Around 19,000 insolvency cases closed, liquidation remains minimal: IBBI chief Sahoo
Amid growing criticism that the Insolvency and Bankruptcy Code (IBC) has resulted in more liquidations than resolutions, MS Sahoo, chairman of the insolvency regulator IBBI, points out that until 19,000 files were closed before or after admission; thus, if we consider the whole universe of companies touching the CBI, the percentage of those in the process of liquidation is negligible. In an interview with FE’s Banikinkar Pattanayak, he also refutes the allegation of massive haircuts for lenders due to IBC. On average, the value of assets of companies that attended a resolution until March 2021 was only 22% of their owed to creditors when they entered the IBC, he says. This means that while creditors envisioned a 78% haircut to begin with, the IBC not only saved those companies, but also reduced the haircut to 61% for financial creditors, he explains.
Five years after the creation of the IBC, up to 1,277 cases have been put into liquidation while only 348 cases have been resolved (until March 2021). Has the IBC turned out to be an instrument of liquidation rather than resolution?
You only watch the end of the game, where you see around 1,600 cases reaching the finish line. However, 19,000 cases were closed, before or after admission, but before reaching the finish line. If we consider the entire universe of companies affected by CBI, the percentage of companies in liquidation is negligible.
Even at the end of the game, what matters is the value of the stressed assets saved. In value, companies representing 70% of stressed assets were rescued, while those representing 30% of stressed assets were liquidated.
In addition, among the companies in liquidation, three quarters have disappeared, and among the rescued companies, one third have disappeared. This means that among the companies that touched the finish line, two-thirds were initially missing. The companies in liquidation had assets valued, on average, at around 6% of the claims against them, when they entered the IBC. If a business has been sick for years and assets have depleted significantly, the market is likely to liquidate it.
The Code provides for reorganization in two ways, first by a resolution plan, failing which, by liquidation. It is the market that makes the choice, and the law is only a facilitator. The market frees up resources by liquidation for other uses. Liquidation is not an end, but rather a way to efficiently recycle resources.
How do you respond to criticism that the IBC has turned out to be a haircutting tool?
It goes without saying that a company coming to the IBC does not have sufficient assets to repay all of its creditors. The companies, which were rescued via the IBC until March 2021, had assets valued, on average, at 22% of the amount owed to creditors when they entered the IBC. This means that creditors were considering a 78% haircut to begin with. The IBC not only saved these companies, but also reduced the haircut to 61% for financial creditors.
Why does IBC give zero haircuts in one case and 100% in another? It depends on several factors including the nature of business, economic cycles, market sentiment, and marketing efforts. However, this critically depends on the stage of stress at which the company enters IBC, as much as on the stage at which a patient arrives at the hospital.
The haircut is generally the amount of the realization compared to the amount of the claim. The amount of realization often does not include the amount that would be realized from the holding of shares after resolution, and through the cancellation of cancellation transactions and the resolution of the insolvency of the guarantors. The amount of the claim often includes the NPA (non-performing asset), which can be written off completely, and the interest on that NPA. It can include loans as well as collateral for these loans. These project a higher haircut than it actually is.
It may be appropriate to see a discount to the assets available in the field and not to the claims of creditors. Because the market offers value for what a business brings to the table, not what it owes to creditors. The IBC maximizes the value of assets at the start of the process, not assets that probably existed before. Since it buys back part of the going concern surplus, the bailout realizes on average 190% of the net asset value of existing assets, generating 90% bonus, instead of haircut. In addition to the rescue of the company, the IBC achieves, among the options available to creditors, the highest in terms of percentage.
Has there been an upsurge in insolvency cases after the moratorium was lifted on March 25? How many files have been submitted since?
Since the expiry of the suspension of filing, requests for the opening of insolvency proceedings have been filed by around 250 companies. It is on the expected lines and has been the international experience. The higher default threshold of ₹ 1 crore, coupled with support and abstentions, limited the flow of applicants. Most importantly, stakeholders like to use the Code when the likelihood of resolution is high. They can wait for the opportune moment to invoke the Code.
