Marking the first time that the concept of ‘time value of money’ made its way into India’s legal discourse, the Insolvency and Bankruptcy Code (IBC) and specifically, provisions relating to the Corporate Insolvency Resolution Process (CIRP), completed two years of existence last December; long enough to establish its popularity and effectiveness as a mechanism to deal with the country’s toxic stressed assets pile-up while also favourably impacting India’s ease-of-doing-business ranking.
Since its enforcement on December 1, 2016, the law has, as per admission of the various stakeholders involved, contributed significantly both tangibly — as a means for cash-starved banks to recover capital stuck in stressed assets with average recovery far exceeding previous recovery mechanisms, and intangibly — bringing about a fundamental change in borrower behaviour, where the fear of losing control of their companies has led promoters to be more proactive about debt repayments.
The real gain from IBC is not from resolutions in the courts but resolutions due to the fear of IBC, say bankers. IBC has been quite successful in creating a positive change in behaviour of the corporate borrowers who were earlier incentivised to default as the courts were very slow in giving judgments. “With its time-bound process, creditor-in-control model, exclusion of promoter under 29A and market-oriented resolution, we are observing a scenario where defaulting borrowers are coming upfront to settle their dues rather than face CIRP under the National Company Law
Tribunal (NCLT),” bankers said.
Earlier in January, corporate affairs ministry secretary Injeti Srinivas said while creditors had recovered `80,000 crore through the system, recovery through indirect impact of the law has come close to `3-3.5 lakh crore.
According to the Reserve Bank of India (RBI), under the IBC average, recovery stood at 46.1% of the amount filed in the first half of the last financial year against 41.3% in the previous fiscal. In comparison, recovery stood at 12.4% of amounts filed for the previous fiscal through other mechanisms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act, Debt Recovery Tribunals (DRT) and Lok Adalats.
Latest available data with the Insolvency and Bankruptcy Board of India (IBBI), which essentially speaks about the popularity of IBC, reveals that nearly 1,500 corporate debtors have been admitted into CIRP by the end of December 2018. However, as resolutions progress, one development that has bothered observers is the fact that out of the total number of cases admitted, 302 cases ended in liquidation while 142 were closed on appeal or review or settled, 79 ended in approval of resolution plans and 63 were withdrawn. Compared with 13.48% that ended with a resolution plan, a far higher 51.53% of CIRPs closed thus far have ended in liquidation. But it’s important to note that 75.16% of CIRPs ending in liquidation were earlier with BIFR and or defunct.
As RBI noted in its banking trends 2017-18 report, “Though the number of liquidation cases so far appears to be comparatively large, a closer examination suggests that these mainly consist of long-pending issues. As the intrinsic value of these assets had already eroded, liquidation was a more efficient strategy than resolution.” However, analysts have raised concerns that in some cases, companies are liquidated even in the presence of optimal resolution, based on the fact that, of the 302 liquidated cases, there were 48 cases where the resolution value was higher than the liquidation value.
In older cases, it is understandable that the value of assets has already deteriorated and there is no choice but liquidation, as long as it is the best recourse to get these assets off banks’ books, bankers said. However, in some cases such as EPC firms, there is no solution in sight while these assets are in NCLT, they pointed out.
“Also, so far there is no solution to keep firms involved in trading in commodities, rice milling, oil extraction, etc, where stock and receivables vanish soon after they are admitted under bankruptcy proceedings, and where the company does not have any big assets and relatively large outstandings. These are destined for liquidation,” they said.
According to bankers, in EPC companies’ cases, even if there are interested bidders, they insist on continuing with guarantees and are only willing to give 10-15% of cash or even lesser amounts upfront, while continuing the rest of the non-fund based facilities. “In other cases, bidders are willing to pay less than 20% of the value,” they added.
According to Ashish Pyasi, principal associate with Dhir and Dhir Associates, “Though the RBI report suggests that there is better recovery, recovery and resolution are two different things. One is aimed at only regaining through repayment whereas the other is meant to resolve the financial distress of the corporate debtor, and in that process, maximisation of value of assets may happen if there is such possibility.”
