Mallya and the IBC: Would the present insolvency regime have made a difference?
[Divisha Mehta and Gibran Naushad graduated from National Law University, Delhi in 2017 and are currently based in New Delhi, India.]
On 15th February, 2019, Dr. Vijay Mallya lodged his appeal in the United Kingdom High Court against the 3rd February, 2019 decision of the Secretary of State of the United Kingdom and the 10th December, 2018 order of Senior District Judge Emma Arbuthnot of the Westminster Magistrate’s Court which mandating his extradition. In this particular circumstance, the Westminster Magistrate’s Court, after perusing the evidence provided by the Government of India as well as Dr. Mallya, concluded that a prima-facie case was made out against Dr. Mallya on the allegations raised by the Government of India on account of conspiring to defraud, making false representations to make a gain for himself and conspiring to launder money. It is still unclear where this case will go from here and how long it will actually take to get Dr. Mallya to India, if at all, considering that if the High Court rejects his appeal, he still has the opportunity to appeal to the Supreme Court within 14 days of the High Court’s verdict.
However, a particular detail that deserves more attention than it is getting is the fact that this judgment also raised several interesting questions regarding the involvement of IDBI Bank, which is owned by the Government of India. J. Arbuthnot noted that IBDI Bank failed to abide by its own rules of operation when it came to a new client and an example of this was that despite the low credit rating of Dr. Mallya at the time of grant of loan, the necessary finance was given to Kingfisher Airlines which was owned by him, without much hassle. There is indication that Dr. Mallya’s persona and lifestyle could have potentially tricked people not well versed with understanding financial statements in wrongly assessing his capability to pay back the loans, but for a bank with an aggregate balance sheet size of over Rs. 3 trillion, it is worth looking into why the first loan was granted at all even before the risk rating had been carried out. There are also reports that there were in fact two internal notes prepared by IDBI Bank before the loan was given, the first one describing the pathetic financial condition of Kingfisher Airlines and the second showing a great deal of confidence in the operations of Kingfisher Airlines and favouring sanction of loan to it. Such a conflict of opinion within the same organization raises a red flag, and the same is being investigated into by the Enforcement Directorate itself.
Closer home, on 25th January 2019, the Hon’ble Supreme Court of India, in its landmark judgment in Swiss Ribbons Pvt Ltd. & Ors. v. Union of India & Ors., upheld the constitutionality of the Insolvency and Bankruptcy Code, 2016 (IBC) and observed that the same has been an extremely successful step of the Government in order to regain the rightful position of the Indian economy. Given the current scenario, it is an interesting question to ask if the situation of Dr. Mallya and Kingfisher Airlines would have been any different if the IBC had already been in place at the time of their loan defaults. The IBC, which was notified on 28th May 2016, completely shifted the paradigm of insolvency law in the country, steering the law towards a creditor-in-control approach. The recently amended IBC which introduced Section 12A with effect from 6th June 2018 allows the withdrawal of a corporate insolvency resolution process by a corporate debtor if it is willing to repay the debt prior to issuance of the invitation for expressions of interest. While this law is prospective in nature, the same could have completely changed the outcome of Dr. Mallya’s case provided he actually was willing to pay his debts as he expressed in a series of tweets on 4th December 2018, right before the Westminster Magistrate’s Court came to its decision. Further, even if Dr. Mallya would have been unable to pay his dues, the banks could have recovered the money owed to them by following the process prescribed under IBC.
Another important factor facilitating the defaults committed by Dr. Mallya was the asymmetry of the information available. The funds made available to Kingfisher Airlines, particularly the ones by IDBI and SBI, evidence a murky picture insofar as the availability of information relating to Dr. Mallya’s default projection was concerned. While the IDBI loan, as mentioned above, was sanctioned despite an internal note of the IDBI acknowledging that Kingfisher Airlines was in the red, the debt recast package given by SBI becomes highly questionable in view of the massive erosion in the share value of Kingfisher post the deal (which was rather predictable). In addition to the above-mentioned loans, certain loans were sanctioned in 2012 by a consortium of banks for the apparent ‘revival of Kingfisher’ while Dr. Mallya continued to spend on his buoyant ventures.
Information Utilities (IUs), a novel mechanism set up under the IBC, is primarily intended to curb this mismatch of information. The only information utility that is operational presently is the National E-Governance Services Limited (NeSL), a government company promoted by leading public institutions like SBI, Life Insurance Corporation, Canara Bank, Bank of Baroda, ICICI Bank etc. The problem with such a composition becomes apparent at the very outset. If one takes the example of Kingfisher, one could imagine a possibility that the dissipation of information by SBI would remain the same even after the establishment of an IU such as NeSL since SBI is a 10% shareholder in NeSL, thereby making the presence of prejudice possible. Such chances of prejudice would be the same in case of any of the other shareholders of NeSL as well, thereby raising questions about the effectiveness of such a framework.
Symmetry of information still remains a grey area when it comes to these IUs. Regulation 19(1) of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (Regulations) stipulate that the registered user can submit information to any IU. Additionally, Regulation 19(3) of the Regulations stipulates that a user can access information stored with an IU through any IU. In case of multiple IUs being present in the country, the dissipation of information is bound to become a problem. There is no clarity on the mechanism for sharing of information between different IUs, and accordingly, issues pertaining to storage, data privacy, responsibility in case of any neglect, amongst other things, would make the mechanism rather inefficient. The onus would technically be put on the information seekers to gather the requisite information through multiple queries to and clarifications from different forums, which would be an expensive and tedious process. Additionally, through Regulation 21(2)(a) of the Regulations, an obligation is put on the IU to communicate the information of default to all creditors. The result of such a provision would be that in a multiple-IUs scenario, the IU where a defaulter is listed would have to inform all the creditors of such defaulter about the default. Since the creditors of the defaulter could be listed in any of the multiple IUs, the information sharing process contemplated by the Regulations would naturally become extremely cumbersome. The Report of the Working Group for Information Utilities provides a solution to this by stipulating that the IU shall inform all other IUs about the default. Additionally, the IU, on coming to know about a default, shall inform all creditors about the default. However, the efficient functioning of such a broad-based sharing mechanism between regulators is something that one would only be able to judge with time, once the mechanism becomes operational in the future.
Dr. Mallya’s case also could have been completely different in the sense that there are allegations of fraud, misrepresentation and money laundering which would be covered under the Indian Penal Code, 1960 as well as the Prevention of Money Laundering Act, 2002. In other words, the case would have been more criminal and less financial in nature. The UK Court has come to a finding that Dr. Mallya was in fact doing everything he could by using the Kingfisher Airlines loans to fund any loan that became due to be paid, which included the Formula 1 Racing Team, his passion project, and his private jet. On the face of it, this indicates a situation wherein Dr. Mallya’s case was perhaps more than what was envisioned under the IBC and was not merely a case of failure of a business idea. As the IBC finally comes into its own and has received the stamp of approval of both the legislature as well as the Apex Court of this country, Dr. Mallya’s case serves us a ready reminder of what it could have been, and what it actually is.
 Judgment dated 10.12.2018 of the Westminster Magistrate’s Court in the case of The Government of India v. Vijay Mallya.