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Inordinate delays in the resolution of companies that come under the Insolvency and Bankruptcy Code (IBC) are leading to value erosion. Nearly every third company admitted under the Code since its inception in 2016 has faced liquidation; latest data show that three in four admitted cases have dragged on for more than 270 days, the deadline by which resolution should be concluded.
In this context, a recent ruling by the Supreme Court, which says that an insolvency resolution plan cannot be withdrawn or modified after it has been approved by a Committee of Creditors (CoC) has proved to be a shot in the arm for creditors of stressed companies.
It will prevent inordinate delays in resolution, help the sale of stressed assets and likely reduce the amount that lenders have to forego.
But other reasons for delays in resolution continue and buyers of these stressed assets consequently also continue to face losses. The value of the stressed asset they come forward to purchase continues to diminish as delays mount; it also diminishes when the lenders and other stakeholders do not help a struggling company continue to do business while being under IBC.
Since inception in 2016, the IBC process has not been able to stick to mandated timelines. As per data from the sector regulator, an average IBC case now takes 460 days or nearly 15 months for resolution. This is an improvement over the average time taken in 2017 at nearly 1,600 days or over four years.
But even this improved resolution pace is a far cry from what the IBC initially envisaged – 180 days – for resolution of stressed companies and later stretched to 270 days, with 330 days being the “outer limit” for completing a resolution.
The SC ruling earlier this month came in a case filed by the buyer of Educomp Solutions Ltd (ESL), which was one of the largest edtech companies in India before it filed for bankruptcy in 2017.
Ebix Singapore Pvt Ltd made an offer to buy ESL for Rs 400 crore in February 2018. But the purchase could not be completed, first because the required majority in CoC failed to approve the plan and later on due to probes by various investigative agencies.
Ebix sought to withdraw the offer in 2019 and filed an appeal with the National Company Law Tribunal. It filed for withdrawal in 2019 because the purchase offer had been made upon the understanding that Ebix will get control of the company before the start of the academic session of the year 2018, but inordinate delays eroded the value of ESL.
The NCLT approved the withdrawal of Ebix from the deal on repeated pleas by it but the National Company Law Appellate Tribunal (NCLAT) then reversed the withdrawal. Now, the SC has also said that withdrawal cannot be allowed.
Meanwhile, the value of ESL eroded by three-fourths; it had 5000 schools as customers in 2018 but now, just 100 “active contracts” remain. Shantanu Prakash, chairman and MD of ESL, told moneycontrol that “the actions of the CoC and the Resolution Professionals (RPs) have completely derailed an otherwise thriving company that merely needed balance sheet correction. It is shocking to see how vested interests within the CoC have compromised the CoC’s remit to preserve and enhance the value of assets which are entrusted in its care”.
Su-kam Power Systems
A person privy to the insolvency proceedings of Su-kam Power Systems, which is also going through insolvency proceedings, pointed out that while this case did not witness delays in resolution, “inertia” of the lenders led to the company’s value erosion.
This person claimed that when the company had filed for resolution under IBC, its monthly turnover was Rs 25 crore but within seven-eight months, the company’s turnover came “close to zero”. This person declined to be identified.
“When Su-kam was admitted into insolvency it was a robust running business with lakhs of customers and hundreds of distributors, suppliers and service providers. The company was up to date on salary payments to its employees and to the statutory authorities. After commencement of the insolvency resolution process, the CoC was not interested in protecting the business of Su-kam as a going concern. Their primary aim was to use the IBC process as a recovery mechanism which led to destruction of the value of the enterprise and contributed to loss of hundreds of jobs and also in the end led to a compromise of their own interests,” Kunwer Sachdev, the CEO and founder, said.
Buyers walk away
There are multiple reasons for delays in resolution of bankrupt companies and one of these is approved buyers having second thoughts after their bids have been voted on by the CoC and accepted.
One banker, who has been a member of several CoCs, had said earlier that as resolution plans get delayed, the stressed company loses customer confidence and this leads to value destruction.
“I agree that in some cases, the buyer may be backing off for genuine reasons and one of these could be that the value of the corporate debtor has eroded because of inordinate delay in the process of approving the resolution plan. But if a buyer is allowed to walk away in one case, then everyone will come back to renegotiate and the sanctity of the entire resolution process will get destroyed”, she said.
In the past, some big IBC cases have been delayed by buyers’ reluctance. The Amtek Auto resolution has been underway since 2017 and reports suggest that after much back-and-forth, the prospective buyer may finally clinch a deal wherein lenders will still have to sacrifice more than 75%, after four years.
In the Bhushan Power & Steel Limited (BSPL) resolution too, delays took place because the buyer, JSW Steel Limited, was apprehensive about its own promoters getting embroiled in investigations by government agencies against promoters of the corporate debtor. BSPL was eventually taken over by JSW Steel this year.
While the SC’s stand on approved insolvency resolution plans being binding is a significant milestone in the five-year journey of IBC, sector regulator Insolvency and Bankruptcy Board of India (IBBI) is also already trying to tie up other loose ends. It has released a discussion paper, for example, to regulate the all-powerful CoCs by devising a code of conduct for the panels.