The Insolvency and Bankruptcy Code (IBC) was enacted to speed up debt settlement and increase the rate of recovery. Following some early triumphs, particularly in the resolution of a number of high-profile steel companies, the impetus has dissipated, and recovery rates have fallen as debtors have begun to game the system. “Low recovery rates with haircuts as high as 95% and the delay in resolution process with more than 71% cases pending for more than 180 days clearly point towards a deviation from the original objectives of the Code,” according to the Parliamentary Standing Committee that recently looked into the issue.
The recovery rates under SARFAESI and IBC in 2019-20, according to the Reserve Bank of India, were 26.7 percent and 45.5 percent, respectively. If the top nine accounts are omitted, however, IBC recovery drops to 24%, according to a Macquarie Research research. Recovery rates were as low as 10% in some situations, such as Videocon and Ushdev International. Even if we assume that the slowdown has reduced recovery rates, it is absurd to believe that the recovery value will fall below the liquidation value.
The Ministry of Corporate Affairs claims that “resolution value is nearly 188 percent of the liquidation value” (House panel report), but this is based on an average of only about 4,500 cases cleared for insolvency resolution so far (out of 32,547 IBC cases submitted to NCLT since 2016) and conceals wide variations.
The National Company Law Tribunal's (NCLT) decision in the instance of Siva Industries last week highlights the IBC's grey areas. After the Committee of Creditors appeared to have approved a debt settlement plan offered by a shareholder, the NCLT bench in Chennai overturned it. An existing promoter can regain control of the company under Section 12A of the IBC if 90% of the creditors agree to the debt resolution plan he submits.
In this matter, the NCLT has expressed reservations about whether the CoC has given its consent, citing the lack of written proof. The case raises the question of whether Section 12A should be revisited. There are concerns that parts of the CoC, the resolution professional, and the debtor might cooperate, resulting in a significant haircut for lenders. The House Panel is correct in emphasising the importance of a code of conduct for the CoC and the RP.
About 8% of the almost 4,500 cases undergoing insolvency resolution have been settled, 30% have gone into liquidation, and 40% are still waiting. When it comes to speed and valuation problems, it's important to distinguish between deliberate defaulters and genuine promoters. Particularly during pandemics, the interests of MSME creditors and debtors should be considered. A ‘Pre-packaged' resolution may help the latter, while a tiny percentage of the resolution sum could be set aside for the former. The promise of the IBC as a law that transforms India's debt behaviour should not be squandered.
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