Beginning December 2016 till March 2022, 47 percent of corporate insolvency processes went into liquidation, compared with 14 percent that ended in a resolution plan, according to the data. To quantify, out of a total of 5,258 corporate insolvency proceedings initiated under the code till March, only 3,406 have been closed. Among those closed, as many as 1,609 proceedings have ordered liquidation, while 480 have ended in approval of resolution plans.
The economic value of most of the companies that were liquidated had “almost completely eroded” even before they were admitted in the insolvency process, the IBBI report said. Their assets were valued at less than 8 percent of the outstanding debt amount.
Indian lenders are left with no choice but to go for liquidation of stressed assets under the Insolvency and Bankruptcy Code (IBC) due to a mismatch between the quoted value of the asset and the bid price, a majority of bankers and experts Moneycontrol spoke to, said.
“Most of the time, lenders do not reduce the value of the stressed asset while calling for bids, and bidders on the other hand are not enthused by the high valuations,” said Varun Khandelwal, Director and Fund Manager at Bullero Capital.
“In some cases, where the asset has been good, say, for example Bhushan Steel, the resolution was fruitful and the haircut was relatively low. But in cases where assets have not been very useful and/or have been depreciated, the mismatch is large and liquidation seems to be the only option.”
Liquidation under IBC
When a company becomes insolvent or commits a default, its financial creditors, mostly banks, can file an application to initiate an insolvency process by applying to the National Company Law Tribunal (NCLT). The first step is to make efforts to revive and restart the company by preparing a resolution plan and calling for bids, in accordance with the Committee of Creditors (CoC). If that does not work, the next process is liquidation.
In most IBC cases, it is observed that lenders have had to take deep haircuts on their exposure to the stressed asset when the company goes for liquidation. Haircut, in banking parlance, refers to the monetary sacrifice banks need to make on their original loan exposure during the resolution process of a stressed borrower.
Among the large cases admitted under IBC, are Essar Steel, Jet Airways, Dewan Housing Finance, and have been resolved with a certain portion as haircut. In the case of Jet Airways, for instance, banks had to take a haircut of around 95 percent of their exposure.
“Lenders typically, take a call about resolution of a stressed asset or taking it in liquidation on the basis of the recovery they could make in either of the two instances. If the lenders do not feel they are getting the value under resolution of a stressed asset, they don’t mind taking the stressed asset into liquidation,” said Nirav Shah, Partner at DSK Legal, a law firm.
Lack of bidding appetite
Bankers said one of the reasons why financial creditors have to give in to liquidation is because of a tepid bidding appetite following the COVID-19 pandemic. Bidders’ buying capacity was impacted due to the pandemic and the bid amount is more often than not far less than expectations or is equal to the liquidation value of the asset.
“In some cases, it so happens that there is a huge discrepancy in what the bidder has bid and what the CoC expects,” said the head of the stressed assets vertical at a state-run bank, requesting anonymity.
“When there is a mismatch, (and the) value of the asset is deteriorating, we are left with no option but to go for liquidation or accept the bid that is very close to the liquidation value. There is no point in going back and forth and call for fresh bids.”
The banker was referring to Vedanta’s Twin Star Technologies’ bid for Videocon Group companies. Some dissenting creditors in the CoC had alleged that the bid amount was very close to the liquidation value of the company and involved a 95 percent write-off on the bad loan. The NCLAT had ordered fresh bids for the group.
“COVID-19 resulted in the suspension of IBC and easy liquidity and restructuring norms for firms. To an extent, it helped stressed firms weather the storm and good firms focus on reduction of debt as against capex or acquisitions,” said Sagar Manju, Partner, Saraf and Partners.
“However, as and when the suspension ended, the stressed firms failed to recover, and value continued to deteriorate due to uncertainty surrounding economic recovery. Just when COVID-19 was beyond us, the twin problems of inflation and Ukraine war have resulted in distressed buyers taking a pause,” Manju added.
Delays in legal process
Experts said that another reason why banks are forced to opt for liquidation is the long-drawn legal process. Strict timelines prescribed under the IBC, multiplicity of cases and lesser number of tribunals have increased the backlog of cases, which is why lenders prefer to take the liquidation route.
“There may be instances where the lenders could take an additional haircut in case of liquidation, but that typically happens in situations that are beyond the lenders’ control. No lender would prefer to take a larger haircut,” said DSK Legal’s Shah.
Sometimes there are limited options available to the lender, in which case they typically tend to go with the option that creates value maximisation for them, he added.
What next?
According to experts, thanks to a lack of good-value assets, rising inflation and uncertainty over the Russia-Ukraine war affecting the recovery of the economy, the distressed market is likely to stay subdued. However, timely recognition of stressed assets and improving the efficiency of the judicial system may reduce instances where liquidation is the only resort.
“First, the stressed assets should be brought into the bankruptcy process at a very early stage. The longer the stress, the higher the deterioration in value. Good and well-functioning assets result in higher recovery and faster resolution,” said Saraf and Partners’ Manju.
The focus should also be on improving the capacity and efficiency of the tribunals in disposing of objections and plan approval applications, Manju added.
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