Less rescue, more liquidation under IBC

The Insolvency and Bankruptcy Code, a new bankruptcy framework that took effect in 2016, has led to more liquidation than rescue of companies.

The process involves company creditors or troubled companies first approaching the National Company Law Tribunal, which then appoints an insolvency resolution professional.

That person then sets up a committee of creditors to decide on the future of the company.

The NCLT did not receive a single resolution plan in 525, or around a third, of the 1,514 cases that were ordered for liquidation, data in the newsletter from the Insolvency and Bankruptcy Board of India, till December 2021 showed. While insolvency professionals and creditors received plans in many of these cases, those never make it to the insolvency court.

Also read: Govt proposes amendments in IBC for efficient resolution of distressed corporates

So, what’s happening?

In many cases, the resolution applicants simply wanted to realise the real estate and other such assets of these companies and were not too keen on reviving them or interested in working with their employees, Delhi-based insolvency professional Anil Goel said.

“That is also one of the considerations creditors have when they reject plans. I saw this happen in the case of LML Limited also. Creditors felt that they would realise more if they pushed the company to liquidation,” Goel told DH.

For instance, LML Limited got four bids but creditors rejected them all, he said.

Another reason for more liquidation than rescue is the disqualification under section 29A of IBC of promoters from taking part in the bid process, according to Bishwajit Dubey, who specialises in insolvency & bankruptcy practice and product liability at law firm Cyril Amarchand Mangaldas.

Promoters are often at the centre of many family-driven businesses and the corporate debtors have to do all the heavy-lifting in their absence. IBC does not allow promoters of such companies to place bids unless they pay all the amount they owe. Some other proposed plans could have been not commercially viable, Dubey added.

Many of the companies would have been defunct, or not involved in any business activities, when they approached the NCLT and hence unable to find a resolution applicant, said Ashish Chhawchharia, Partner & National Leader – Restructuring Services at Grant Thornton Bharat. “There would not have been buyers when they didn’t see a feasible option to revive the company,” he added.

The pre-packed insolvency resolution scheme introduced in 2021 to provide some respite to pandemic-hit micro, small and medium enterprises (MSMEs) could help change things.

“For small and mid-size cases, we expect a lot more resolutions via the pre-packaged insolvency resolution route and the learnings from this can then be applied to larger cases. That will bring down the liquidation numbers and result in the survival of viable businesses,” Chhawchharia said. “As far as cases that have already gone into liquidation without a plan to the NCLT, it is a function of market forces. If there are no viable assets in the business, tangible or intangible, buyers will not bid for such companies, and it is fit for liquidation.”

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