Delay in resolutions raise questions on IBC regime, BFSI News, ET BFSI
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When the Insolvency and Bankruptcy Code (IBC) came into force five years ago, it was hailed as a landmark reform. However, many questions have been raised due to the delay in the resolutions of companies.
The five-year old regime that follows a creditor-in-control model has side lined systems like SARFAESI, Lok Adalats and Debt Recovery Tribunals. Under IBC’s model, the promoter loses control over the management and debt is auctioned to other interested parties.
However, the supreme court fears that the IBC would also fail like its predecessor because of judicial delay.
“Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the IBC. We cannot let the present insolvency regime meet the same fate,” Justice DY Chandrachud observed in a 190-page judgment.
Litigations by promoters not wanting to let the company out of their hands is one of the major factors under judicial delay.
The Supreme Court on Monday had urged the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal to adhere to the the 330-day deadline for clearing pending resolution plans.
According to the Insolvency and Bankruptcy Board of India, of the 4,500 cases that have been admitted, only 14% of cases have been resolved, 38% are still ongoing and 63% have been closed. Of these, 75% ended up in liquidation, but were already sick or defunct, which made chances of recovery lower. Of the ongoing cases, 75% have already exceeded 270 days and took more than 400 days on average.
The IBC was passed as a law in June 2016, with Jayant Sinha as one of the main proponents of the regime. The IBC requires a corporate insolvency resolution process (CIRP) to be completed in 180 days, which can be extended by another 90 days to a maximum of 270 days.
Who is affected?
Operational or financial creditors, the company undergoing the CIRP and its employees are among the parties affected due to the delay.
“The recent ruling of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Anr highlighted difficulties experienced by parties by reason of a slow CIRP, which affects the subsequent implementation of the plan. These delays, if systemic and frequent, have an undeniable impact on the commercial assessment that the parties undertake during the course of the negotiation. Delay in CIRP increases non performing assets and destroys the value of assets,” said Ashok Paranjpe, managing partner at legal firm MDP & Partners.
What are the reasons for delay in resolutions?
According to Paranjpe, delays are due to three reasons. First, the NCLT taking considerable time in admitting CIRPs, second the late and unsolicited bids by resolution applicants after the original bidder becomes public upon passage of the deadline for submission of the resolution plan, and third due to the multiplicity of litigation and appellate process to the NCLAT and the Supreme Court.
“Such inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive,” he said.
The COVID-19 pandemic has also played its role in causing delays in the IBC process. The recovery rate fell to 39.3% as of March 2021 from 46% as of March 2020. Of the total outstanding amount of Rs 1.32 lakh crore, only around Rs 25,944 crore was recovered in fiscal 2021, or a rate of 19.7%.
Why is timely resolution important?
The main of goal of IBC is a time bound insolvency resolution, value maximization of assets, promotion of entrepreneurship and availability of credit, Paranjpe points.
“The Ebix Singapore matter has effectively highlighted the importance of a faster resolution process, otherwise which would either result in a down-graded resolution amount of the corporate debtor or a delayed liquidation with depreciated three assets, which frustrates the core aim of the IBC,” he said.
Why are banks accepting steep haircuts?
Recently, Jayant Sinha, chairperson of the standing committee on finance, informed the Parliament last month that there were steep haircuts, as high as 95%, and over 71% of the cases were pending for more than 180 days, indicating that there has been a deviation from the original objectives of the IBC.
“Slowing economic growth and inordinate delays in the completion of CIRP proceedings are the two biggest reasons forcing lenders to accept very steep haircuts,” Paranjpe said.
In terms of recovery value under IBC, mostly big companies, situation is unsatisfactory and there are several major cases in which corporates have suffered whopping haircuts of over 70% and in some cases, even 95% due to delay, he added.
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