How do you see the response to the MSME pre-pack program so far?
It takes three to six months for the market to understand a new framework, compare it with other available options, and prepare to use it. Prepack requires a prior agreement between the debtor and the creditors before initiating the formal process. It foresees 90 days of informal preparatory work before the start of the formal part. It is therefore too early to see the answer.
Will there also be a pre-pack program for large companies in the future?
An economic law is essentially empirical, and it evolves continuously through experimentation. The IBC is no exception; it’s a road under construction for good reason. He planned to start with standard and simple processes, but provided for quick course corrections to continue to serve the business and the economy. Therefore, I am not ruling out any possibility, but it is too early to think about it before seeing how it goes for MSMEs.
Few cases in recent months have tested the spirit of the CIB. For example, in the case of Siva Industries Holding, the lenders agreed to a one-time settlement by its former promoter, who had offered only 6.5% of the total debt, and filed a withdrawal request with the NCLT. Has this raised suspicion that the provision allowing withdrawal from insolvency proceedings may be abused and potentially facilitate backdoor entry for ineligible promoters? Should this provision be revised?
There is no ban on promoters from keeping their business through a competitive resolution plan. The ban is aimed at a person, promoter or not, who does not have a credible background. Anyone related or linked to a prohibited person is also prohibited. He is also forbidden to buy goods in liquidation or to participate in the compromise or the arrangement of the company. What is of concern, therefore, is that an ineligible person takes control of a business through a resolution plan.
The Apex Court, in the Arun Kumar Jagatramka case, recently observed that withdrawal under Section 12A leads to a status quo ante with regard to the responsibilities of the company. It is in the nature of a regulation, which differs from a resolution plan, which is binding on everyone.
The case concerning Siva Industries is pending. I don’t have all the facts about it. It may not be appropriate to comment on this.
To file a pre-pack insolvency claim, an MSME debtor will need to obtain the approval of independent financial creditors with at least 66% of the voting rights. But if the idea is to hold debtors accountable so that they can trigger their own insolvency, why insist on two-thirds approval of financial creditors? Will it give faster resolution?
The basic idea is to provide a platform that allows the debtor and creditors to work out a consensus resolution, within the basic structure of the Code. It is the empowerment in terms of continued ownership of the business during resolution, and the ability to set the tone for the resolution through a base resolution plan, and compete with alternative resolution plans. . In addition, it is only fair that creditors are taken into account, as they would waive their rights to initiate normal insolvency proceedings. If 66% of independent creditors disagree, the process could be an empty formality or take much longer to reach consensus.
Last week, the IBBI stipulated that resolution professionals should probe transactions made by promoters for potential embezzlement. If the idea sounds well-intentioned, is it possible to effectively enforce the regulation? Some analysts said it would make the lives of resolution professionals, who as such overwhelmed by the affairs of troubled companies, and many of whom are not always trained to assess such transactions, much more difficult. Your view.
I firmly believe that Insolvency Professionals (IP) are not ordinary professionals. At first, there was some skepticism about the ability of IPs to conduct a resolution process, as they had no experience. They surprised the skeptics by not only seeing that they had carried out the processes well, but also made good profits in some cases during the resolution period. They have, in many cases, unearthed reversals and filed requests for appropriate instructions. In addition, the law appropriately empowers them for the tasks. They can hire any professional to help them in the performance of their duties. IBBI and APIs hold workshops to build their capacity in various areas, including avoidance transactions. Best practices in this area are evolving. The Supreme Court has defined the role of an IP with respect to such transactions.
Let me clarify that this is not a new obligation. The Code provides for this for good reasons; IBBI only facilitates. Recovering the value lost in avoidance transactions increases the likelihood of stress resolution through a resolution plan and discourages potential wrongdoers from engaging in such transactions, thereby preventing stress.