Falling out of favour: Consultancies and law firms suggest IBC revamp

 For all its promise of redeeming stressed companies, the Insolvency and Bankruptcy Code (IBC) is falling out of favour with the industry, which has pointed out several roadblocks to the government. These range from time-consuming litigation to the threat of coercive action post the resolution process.

In a series of representations to the corporate affairs ministry, leading consultancies and law firms have suggested a revamp of the IBC post the suspension of initiation of corporate insolvency resolution process. Dogging delays Investors feel IBC’s promised twin benefits ...

After resolution of big steel cases, banks expect low recoveries from IBC

Having resolved big-ticket insolvency cases like Essar and Bhushan Steel, bankers are now looking forward to a recovery rate of not more than 20-30 per cent.

Till December, 2019, realisation by financial creditors (FCs) under the 190 resolution plans totalled Rs 1.52 trillion or 43.14 per cent; total admitted claims was around Rs 3.51 trillion, according to data from the Insolvency and Bankruptcy Board of India (IBBI). Of the total amount of realisation, around Rs 1 trillion is on account of just four steel companies : Essar Steel, Bhushan Steel, Bhushan Power & Steel and Electrosteel Steels.

However, from here on, banks are not anticipating good recovery from IBC, including cases referred for resolution under the Reserve Bank of India's (RBI's) second list, which included 28 companies.

A senior banker with a public sector bank said, not more than 30 per cent recovery was expected from the RBI's second list. Another top lender said, except one case in which 50 per cent recovery was expected, lenders were looking to recover 25-30 per cent.

“The government has provided a very good piece of legislation, but the spirit in which it is implemented is not right at times. In some cases, resolution amount is coming less than 30 per cent, and even less than 15 per cent. Liquidation value is abysmally low," said a senior banker.

In case of power manufacturing units, why was it that the valuations were low, questioned the banker. The banker, however, said that banks might still prefer IBC to settlement because of the transparency in the method.

However, according to Mrutyunjay Mahapatra, MD and CEO of Syndicate Bank, IBC has helped improve the credit culture and the overall resolution amount should go up as in old cases in there is a significant erosion of value due to ageing of assets.

“IBC has both curative and reformative value.

Earlier, the promoter kept on exploiting methods, and there was no information asymmetry. Different lenders were given different data at times. In IBC, the resolution is timely. Going forward, the resolution value should improve," he said.

"Also, IBC should not be judged solely on the basis of recovery. Any other method would have given the same amount,” said Mahapatra.

Abhishek Dafria, Vice President, ICRA, explained that realisation from resolution would be case specific. "Some of the cases that were admitted were about a decade-old, so the asset quality had deteriorated. One would expect that going forward, cases would be brought in by the creditors at the initial stages so that chances of realisation are better."

Dafria also said that realisation would depend on companies and the industry they belong to - whether in a downcycle or upcycle.

For instance, the realisation from the steel companies was largely led by the improvement in international prices and the safeguard and anti-dumping duties brought in by the government to protect the industry.

"Realisations in future will also depend on the policy measures undertaken by the government to support industries that may be facing headwinds," he said.

However, some analysts believe that the key to ensuring that there is no value destruction in the asset will be timely resolution. Of the 1,961 ongoing corporate insolvency resolution processes (CIRP), 635 had breached the 270-day timeline till December 31, 2019.

Till December 2019

Closed by resolution: 190

Total admitted claims: Rs 351,527.98 crore

Realisable by FCs: Rs 151,664.12

Four big cases:

Amount realised

Corporate debtor Amount realised (Rs crore)

Bhushan Steel Rs 35,571

Essar Steel Rs 41,018

Bhushan Power & Steel Rs 19,350

Electrosteel Steels Rs 5,320

Recovery of stressed assets improved marginally in FY19 driven by IBC: RBI

In 2018-19 (FY19), the recovery of stressed assets increased marginally, mainly driven by resolutions under the Insolvency and Bankruptcy Code (IBC). Cases referred for recovery under various mechanisms grew over 27 per cent in volume and tripled in value during the year, leading to a pile-up of bankruptcy proceedings. In FY19, around Rs 8.15 trillion worth of stressed assets were involved in the recovery process, up more than 200 per cent from Rs 2.70 trillion in 2017-18. The amount involved under IBC was Rs 1.66 trillion and more than Rs 70,819 crore was recovered, with a recovery rate of 42.5 per cent. However, recovery rates yielded by major resolution mechanisms (except Lok Adalats) declined in FY19, especially through the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest mechanism.

Over 9,600 cases worth Rs 3.75 trn disposed of at IBC pre-admission stage

More than 9,600 cases involving a total amount of nearly Rs 3.75 trillion have been disposed of at the pre-admission stage of the insolvency law process, according to the government.

