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February 18, 2020

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IBC - Revival or Recovery?


- Dr. Sanjeev Gemawat, Executive Director (Legal) & Group Company Secretary [ Dalmia Bharat Group ]

Dr-Sanjeev-Gemawat

Going by experience and data, it appears that the IBC, in the three years since its inception, has been more successful as a tool of recovery than revival...

The Insolvency and Bankruptcy Code, 2016 (“IBC”) with its advent instilled a hope in the industry, a hope of revival of stressed assets, a hope in the hearts of employees of stressed assets of reinstatement of their employment, a hope in the minds of the operational creditors (largely coming from the MSME sector) of continuity of business relations. IBC had instilled a hope that it would be a magic wand to meet all those objectives which could not till that date be met by legislations like the RDDBFI Act, SARFAESI Act, SICA and all those laws dealing with recoveries and stressed assets. It was thought that the lacunae of all these laws would be covered while meeting the objective of keeping a stressed asset as a going concern.

Though since the time of its promulgation, IBC has been tested repeatedly on judicial parameters leading to multiple amendments, however, the time is now ripe to analyze whether it meets its objective of revival of stressed assets or has it become a tool for recovery of debts which were otherwise difficult to recover.

The Preamble of IBC lays down the objects to include “the insolvency resolution” in a time-bound manner for maximization of the value of assets in order to balance the interests of all stakeholders. As can be seen from the preamble, IBC rests on three pillars i.e. a) resolution in a time-bound manner; b) maximization of value; and c) balancing interest of all stakeholders.

Non-adherence

However, IBC had some provisions which were antithetical to its very objectives. IBC brought paradigm shift from ‘debtor in possession’ to ‘creditor in control’ regime meaning thereby that stressed asset would be in control of creditors who would be more interested in recovery of their money rather than in revival of a stressed asset. IBC itself is not determining or laying down any parameters for determination whether a stressed asset had the potential to continue as ‘going concern’ or that it should be liquidated. Rather its destiny has been entrusted in the hands of financial creditors, whose interest in the practical sense revolves around recovery of their money and they have no other incentive to put the stressed assets as a going concern. It is also relevant to mention here that the duty of running the stressed asset has been cast upon the Committee of Creditors (“CoC”) who may practically not have any experience of running business like that of the stressed asset thus putting the same at a further risk.

This view finds force from the latest Report in the Resolving Insolvency Index, India’s ranking jumped 56 places to 52 in 2019 from 108 in 2018. Recovery rate increased from 26.5% in 2018 to 71.6% in 2019 and time taken in recovery improved from 4.3 years in 2018 to 1.6 years in 2019.

Since the coming into force of the provisions of IBC with effect from December 2016, 2542 Corporate Insolvency Resolution Processes (“CIRP”) have commenced by the end of September 2019, of which 587 have ended in orders for liquidation and 156 have ended in approval of resolution plans.

It is seen that about 56.17% of the CIRP, which were closed, ended in liquidation, as compared to 14.93% ending with a resolution plan. The average time taken for completion of 156 CIRP, which have yielded resolution plans is 374 days; while the average time taken for completion of 587 CIRP, which have yielded orders for liquidation is 300 days.

Moving on to the issue of maximization of assets, it can be noted that IBC has utterly failed to meet the timelines provided therein, resulting in deterioration in the value of stressed assets. Howsoever, the legislation is not to be blamed alone as equal contributor to this failure is judicial innovation. IBC initially prescribed a time limit of 270 days for CIRP. The effect of these timelines was diluted when the same were held to be directory and not mandatory. By virtue of an amendment, the time limit was revised to 330 days including time spent in legal proceedings. However, this revised timeline is also being considered to be directory and not mandatory. We need to appreciate that delays of this kind would force a stressed asset into liquidation as with the passage of time, the value of the asset deteriorates. Further, while keeping in view “maximization”, creditors see the value of the asset, vis-à-vis revival or liquidation, which it can fetch on the date of approval by CoC and lose sight of future potential which an asset may have in terms of revival and generating opportunities in terms of business, employment, revenue generation etc. The CoC which can revive the stressed asset inter-alia by restructuring of loans, oscillates only between option of an acquirer coming in and clearing their dues on one hand and on the other hand, liquidation.

As regards balancing of interests of all stakeholders is concerned, the present scheme of IBC itself differentiates between the different categories of creditors. While lot of autonomy has been given to CoC, which comprises the financial creditors, least focus has been placed upon operational creditors. The distinction between dissenting and consenting creditors takes away the freedom of not giving consent as the dissent would cause further financial loss to the dissenting creditors. Also, it needs to be appreciated that discrimination with operational creditors would lead to a cultural change among operational creditors which would impact extending credit while providing goods or services. In an economy which is short of funds / liquidity, such cultural change may adversely impact the economic growth.

As per the data compiled by IBBI, out of 21136 applications filed, 9653 cases involving a total amount of approx. `374,931 Cr have been disposed of at pre-admission stage itself. 2838 cases were admitted into CIRP, out of which 306 cases are closed by appeal/review/withdrawal.

The experience, above data and analysis so far suggests that during its journey for over last three years since its inception, IBC has been successful as a tool of recovery while it needs to work hard for being seen as a tool of revival.

Sanjeev-Gemawat

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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