Why are liquidation cases under IBC rising? Haircut becomes new fear for creditors | Interview

Most of the corporate debtors under CIRP are those where there are no assets or lucrative business for which a Resolution Applicant can bid for.

The Insolvency and Bankruptcy Code 2016 has been a landmark law that has contributed to ensuring the ease of doing business in India. However, the cases of liquidation are rising faster than those which are resolved. “The main reason for same is that most of the corporate debtors under CIRP are those where there are no assets or lucrative business for which a Resolution Applicant can bid for,” Manoj K Singh, Founding Partner, Singh & Associates, told Samrat Sharma of Financial EXpress Online, in an interview. He added that not every financial institution or operational creditor is using I&B Code as a corporate debtor may go into CIRP proceedings and there are chances that they receive a haircut to the tune of 90 per cent.

Here are excerpts of the interview:

1) Has IBC been successful in reducing the stressed assets of the country?

 If we look on subjective terms, we can say yes, I&B code has helped in reducing stressed assets on paper as of now. Instead of waiting until the end, the financial institutions or operational creditors have the mechanism to use I&B Code 2016 as a tool to raise the alarm early and with a time-bound procedure.

However, practically barring a few successful resolutions or settlements, there is no reduction in stressed assets. As not every financial institution or operational creditor is using I&B Code as they are aware that if a corporate debtor undergoes CIRP proceedings, there is a negligible chance for the creditor to receive the debt without a haircut. In fact, in the worst case, the financial institution might have to agree for a haircut to the tune of 90 per cent or they might not receive anything at all. 

2) Why is the number of cases of liquidation under IBC on the rise?

The main reason for the same is that most of the corporate debtors which are under CIRP are those where there are no assets or lucrative business for which a resolution applicant can bid for. For example: With respect to a corporate debtor who is in the real estate sector, any resolution applicant will only proceed with submitting its resolution plan if there is any unsold inventory or still there is receivable from customers. If there is no unsold inventory, receivable, or any land bank, nobody would like to proceed with taking over such assets which will not give any return. 

The second reason can be that the resolution plans received by COC (who have been given the driver seat for resolution having commercial wisdom to decide) are not found by them as commercially viable or the haircut proposed or mode of commissioning of the resolution plan are not acceptable to them. Especially in the case of a secured creditor, who will not like to part with smaller pie from the cake if it has the secured asset in its kitty.

Thirdly, due to the sluggish economy, even the prospective resolution applicants (other than Asset Restructuring Companies) would first like to secure themselves before they bid for others.   

3) What are your recommendations to improve the IBC proceedings?

While the intentions of IBC regarding timely resolutions and value maximization of the assets are bona fide, it does not have a solid ecosystem to ensure an effective manifestation of this intention. For example, even though the number of benches of Adjudicating Authority (i.e. NCLT) has been increased but it still less looking at the quantum of cases. Further, the timelines provided under the Code are breached almost in all cases on one pretext or another. Sometimes, the same is due to the pending applications before NCLT.