The Insolvency and Bankruptcy Code (IBC), which came into force in 2016, provides for resolution of stressed assets in market-linked and time-bound manner.

As many as 21,136 applications have been filed under the Code, the corporate affairs ministry said in a release on Sunday.

"9,653 cases involving a total amount of approx. Rs 3,74,931.30 crore have been disposed of at pre-admission stage of IBC," it said.

About 2,838 cases were admitted into the corporate insolvency resolution process (CIRP) and out of them, 306 cases have been closed "by appeal/review/withdrawn", according to the release.

Further, the ministry said that in the 161 resolved cases, the realisable amount is Rs 1,56,814 crore.

Amended IBC sets threshold for initiating corporate insolvency cases

The government has proposed at least 100 individuals or 10 per cent of creditors such as homebuyers have to come together to initiate corporate insolvency proceedings under the amendments to the Insolvency and Bankruptcy Code (IBC).

Adding a clause to Section 7 of the IBC, the IBC Amendment Bill, tabled in the Lok Sabha on Thursday, has proposed to make this change retrospectively. It seeks to give 30 days for cases where a single homebuyer has taken a company to insolvency to comply with the revised criteria from the time of the commencement of the Act.

The proposed threshold will be applicable in all cases where a financial debt is owed to a class of creditors or is in the form of securities or deposits, and provides for appointing a trustee or agent to act as authorised representative for all the financial creditors.

“Overall the theme of the amendments proposed in the IBC is to remove the hurdles being faced and to make it more attractive for investors,” said Manoj Kumar, partner, Corporate Professionals.

The government has not, however, as demanded by industry bodies, yet announced an increase in the overall threshold for a company — currently Rs 1 lakh — to be admitted to the corporate insolvency resolution process.

The IBC has taken a big step in providing a clean slate to buyers of stressed companies by barring criminal proceedings such as attachment, seizure, or retention of property of such companies for offences committed before the initiation of insolvency proceedings.

The Amendment Bill has introduced clause 32A in this regard: “Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force … The corporate debtor (company undergoing insolvency) shall not be prosecuted for such an offence from the date the resolution plan is approved.”

Anshul Jain, partner, PwC India, said: “While this will be a great reprieve to successful bidders, the IBC itself cannot fix this issue … Other laws have to be amended accordingly to make the intent of this amendment felt.”

Addressing the concerns of interim or rescue financiers, the Bill has also expanded their definition of “any financial debt raised by the resolution professional during the insolvency resolution process period” by adding “… and such other debt as may be notified”.

In its statement of objects and reasons, the Bill stated, “A need was felt to give highest priority in repayment to last mile funding to corporate debtors to prevent insolvency…in case the company does land in that situation — to prevent potential abuse of the Code by certain classes of financial creditors.”

The Bill, while adding an explanation in Section 14, which deals with moratorium, licences, registrations, or clearances given by the government, shall not be terminated due to insolvency, subject to the condition that there is no default in paying current dues arising out of the use of the licence during the moratorium period.

While some experts said most companies under the IBC would not benefit from the clause because they did not have sufficient funds to pay their current dues, other felt differently. “This will preclude the need to reapply for licences and permissions and save the successful resolution application a lot of management time and overhead,” said Uday Bhansali, president, financial advisory, Deloitte India.

The resolution professional has also been empowered in the Bill to continue to manage the stressed company even after the expiry of the corporate insolvency resolution period (CIRP), until an order approving the resolution plan or appointing a liquidator is passed.

This had become an issue in the case of Essar Steel, where the CIRP continued way beyond the 330-day deadline. The resolution professional will be allowed to start insolvency proceedings against another corporate debtor to recover dues.

The Bill has also clarified that the insolvency commencement date will be treated as the date of admitting the CIRP application and the resolution professional will have to be appointed by the same date.

Will ensure regulations are 'grounded on realities': IBBI chairman Sahoo

Emphasising that the insolvency law provides a new lifeline to save a company from premature closure, IBBI Chairperson M S Sahoo has said the board will continue with efforts to develop best practices and ensure that regulations are "grounded on realities".

More than three years after implementation of the Insolvency and Bankruptcy Code (IBC), which has brought in "significant behavioural changes among the stakeholders," he said there are early evidences of the Code delivering better outcomes than the erstwhile similar frameworks.

The Insolvency and Bankruptcy Board of India (IBBI) is a key institution in the insolvency ecosystem. The Code provides for time-bound and market-linked Corporate Insolvency Resolution Process (CIRP).

The Code has undergone various amendments and the recent Supreme Court verdict in Essar Steel case has provided clarity about various aspects, including the roles of resolution professional, resolution applicant and Committee of Creditors (CoC).

