MUMBAI: Sixteen months after the rollout of Insolvency and Bankruptcy Code (IBC) to cleanse the banking sector’s bad loans mess, the jury is still out. The BJP made tall claims that IBC helped banks recover Rs 4 lakh crore, but in reality, as rating agencies say, lenders are likely to take at least 60 per cent haircuts for most of the accounts referred by the RBI either because there are no takers or the asset value has simply eroded. The IBC’s unique feature is its adherence to timeline — 270 days in all to enact a resolution plan, failing which the account goes straight into liquidation. For now though, the NCLT appears somewhat flexible in relaxing the deadline.
Of the 12 large loan accounts, the 270-day deadline has either expired or is about to in the next few days. The tribunal has already granted more time in at least in one instance — Alok Industries, which had a two-week period ending on March 31 for resolution. More such instances are likely in the next few weeks.
This is because IBC’s core function is to find a resolution plan as liquidation is an antithesis of resolution. “Liquidation brings the life of a firm to an end, destroys organisational capital and renders resources idle till their reallocation to alternate uses. Further, it is inequitable as it considers the claims of a set of stakeholders fully,” observed MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI).
Therefore, IBC does not allow liquidation of a firm directly, but only after the process fails to yield a resolution. According to Sahoo, competitive resolution maximises asset value while recovery maximises the value of the creditor alone. Recovery does not keep the firm alive, maximise the value of its assets and balance the interests of stakeholders, and hence it’s an antithesis of a resolution.
Perhaps that’s why, the NLCAT in the matter of the Prowess International Pvt Ltd held that insolvency resolution process was not a recovery proceeding to recover dues of the creditors, but an act relating to reorganisation and insolvency resolution of corporate persons.The Code, however, envisages resolution process, well before the insolvency balloons to an un-resolvable proportion.
Of the 12 large accounts, accounts pertaining to the steel industry attracted investor interest, unlike others including power. But there’s an urgent need to minimise the legal roadblock as promoters, bidders and creditors are stalling routine proceedings. This could further stretch the resolution process.
Drafting a legislation is only the start, while the challenge is ensuring its implementation in true spirit. For IBC to be perfect, it needs a series of amendments as recommended by the high-level panel. These include changes that could help banks, ARCs to extend interim finance to companies undergoing bankruptcy, reducing the threshold for creditors’ vote to 66 per cent from the current 75 per cent for extending the resolution period.