Nearly 70% of stressed SMEs face liquidation

Around 70 per cent of small and medium enterprises (SMEs) undergoing insolvency proceedings face liquidation, as their promoters are the only ones presenting resolution plans. The recent ordinance amending the Insolvency and Bankruptcy Code (IBC) virtually debars promoters from bidding for their stressed assets.

Experts said at least 200 of the 300-odd SMEs would have to face liquidation. REI Agro, Hind Motors, VNR Infrastructure, and Blossoms Oils and Fats were recently pushed into liquidation as no third-party resolution plan was submitted, insolvency professionals said. 

Some other companies are also nearing liquidation as no third-party resolution plans have come their way. Two of them were Gupta Coal India and Gujarat NRE Coke, said sources close to the proceedings. They added the creditors to these companies had not approved plans proposed by the promoters.

Experts said small and medium-sized companies may junk the IBC for other methods of restructuring such as the Scheme for Sustainable Structuring of Stressed Assets (S4A). The S4A aims at financial restructuring by allowing banks to acquire equity in stressed projects. However, their promoters can still own the companies.

“The purpose of the code is to provide the defaulter an opportunity to be restructured. Why will any promoter file for insolvency if he is not given the chance to place a plan?” said Sumant Batra, managing partner of Kesar Dass B & Associates.

Besides debtors, lenders can also drag a defaulter to the National Company Law Tribunal (NCLT). The intention of the code is also that defaulters can file for insolvency if they want to restructure themselves.

Batra said the code could lose its sheen if companies and banks started looking at other methods of restructuring debt. He pointed out that foreign investors were only interested in medium-sized firms if the existing promoter was part of the investment plan. 

“These small and medium-sized companies do not have strong managements, which is why investors are not interested,” said Nilesh Sharma, senior partner in Dhir and Dhir Associates. 

Promoters of companies undergoing resolution can present a plan in case an operational creditor has dragged the company to the NCLT and the company does not have any financial dues. Operational creditors include vendors and service providers.

Manoj Kumar, partner and head at Corporate Professionals, said an entity where the promoter was not a corporate guarantor could also bid for the company undergoing resolution. However, in 99 per cent of cases the promoter of the debtor company was a corporate guarantor, he added.

The ordinance has barred promoters of companies undergoing resolution from bidding in auctions that form part of the bankruptcy proceedings. Sister concerns and corporate guarantors, too, will not be eligible to bid for these companies.