When asked about the key takeaways of three years, Sahoo said the Code has re-defined the debtor-creditor relationship and brought in significant behavioural changes among the stakeholders.

"The life of a company is as precious as that of an individual. The Code provides a new lifeline to save the company from premature closure. It is the duty of the insolvency ecosystem and the stakeholders, particularly creditors, to save every company, wherever there is economic value," he told PTI in a recent interview.

As many as 10,860 cases under the Code were pending before the National Company Law Tribunal at the end of September 2019, as per data provided by the corporate affairs ministry to the Rajya Sabha.

About the priorities of the IBBI, Sahoo said the regulator would continue its engagement with the stakeholders to ensure that insolvency reform remains a reform by, for and of the stakeholders.

"It will continue to engage with academia, industry, professionals and other stakeholders to create awareness about it, build their capacity to use the Code for insolvency resolution and liquidation, develop best practices, promote research, and to ensure that the regulations are grounded on realities," he noted.

Further, Sahoo said the IBBI would keep a close watch on the developments and take note of lessons.

"It would modify the regulatory framework to address the challenges and to plug the loopholes, if any, within the confines of the Code, and build the capacity of the IPs (Insolvency Professionals) and other constituents to take the insolvency reforms to the next level," he added.

Insolvency resolution: Share of operational creditors reduces to 48% in Q2

The cumulative share of operational creditors in companies admitted under Insolvency and Bankruptcy Code (IBC) has reduced to 48 per cent at the end of Q2 from 50 per cent in Q1 of FY20.

Correspondingly, the share of financial creditors has risen from 40 per cent to 43 per cent in the same period, data from the Insolvency and Bankruptcy Board of India (IBBI) showed.

The number of cases admitted for Corporate Insolvency Resolution Process (CIRP) has gone up significantly over the last 10 quarters with a major chunk of these cases admitted in the last six quarters, reflecting the acceptance of IBC as an effective debt resolution mechanism. On a quarter-on-quarter basis, the number of cases admitted under IBC rose 17 per cent to 2542 in Q2.

Around 41 per cent of the overall cases belong to the manufacturing sector, followed by the real estate (20 per cent), construction (11 per cent) and trading sectors (10 per cent). The sectors have remained constant with the previous quarter, even as the overall percentage number has changed. Within the manufacturing domain, basic metals (7 per cent) and textiles (7 per cent) sectors continue to have the largest cumulative number of cases admitted under the IBC.

Research by CARE Ratings shows that of the 2,542 cases admitted under IBC, 59 per cent of the cases are still in the resolution process. As many as 586 cases have gone into liquidation. Over two-thirds of these cases were under Board for Industrial & Financial Reconstruction (BIFR) or non-operational companies where the resolution value was less than or equal to the liquidation value. Five per cent of the cases were withdrawn under Section 12 A of IBC- the key reason being either the full settlement with the applicant or other settlement with creditors. Six per cent of the total cases have culminated in approval of resolution plans.

“In past, the recovery rate in India was as low as 26 cents to a $1 (or 26 per cent recovery). Post implementation of the IBC, as can be seen in the above table, the recovery rate till date in India has improved to 42 per cent. However, the recovery for Q2 in FY20 has dipped to 34 per cent, which is still better than 14 per cent reported in the last quarter (Q1 of FY20). Though the IBC process is time

bound, many of the larger cases have witnessed significant delays due to various reasons such as litigation. However, this timeline of 300 days is significantly superior to the earlier legal process where it was not unusual for the entire process to take a better part of a decade to complete”, the report by CARE Ratings noted.

At the initial stage, the Reserve Bank of India (RBI) had directed the initiation of resolution proceedings for 12 large accounts by banks. These 12 companies had outstanding claims of Rs 3.45 trillion compared to a liquidation value of Rs 73,220 crore. Resolution plans for seven companies have been approved, while liquidation orders were passed against two companies. In case of Amtek Auto, implementation of the resolution plan failed and hence, the process has been restarted.

3 years on, just 6% resolution plans accepted under IBC, says report

With the Insolvency and bankruptcy process closing in on three years of existence, a look at the data shows that only 6% of the cases admitted under IBC since January 2017 saw their resolution plan passed by the tribunal. Of the 2,162 cases admitted under the IBC, corporate insolvency resolution process of 1,292 cases are going on, of which 445 have seen their CIRP process go beyond 270 days — the prescribed time limit for presenting a resolution plan, failing which the company goes into liquidation.

insolvency

IBC Bill won't encroach on SC domain, says FM Nirmala Sitharaman

The government’s move to amend the Insolvency and Bankruptcy Code (IBC) was largely to clear its legislative intent and not to encroach on the Supreme Court’s domain, Finance Minister Nirmala Sitharaman said on Monday.

She was replying to a debate on the amendments to the code in the Rajya Sabha.

