Supreme hiatus in insolvency proceedings

Supreme hiatus in insolvency proceedings

The Supreme Court has stayed bankruptcy proceedings set to be initiated against power producers and others till mid-November. Assorted debtors had challenged bankruptcy proceedings that are set to be initiated against them on the basis of the RBI’s February 12 circular, which calls for reporting of default if loan servicing is delayed by even one day for large loans, initiation of a resolution plan that should be completed within 180 days, and, failing resolution, filing for insolvency under the Insolvency and Bankruptcy Code (IBC) within 15 days of the 180-day deadline for bank-initiated resolution. It gives banks and the government time create a mechanism for resolving bad loans in the power sector, besides an opportunity to settle the legal validity of insolvency measures.

Power suffers from failure of politics and policy — in a country where diesel generators meet the demand for power in many places, capacity utilisation of power plants is less than 50%, because politicians do not have the courage to ask consumers to pay for the power they consume. Bankrupt state utilities refuse to buy power, killing the viability of new projects. Failure to give power projects fuel linkage has crippled several projects. Without sorting these problems out, the power sector cannot be redeemed. However, banks need to recover their loans from defaulting power projects. The solution is to sell these to a special purpose vehicle owned by the banks themselves, so that, one, banks can clean up their books, even if booking a huge loss for now, and, two, the upside will accrue to the banks when the sector turns viable.

The court will do well to observe that insolvency seems to be recovering good money in cases where competition is not curbed in the bidding for resolved assets.