Resolve this: How India's insolvency process drags on, erodes asset value

Litigation tactics of corporate debtors and poor judicial infrastructure among reasons for delay

When firefighters put off a blaze at a plant Hindustan National Glass (HNG) owns in Nashik on the evening of December 29 last year, it was the third such accident at the bankrupt company’s facilities since 2022. There was a fire in Rishra near Kolkata in 2022 and another in Naidupeta, Andhra Pradesh, in mid-2023 as four furnaces of the glass manufacturer and can’t be repaired shut as the insolvency process drags on.

“This plant (in Nashik) will now close down for the foreseeable future. Similar stories of furnaces catching fire are being heard from other factories also. Delay in (insolvency) approvals from judiciary is killing the business and value of the company,” said a source.

AGI Greenpac emerged as the winning bidder for HNG in the corporate insolvency resolution process (CIRP) in July 2022 but then got embroiled in litigation.

Reserve Bank of India governor Shaktikanta Das recently said delays at bankruptcy courts erode the value of stressed assets.

Delay and stall

Das said that the evolving jurisprudence related to the Insolvency and Bankruptcy Code (IBC); litigation tactics adopted by some corporate debtors, lack of coordination among creditors, bottlenecks in the judicial infrastructure are some of the reasons for the delay.

According to data by the Insolvency and Bankruptcy Board of India, 67 per cent of ongoing CIRP cases have already crossed the resolution deadline of 270 days.

HNG is not alone. Jet Airways went into insolvency in June 2019 and found a successful bidder (Jalan-Kalrock consortium) two years later in June 2021. The company is staring at the expiry of its air operator’s certificate and its resolution plan looks uncertain as lenders and the consortium lock horns.

Of 2,249 CIRPs that were ordered for liquidation as of September 2023, as many as 187 had claims of more than Rs 1,000 crore each. These companies had a debt of Rs 8.43 trillion and their assets on ground were valued at Rs 43,000 crore.

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

State Bank of India (SBI) in 2022 sold the Rs 3,815 crore non-performing loan account of KSK Mahanadi Power to an asset reconstruction company after two years of the insolvency process. Experts called it the single-largest distressed loan sale on an upfront payment basis by any bank and it led to significant recoveries for SBI.

Objections by erstwhile promoters of a bankrupt company or its suspended board, competing resolution applicants and numerous dissatisfied creditors delay the resolution process. Experts said that these challenges require a tribunal to expeditiously adjudicate but IBC does not prescribe any timelines.

“Resolution applicants even face operational challenges from regulatory bodies as well as private contractors of the corporate debtor,” said Sukrit Kapoor, partner at King Stubb and Kasiva, a law firm.

For timely resolution

Kapoor recently closed a settlement for a successful resolution applicant of a hydro power plan, which got a National Company Law Tribunal (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 in NCLAT by the said creditor to delay the transfer of machinery and the return on investment through generation of power can be achieved with visible timelines,” said Kapoor.

IBC experts say that often there are clashes between different government departments that lead to delay and there is a need for better coordination between ministries to avoid last-minute claims. For instance, in April 2023, the Income Tax Department filed an appeal against the NCLT approving Suraksha Group's bid to buy Jaypee Infratech, which has been undergoing insolvency proceedings since August 2017, over certain claims. This further delayed the process of implementing the resolution plan.

“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,” said Yash Vardhan, Associate Partner, IndiaLaw LLP.

There is a considerable time between a company defaulting and being declared a non-performing asset (NPA). The onus is also on lenders to commence the IBC proceeding on an appropriate time upon default without waiting for the account to turn into NPA to avoid value erosion, Vardhan said.

“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,” said Sonam Chandwani, managing partner, KS Legal and Associates.

Chandwani cited the example of Amtek Auto Ltd, where extended delays in the resolution process resulted in a marked devaluation of its operational assets, thereby reducing the recoverable amount for creditors. “Similarly, in the matter of Essar Steel, protracted legal battles led to substantial value erosion, reflecting negatively on the efficacy of the IBC in achieving its twin objectives of maximising value and timely resolution,” she said.