Default tolerance has disappeared

Resolution plans under the Insolvency and Bankruptcy Code (IBC) have yielded 200% of liquidation value for creditors in addition to rescuing viable firms, said Dr M S Sahoo, Chairperson of Insolvency and Bankruptcy Board of India (IBBI).

“They are realizing, on an average, 45% of their claims through resolutions plans under the Corporate Insolvency Resolution Process (CIRP), which takes on average 300 days and entails a cost on average of 0.5%,” said Dr Sahoo.

“This is significantly better as compared to the previous regime which yielded a recovery of 25% for creditors through a process which took about 5 years and entailed a cost of 9%,” Dr Sahoo pointed out.

Speaking at the FICCI-IBBI-CGI-HK Conference on IBC Hong Kong on 26 April 2019, Dr Sahoo said that the repayment of debt is no longer an option, it is an obligation as tolerance for default has disappeared.

“A stakeholder may initiate CIRP of the firm when it fails to service its debt for the first time. If process is initiated, the Code shifts control from the debtor to creditors for resolution of insolvency. Through the process of resolution, the ownership often shifts to third parties. Thus, ownership of firm is no more a divine right and equity is no more the only route to own a company.” Dr Sahoo informed.

Creditors also need to explain to themselves and their stakeholders why they initiated an insolvency proceeding or why they did not, in case of a default, he elaborated.

Consequently, there would never be a high value default if this law exists in the statute book, he added.

Dr Sahoo acknowledged the support of the Judiciary, Government and the Regulators in facilitating implementation of the Code, both in letter and spirit.

He explained that SEBI has exempted acquisitions under resolution plans from making public offers under the Takeover Code. RBI has allowed external commercial borrowing for resolution applicants to repay domestic term loans and the Competition Commission of India has devised a special route for expeditious approvals for combinations envisaged under resolution plans, said Dr Sahoo.

He also highlighted that the Revenue Department has allowed setting off the aggregate amount of the unabsorbed depreciation and loss brought forward against book profits arising from a resolution plan.

The Government has demonstrated the highest commitment to this reform. It subordinated its dues to claims of all stakeholders except equity, he said.

Mrinalini Srivastava, Acting Consul General of India in Hong Kong, apprised the conference participants of the features of the Code and encouraged the investors to partake in opportunities offered by this landmark reform.

SBI MD Anshula Kant added that bankers’ approach to resolution and recovery has been renewed under IBC.

Promoters’ behaviour has also changed, and they are reaching out to bankers to resolve their stressed assets.

In turn, bankers are open to offer flexibility in genuine cases where the entity has been a victim of circumstances and not guilty of gross negligence or mismanagement, assured Kant.

She also explained that banks have also converted debt into equity in businesses facing real problem and lauded IBC for helping it take off stressed assets from SBI’s balance sheet.

“The rapidity of changes in the IBC legislation shows responsiveness of the Government and Regulator,” said Kant.

The insolvency resolution process under the Code is maturing very fast, observed Shardul Shroff, Chairman of FICCI National Committee on Stressed Assets and Executive Chairman, Shardul Amarchand Mangaldas & Co.

“The significant quantum of debt resolved under the resolution process is a testimony of the success of the Code. The investors have tremendous opportunity of investment in the distress assets in India at an attractive valuation.

“However, there are some issues such as distribution of the resolution amount amongst the secured, unsecured and operational creditor which would need to be ultimately resolved by Supreme Court,” Shroff pointed out.

The standout observation has been the behavioural change in both Borrowers and Lenders, noted Sumit Khanna, Partner and Leader, Corporate Finance & Restructuring Services, Deloitte India.

The baseline has changed with the new realization that borrower’s need to repay and that the law is secular and no one is above the law, he added.

“The journey over the last two years has been exhilarating. It has not only tested the mettle but also the character as a firm and as individuals of all who are part of the journey. Clarity of purpose, absolute commitment and a high integrity quotient were our guiding lights in the process”, stressed Khanna.

He said that the road ahead is challenging with some contentious issues that need solution such as group resolution for conglomerate with complex asset holdings.

“Introduction of pre-packed insolvency and mediation will lead to compression of timelines as also costs at the NCLT’s and NCLAT. This would be further augmented basis the positions already settled by the apex court” he said.

The Conference was organised as part of the Roadshow on ‘Insolvency and Bankruptcy Code of India – New Paradigm for Stressed Assets’ in Hong Kong from 24-26 April 2019. fiinews.com