67% of ongoing corporate insolvency resolution cases cross 270-day timeline

Although IBC leaves little room for interference, objections by erstwhile promoters or the suspended board of corporate debtor, competing resolution applicants, and dissatisfied creditors are many

Ten minutes before the clock struck eight on the evening of December 29, a fire started at the Nashik factory of container glassmaker Hindusthan National Glass and Industries (HNG). As firefighters tried to douse the flames — fortunately, no one was hurt — murmurs started about the delay in implementing a safety plan.

The murmurs carried pent-up angst. Nashik is not the first HNG factory to suffer a fire incident. In the middle of last year, there was a fire in its plant in Naidupeta, Andhra Pradesh, and before that, in 2022, a similar incident in its facility in Rishra, near Kolkata.

Currently, four furnaces of HNG are shut due to lack of maintenance, as its resolution process drags on under the Insolvency and Bankruptcy Code (IBC). The delay has meant that repairs to HNG’s glass furnaces hang fire. If a furnace leaks, it puts the supporting steel structures at the risk of melting and even collapsing.

HNG is not an isolated example of delay in IBC resolution.

Last week, Reserve Bank of India Governor Shaktikanta Das flagged the issue of delays in resolution of stressed assets through bankruptcy courts and said the delays erode the value of assets.

“As of September 2023, 67 per cent of the ongoing corporate insolvency resolution process (CIRP) cases have already crossed the total timeline of 270 days, including a possible extension period of 90 days,” Das said while speaking at the Conference on Resolution of Stressed Assets and Insolvency and Bankruptcy Code organised by the Centre for Advanced Financial Research and Learning in Mumbai. “More concerning is the fact that the average time taken for admission of a case during FY21 and FY22 stood at 468 days and 650 days, respectively. Such a long degree of delays will substantially erode the value of the assets.”

The timeline for completion of resolution under the IBC, which was established in 2016, is 270 days, and can be extended subject to conditions.

In response to Governor Das’s speech, Anil Agarwal, the Vedanta Group chairman, posted on the social media platform now known as X: “One thing which saddens me is seeing a business in India closed or stuck in the bankruptcy process. Around 12,000 companies are currently in NCLT process. If these companies are revived, it will add at least $1 trillion to GDP.”

Business Standard could not obtain a comment from the Insolvency and Bankruptcy Board of India on the IBC delays and their impact.

 

Firefighting

In July 2022, AGI Greenpac emerged as the winning bidder for HNG, but the matter has been embroiled in litigation, the latest being the one over the approval of its plan by the Competition Commission of India by a rival bidder.

Litigation is one of the many factors. The evolving jurisprudence related to the IBC is another. Others — as the RBI governor pointed out — include lack of effective coordination among the creditors and bottlenecks in the judicial infrastructure.

Experts also point to the instance of Jet Airways, which went into insolvency in June 2019 and, in June 2021, found the winning bidder in the Jalan-Kalrock consortium. The airline is staring at the expiry of its Air Operator’s Certificate while the future of the winning resolution plan looks uncertain with the lenders and the consortium at loggerheads.

Of 2,249 CIRPs that ended up with orders of liquidation, 187 had claims of more than Rs 1,000 crore. These companies had debt of Rs 8.43 trillion, of which assets on the ground were valued only at Rs 0.43 trillion.

“These delays are eroding value either for the company or the lenders. In many cases, the lenders are taking a huge haircut and selling their loans. We can have aspirations to clear a record number of cases, but we are yet to see action on the ground,” says Anshul Jain, partner, PwC.

In 2022, State Bank of India (SBI), after going through the IBC process for two years in the case of KSK Mahanadi Power, sold its debt of Rs 3,815 crore outstanding loans to an asset reconstruction company. Experts called it the single-largest distressed loan sale on an upfront payment basis by any bank, which led to significant recoveries for SBI.

Navigating challenges

Although the IBC leaves little room for interference with the corporate insolvency resolution process, objections by erstwhile promoters or the suspended board of the corporate debtor, competing resolution applicants, and dissatisfied creditors are many, and are the primary reason for delays in resolution.

Experts say navigating through these challenges requires a tribunal to adjudicate expeditiously, but the bankruptcy code does not prescribe a timeline for the tribunals to adjudicate these objections.

“The resolution applicants even face operational challenges from regulatory bodies as well as private contractors of the corporate debtor,” Sukrit Kapoor, partner, King Stubb & Kasiva law firm.

Kapoor recently closed a successful settlement for a hydro power plant, which got a National Company Law Tribunal’s (NCLT) order against an operational creditor for releasing machinery. “Despite the directions against the operational creditor, the successful resolution applicant resolved the issue through a settlement to ensure there are no further challenges to delay the transfer of machinery and the return on investment through generation of power can be achieved with visible timelines,” he says.

IBC experts also say there can be clashes between departments. For instance, in April 2023, the Income Tax Department filed an appeal against the NCLT for approving Suraksha Group’s bid to buy Jaypee Infratech Ltd, which has been undergoing insolvency proceedings since August 2017, over certain claims.

“The Act provides a time period for admission of IBC applications. The Supreme Court made this time period not mandatory. Currently, there is considerable delay in admission, which leads to further erosion of value,” says Yash Vardhan, associate partner, IndiaLaw LLP.

Vardhan says the onus is also on the lenders to commence the IBC proceeding upon default without waiting for the account to turn into a non-performing asset.

“It is imperative to address systemic inefficiencies and foster an environment conducive to swift and equitable resolutions, thereby safeguarding the interests of all stakeholders involved in the insolvency process,” says Sonam Chandwani, managing partner, KS Legal and Associates.

Chandwani cites the instance of Amtek Auto, where delays in the resolution process resulted in a marked devaluation of its operational assets, reducing the recoverable amount for creditors.

“Similarly, in the matter of Essar Steel, protracted legal battles led to substantial value erosion,” she adds.