Monday, January 30th, 2023 06:50:39

Insolvency and Bankruptcy Code, A game changer

Updated: June 28, 2018 9:57 am

Features of the Code making this succeed

The Insolvency and Bankruptcy Code was brought after unsuccessful efforts of many decades, to revive the sick companies or take them to conclusion of liquidation, backed by many laws including Companies Act, 2013 and Companies Act, 1956, Sick Industrial Companies Act, 1985,Recovery of Debts Due to Banks & Financial Institutions Act, 1993, etc. But finally, this Code is the one which seems to be working.As the data shows and experts feel that this has just the beginning and once the law evolves to maturity, the results could be surprising and beneficial in establishing the healthy credit market in India.

What is significant to know is that: 1) It enables even the goods and services providers having undisputed outstanding dues of Rs. 1,00,000 or more to get the insolvency resolution process started (even employees can initiate this process) viz. ask all stakeholders to gather through a legally formed committee of creditors and work out a plan of resolution to make the company run as going concern. 2) The entire process of finding a resolution is to be completed within a period of 180 days which in some cases can be extended to 270 days but only with the permission of Court (NCLT). 3) The process is run by a professional representative duly appointed by committee of creditors and is under the close watch of the regulator – Insolvency and Bankruptcy Board of India (IBBI), Professional Agencies (IIIPI, IIPICSI, IIPICAI) and Courts. 4) No civil court cases can be initiated against this company under CIRP (Corporate Insolvency Resolution Process). 5) The waterfall (technical term for defining the order of payment of various types of dues) is defined and importantly, it does not keep the government dues at the top, unlike the earlier acts. 6) And at the end of it all, if it is concluded to the satisfaction of the court that the company fails to reach a resolution (in other words the company cannot pay off its dues to the satisfaction of the creditors), it shall be liquidated i.e. its assets sold off to pay off its dues, in another 2 years.

Fact File

  • Over 2100 companies have cleared their outstanding dues of around Rs. 83,000 Crore to Banks due to fear of losing control over their businesses
  • Recoveries made by lenders (financial creditors) is around 70% of their claims value and 215% of the liquidation value in Jan-Mar’18 quarter (12 cases reaching resolution) and in many cases the recovery % is equal to or more than 100% of the claims admitted
  • Competitors / Companies find assets at attractive value which otherwise were lying idle – a win-win for buyers, lenders and promoters
  • Insolvency Code is being used as a Debt Recovery Tool – a potential abuse of the code by Operational Creditors?(60% cases filed by Operational Creditors till Dec-17)
  • Homebuyers given the status of Financial Creditors under IBC What an achievement in the direction of unlocking the value locked in stressed assets of companies, which are either willful defaulters or have turned defaulters due to turn of economic events for them.

Big achievements or the just the beginning

The Bankruptcy Law Reforms Committee, the father of this law gathered the data of recovery from sick (defaulting) companies in India and estimated it at 26% of the claim value. As the above data shows (even though for a small population of 12 companies reaching resolution in Jan-Mar’18 period), the recoveries are at healthy ~70%. This is significant jump.

Lets understand, why have companies come forward and paid back Rs.83,000 Crores, while they were unwilling to pay earlier? What in this law has made them to reach this conclusion of paying? This law works on the principle that the lenders shall take control of defaulting companies, if the promoters are not able to pay up. In the fear of losing control over the valuable assets (of course, value is not discovered now), the promoters are willing to do, all what is necessary to pay back the dues and retain control over their businesses.

Another significant attempt to stop dishonest promoters from getting the back door entry into their business, at a discount, through the resolution process has been made in the Act by way of Section 29A, which debars the willful defaulters to bid for their own companies in a resolution plan. I think this is only fair to do so, though there are pros and cons of blanket bans, of course.

But, unfortunately most of the big cases, as of now are in the courts due to various technical issues of the process being challenged. But, I feel this is the process of evolution for all including companies, promoters, lenders, creditors, courts and taxpayers.

Now that a large community of the society i.e home buyers are also treated as financial creditors under the Code (earlier they were other creditors), it would be interesting to see if this Code becomes a good recovery tool for the homebuyers or they are the losers at the end of it all, as it is being debated whether the bad projects can actually be revived through the process of insolvency resolution process or not The opinions might differ about the achievements so far and the course correction needed to achieve its desired goal but it’s certainly making its presence felt to all those whom it matters and, in my opinion, the game of insolvency resolution has just begun!


By Piyush Garg

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