The Insolvency and Bankruptcy Code, 2016, is an epochal legislation to bring a paradigm shift in the manner of resolution of stressed companies that were unable to pay off their debts. However, of late, numerous criticisms have surfaced that the IBC is facilitating high haircuts (lesser recovery than admitted claims) to the lenders, which is causing substantial losses of public monies. For instance, prominent financial journalist Sucheta Dalal, in her recent article in a leading blog, has criticised what she terms “ridiculous haircuts” being accepted by the lenders under the IBC.
The criticism of the IBC also seems to be fuelled by the fact that under it, the lenders have on average realised only around 40% of their total admitted claim (going as low as 6% in a certain case), and around 75% of the companies have faced liquidation instead of the desired resolution of insolvency. The critics seem to have relied upon two criteria: higher haircuts and “lesser resolution than liquidation” to assert that the IBC has turned out to be an instrument providing legitimacy to the loss of public money. Broadly, it is argued that the IBC is not facilitating the very purpose for which it was enacted, which is maximisation of the value of the stressed companies.
However, the critics have failed to appreciate that whether the IBC has been successful in facilitating the recovery of debts should be ascertained not by comparing the realised amount with the admitted claims, but rather by comparing the realised amount with the value of assets of a company under stress, i.e. liquidation value. It is absurd to even assert that the IBC ought to have facilitated the realisation of all admitted dues of lenders irrespective of the value of the assets of a company. Simply put, if a company having assets valued at `100 has total admitted dues of `500, it would be grossly unfair to criticise the IBC if the lenders realise only `186. As per a report published by the Insolvency and Bankruptcy Board of India (IBBI), the lenders, till 31 March 2021, have realised around 186% of the liquidation value of the assets of the companies that were resolved by the IBC. According to the same report, lenders of more than 25% of the companies have realised more than twice the liquidation value of the respective firms. In this context, it is also relevant to mention that the IBC has revolutionised the recovery mechanism from the guarantors of the stressed companies, the constitutional validity of which has been successfully defended by the present government recently before the Supreme Court. Thus, the recovery rate will, in all probability, increase further in the coming times, since the lenders are likely to initiate insolvency proceedings against guarantors of the companies.
As regards the second limb of criticism that the companies are increasingly facing liquidation rather than insolvency resolution under the IBC, the critics have failed to take into account the fact that almost 74% of the companies that faced liquidation were already defunct at the time of initiation of the insolvency resolution process. For that matter, 35% of the companies successfully resolved through IBC were defunct and thus were given a new life by the law.
Further, there are allegations claiming collusive insolvency proceedings with the sole purpose of waiver of all liabilities of the stressed companies. Without commenting on the factual merits of such allegations, it would not be wrong to say that the IBC has a robust in-built mechanism to deal with such cases and provides for appropriate penalties including imprisonment for any collusion between stakeholders. In fact, in order to maximise the assets of the companies under stress, the IBC not only consolidates the existing assets of a company, but also has provisions to recover those that have been siphoned off by way of any previous fraudulent, preferential, undervalued or extortionate transactions, which is determined by way of an independent forensic audit.
Nevertheless, it is undeniable that there is a huge disparity between the value of assets of the companies under insolvency and the admitted dues against them, which leads to lower recovery. The remedy to this lies not in modifying the IBC, but in ensuring that the lenders exercise better due diligence while extending loans and also approaching the insolvency courts when the company under stress is still functional and operating. For instance, a company that is a going concern would have a greater value to its assets as compared to a firm that has become defunct.
Hence, we must not shy away from accepting that the IBC has ushered in a new era of insolvency in India and put the nation on the map of insolvency jurisprudence in line with the global best practices. We can safely assume that the Sisyphean endeavour of pushing the boulder of stressed assets up the hill of recovery again and again is done and dusted with. Now, the IBC provides the lenders with all the help required to reach the top of the hill.
(Views expressed are personal)
Anuj Tiwari, New Delhi-based advocate specialising in corporate criminal defence and insolvency laws (anuj@tiwarianuj.com)