Insolvency code missing deadlines of recoveries 2 yrs after ambitious start

According to IBBI data, of the 816 ongoing CIRPs, more than 29% of the cases have breached the extended 270-day deadline within which resolutions were to be completed, and 19% have crossed 180 days

Time-bound resolution, a cornerstone of the Insolvency and Bankruptcy Code (IBC), is under question. If value maximisation is one of the pillars of the IBC, achieving it in a time-bound manner is the other. 

In terms of recovery, till September, financial creditors have realised around Rs 584 billion against admitted claims of Rs 1,265 billion. Compared to a pre-IBC regime, at an average recovery rate of 26 per cent, the figure would perhaps look favourable. But, the code is slipping on timelines, and this is a loss to financial creditors.

According to the Insolvency and Bankruptcy Board of India (IBBI) data, of the 816 ongoing corporate insolvency resolution processes (CIRPs), more than 29 per cent of the cases have breached the extended 270-day deadline within which resolutions were to be completed, and 19 per cent have crossed 180 days.

The picture for the large accounts mandated by the Reserve Bank of India (RBI) is especially grim. Resolution of 12 large accounts were initiated by the banks at the behest of the RBI. Together, they had an outstanding claim of Rs3.45 trillion against a liquidation value of Rs732 billion.

An ICRA report shows that from the RBI’s first list, apart from Era Infra Engineering and the cases that have been resolved, all other cases are yet to be resolved even after 450 days.

So far, there have been three resolutions from RBI’s first list: Bhushan Steel, Electrosteel Steels and Monnet Ispat & Energy.

The resolution plan for Amtek Auto, approved by the NCLT, has, however, run into controversy, with the resolution applicant failing to comply with the plan. 
 

Even for the resolutions, the timelines have ranged between 270 days and 371 days. Thereafter, for the other cases, it has gone haywire.

Underlying reasons

The ICRA report cites litigations emerging out of new areas, such as factoring in late bids by resolution applicants and interpretation of Section 29A on eligibility of applicants, as the main reasons for delay. Late bids are considered within the ambit of the process discourse.
 

“This is a new law and judgments are taking time. Once the judgments are pronounced in the big cases, it will set a precedent for other cases. That said, there is limited conclusion among the large accounts mandated by the RBI in June 2017 with unresolved cases having crossed 450 days. A reasonable timeline is important for the creditor,” said Abhishek Dafria, vice-president, ICRA.

 

According to ICRA’s analysis, lenders for the RBI’s first list are estimated to have lost about Rs40 billion in additional income due to delays in the resolution process beyond the 270-day period.

Vikram Babbar, partner and FS lead, Forensic & Integrity Services, EY, pointed out that nearly 70 per cent cases accepted by the NCLT were still in progress. In many cases, our experience around supporting resolution professionals in conducting forensic audits indicates considerable delays in decision on the use of forensic auditors,” he said.

Some of the reasons for the delay seem to be lack of understanding of the considerations/basis to involve specialists, difference in opinion with the committee of creditors, lack of co-operation from corporate debtor and time elapsed since NPA. 

Typical forensic audit requires around 5-6 weeks to identify preferential and potential fraudulent transactions. There is a growing need for insolvency professionals to carry out the core responsibilities in a time-bound manner and also with a view to ensuring that the outcome is effective,” Babbar added.

The fallout

As the timeline is getting stretched, the interest level of bidders is taking a hit. The stretched timeline has caused interest to wane among resolution applicants, said Saurav Kumar, Partner, IndusLaw. “We are seeing a lesser number of resolution applicants for an asset. Only the big and capable, who can put up a fight, are staying,” he said.

“There is diminishing interest among resolution applicants with the uncertainty,” said Dhaval Vussonji of Dhaval Vussonji & Associates. “People are hesitating to bid aggressively in the first round since the resolution is taking long,” he added. 

Kumar also added that there were instances where resolution applicants had expressed a desire to walk out of the deal as the hearing after approval of the resolution plan has taken more than the specified timeframe.

However, Kumar Saurabh Singh, partner, Khaitan & Co, argued that litigation, per se, may not have impacted the number of bidders participating in a resolution process. It is more a factor of the quality of an asset, he said.

“In India, we have a nine-month timeline for resolution of distressed assets, but in the US and the UK, there are no timelines,” added Singh.
 

The Binani order, which has prioritised value maximisation over process, is expected to complicate matters further. The resolutions from the RBI’s first list of non-performing assets had, however, stuck to the process. 

“The success of the IBC framework is dependent on achieving value maximisation within the defined timeline and prescribed process. Seeking to achieve value maximisation over an indefinite timeframe could be counter productive in achieving resolutions for the large majority of cases,” said Dhaivat Anjaria, a distressed assets specialist who led the resolution for one of the large cases.

“Many successful resolutions have shown that it is possible to balance the objective of achieving value maximisation with that of completing resolution under the defined timelines and processes,” Anjaria pointed out.