handles such bankruptcy cases, the National Company Law Tribunal (NCLT), should first test the intent of any operational creditor making a bankruptcy plea, he added.

"NCLT has to hold an enquiry at the beginning to determine whether this has been filed only for recovery of debt, or whether this has been actually filed for are solution or a liquidation process ."
Ericsson-Rcom

Swedish telecom equipment firm Ericsson became the first high-profile foreign vendor to use the tool, filing a petition this week to drag Indian telecom carrier Reliance Communications to insolvency courts over unpaid dues of Rs 180 million.

By comparison, RCom, as the company is widely known, owes nearly $7 billion to its banks, who have agreed to a standstill over its servicing obligations until year end, while the company attempts to restructure.

RCom said it plans to challenge the Ericsson plea.

About 1,000 insolvency petitions have been triggered since early 2017, when the first case was admitted under the new rules, but consultant EY estimates about 80 percent of these were withdrawn following out-of-court settlements. About 60 per cent of the cases brought to the NCLT are initiated by operational creditors, estimates show.

Sanjay Ruia, a Mumbai chartered accountant who took a holiday tour operator to bankruptcy court over unpaid audit and advisory fees, said the law had made it easier for creditors like himself who would formerly have struggled to recover dues.

The Business Standard, New Delhi, 16th September 2017

Comments

Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

RBI rushes in to prop up falling rupee

RBI rushes in to prop up falling rupee India’s central bank reportedly intervened in the currency markets on Monday to prevent a further slide in the local unit, which breached the 67 mark to a dollar for the first time in 15 months amid a widening trade gap and runaway import bills fuelled by high crude-oil prices. Some state-owned banks were seen selling dollars aggressively, interventions that market dealers attributed to the central bank’s strategy to stem the decline of the Indian rupee against the US currency. The rupee is the worst performing among a dozen Asian monetary units in the past three months. It lost 4.25 per cent to the dollar during the period, show data from Bloomberg. On Monday, the Reserve Bank of India (RBI) is said to have sold about Rs 800 million collectively on the spot and exchange traded futures markets, dealers said. An email sent to RBI remained unanswered until the publication of this report. The currency market has seen such a strong central bank interven…

GST Refund of Rs 20,000 Cr Pending: Exporters’ Body

GST Refund of Rs  20,000 Cr Pending: Exporters’ Body Refund of over Rs 20,000 crore on account of Goods and Services Tax (GST) is pending with the government with more than half the amount stuck as input tax credit, Federation of Indian Export Organisations said on Tuesday. While claims over Rs7,000 crore were cleared in March, the amount was Rs 1,000 crore in April.However, after exporters’ request, the GST council and tax department are organizing a second phase of Special Refund Fortnight starting May 31, which will enable exporters to draw their refunds at a speedy pace. Many exporters have been unable to file the refund of input tax credit due to technical glitches, exports and claim happened in different months. The major challenge lies on ITC refund especially because the process is partly electronic and partly manual which is cumbersome and add to the transaction cost, the exporters’ body said. On IGST, refunds are getting delayed due to airline and shipping companies not submitt…