Agreeing that under the IBC regime, the resolution process has become speedier and effective, Pyasi said in some of the cases liquidation was a better option than resolution as the value of assets had depleted/eroded due to various pending issues such as industry-specific issues, economic slowdown, pending litigations, delay in recovery, etc. “In future, there is a good possibility we will also see more resolution than liquidation. As IBC is evolving, the paradigm is also evolving towards resolution,” he added.
The two years since the law’s implementation have also revealed several teething issues, undermining the effectiveness of the Code. Infrastructure has proved inadequate, skilled manpower has since been overwhelmed and litigations have led to inordinate delays, which could also hypothetically drive up the liquidation figures.
Reflecting rather poorly on the impact of the law, data available with the IBBI suggest that of the 898 ongoing processes, 275 cases have breached the 270-day deadline since admission while another 166 have crossed 180 days. The 12 large stressed accounts where banks initiated CIRP on directions from RBI in June 2017, with an outstanding claim of `3.45 lakh crore against liquidation value of `73,220.23 crore, have been widely tracked as proof of the process.
Of these 12, resolution plans for only three corporate debtors — Electrosteel Steels, Bhushan Steel, Monnet Ispat and Energy have been approved. Liquidation orders have been passed in case of Lanco Infratech while the tribunal recently allowed for start of the resolution process afresh in Amtek Auto after Liberty House failed to honour its payment commitments.
However, delays in resolution of these 12 accounts can’t be seen as teething issues, according to Suharsh Sinha, partner, AZB & Partners. “For a nascent law, the natural progression would have been for smaller cases to be organically tested at NCLT before the large matters were referred to IBC. But the most complex cases with the most well-connected and influential promoters became test cases. Given this reality, the current lot of issues can’t be referred to as teething issues,” he said. He added that given that it is overhauling ‘creaking’ restructuring laws of the past, IBC has functioned relatively well.
Anecdotal evidence also suggests that delays in resolution owing to excessive litigation, among other factors, have prompted bankers to go for quick cash-based recoveries, sometimes even at a haircut compared with the expected recovery in event of a successful resolution under the IBC.
Recently, Central Bank of India put on the block stressed assets worth `3,322 crore, including its exposure to Essar Steel India with an outstanding balance of `423.61 crore, Bhushan Power & Steel (`1,550.07 crore) and Alok Industries (`1,251.10 crore), to be sold on a full-cash basis; all three stressed accounts are undergoing CIRP.
In fact, among stressed accounts currently being resolved under IBC, Essar Steel has witnessed the highest number of lenders wanting a quick exit. Only recently, SBI finally shelved its plans to sell its `1,543-crore exposure to Essar Steel amid poor response despite several extensions.
Since IBC is a new law, litigations were bound to happen, bankers said. According to them, the good part is that the Supreme Court is coming out with elaborate judgments explaining the real intent of law. The understanding of law among the stakeholders, including the Adjudicating Authorities (AA), is gradually improving. Initially, despite the law being very clear that the committee of creditors’ (CoC) decision on resolution plan must not be judged from a commercial angle, in many orders, AAs had been referring back the decisions of CoC or finding faults with such decisions. The SC has now underscored, in the Swiss Ribbon case, the CoC’s exclusive authority to decide on the resolution plan. “The second reason may be the not-so well-developed secondary market for these stressed assets. Gradually, we will have more players who will purchase and sell assets coming out of insolvency or liquidation and then we expect the real purpose of IBC will be justified,” one of the bankers said.
The SC delivered a landmark judgment in Swiss Ribbons vs Union of India & Others that upheld the constitutional validity of IBC in its entirety and cemented supremacy of creditor rights in insolvency firms. “…the experiment conducted in enacting the Code is proving to be largely successful. The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained. The result is that all the petitions will now be disposed of in terms of this judgment. There will be no order as to costs,” the judgment from January 25 read.
Litigations aside, some concur that NCLT itself could be the weakest link in the process, compromising on the time value of money in process. According to AZB Partners’ Sinha: “NCLTs are currently tasked with hearing matters relating to the Companies Act, Competition Act and IBC. They are overburdened, leading to backlogs and delays. The government should consider having dedicated benches for IBC.”
Source: Financial Express, April 3, 2019