“In spite of the global headwinds, we have brought such reforms. It is not being done exclusive of the court and it is not certainly eroding into the court’s domain,” the minister said.

The Rajya Sabha later passed the IBC amendment Bill, which has been changed for the third time since its inception three years ago.

Sitharaman said the National Company Law Appellate Tribunal’s (NCLAT’s) interpretation in the Essar Steel case to treat secured lenders and operational creditors on a par defeated the spirit of the IBC.

She said the Supreme Court itself has said that economic laws require flexibility and experimenting. “If courts are saying this, why are we hesitating. We are using our legislative mandate… Amendments are being brought as we gain experience from time to time,” Sitharaman said.

The NCLAT had recently ruled in the Essar Steel’s case that the Committee of Creditors (CoC) had no role in distribution of claims and brought lenders (financial creditors) and vendors (operational creditors) on a par.

The Supreme Court had then ordered a stay on the NCLAT’s ruling. The government has amended the Act in a timely and speedy manner to address “very serious interpretative problems,” the minister said.

Batting for the IBC, the finance minister quoted the Supreme Court saying that “Defaulter’s paradise has been lost to the IBC.” She said that the code had given a new lease of life to companies in the ICU (intensive care unit). Around Rs 1.24 trillion had been realised from the approval of 117 resolution plans.

The minister said financial creditors were getting on an average 43 per cent of claims against getting nothing if defaulting companies were never taken up under the IBC.

She said the IBC had turned out to be the most effective mechanism for cases under the Board for Industrial and Financial Reconstruction (BIFR). She said of the total 475 corporate insolvency cases which yielded to liquidation, 349 were earlier under BIFR.

Talking about the amendment to the timelines where a 330-day limit has now been introduced for resolution process to be finalised, including the time taken for litigation, the minister said several of the top 12 IBC cases have been pending for more than 600 days.

She also assured all bidders that no criminal proceedings with be taken up against the winning applicant and only the corporate debtor will be held liable for such proceedings. 

graph

Reiterating the stance of the government that a resolution plan will be binding upon the Centre, state and local authorities, Sitharaman asserted, “No further claim will be made by the government once a resolution plan has been approved.”

Sitharaman told Parliament that a total of 6,079 cases got disposed of even before admission. “It meant an amount of Rs 2.84 trillion being redressed. That’s the indication of an effective mechanism,” she said.

Bring uniform proposal outside IBC to solve homebuyers' woes: SC to Centre

The Supreme Court on Tuesday asked the central government if it had a "uniform proposal" outside the Insolvency and Bankruptcy Code framework to resolve the problems being faced by lakhs of homebuyers who were yet to get the possession of their flats despite having paid the cost of their properties to the builders.

“This issue will be bothering lakhs of homebuyers. Within the IBC (Insolvency and Bankruptcy Code), we cannot do anything. But outside it, you (Centre) can suggest something. We can consider that," said a two-judge Bench of Justices A M Khanwilkar and Dinesh Maheshwari, adding that such policy issues had to be resolved by the Centre.

Hearing a bunch of pleas moved by several homebuyers of Jaypee Infratech Limited (JIL)’s projects, the top court said that they wanted proposals from the central government which could apply to all such real estate projects stalled across the country. JIL homebuyers have moved the top court pleading that the company should not be sent into liquidation as it would cause “irreparable loss to thousands of home buyers”. The matter will now be heard on July 11.

On August 9 last year, the top court had ordered re-commencement of the corporate insolvency resolution process against JIL. It had then barred the company, its holding company Jaiprakash Associates Limited (JAL), and the promoters from participating in a fresh bidding process.

At the time, the top court had also allowed the Reserve Bank of India to direct banks to initiate insolvency proceedings against JAL, and said that there was "no doubt" that both JAL and JIL lacked financial capacity and resources to complete unfinished housing projects.

Hearing another case against JIL, the National Company Law Appellate Tribunal (NCLAT) reserved its order on a plea moved by lenders to JAL seeking to be a part of the Committee of Creditors (CoC) of JIL. The lenders, which include Axis Bank, Standard Chartered Bank, and ICICI Bank, contend that for the loans given to JAL, the company had pledged the land bank which belonged to JIL. It was thus important for them that they be a part of the CoC of JIL so as to have a say in the insolvency process of the company.

In May 2018, the Allahabad bench of National Company Law Tribunal (NCLT) had asked JAL to return nearly 760 acres of land back to its subsidiary JIL. The NCLT had then said that the transfer of land was "fraudulent" and "undervalued", and asked the parent company to release and discharge interest created over the land to lenders including ICICI Bank.

On May 24, the NCLT order was stayed by the appellate tribunal while it heard plea moved by the banks questioning as to who was the rightful owner of the land bank.