Need objective framework for assessment of recovery process: IBBI Chief

IBBI chief MS Sahoo | PC-PTI

Insolvency Bankruptcy Board of India’s Chairperson, MS Sahoo has called for an objective framework for assessment of the recovery process of stressed assets.

Many stakeholders have a view based on their own perceptions based on expectations, transactions, etc. depending on exposure and ideological inclination and tend to present views as assessment, said Sahoo on September 2 at the CII Conference on Insolvency and Bankruptcy Code, 2016 “5 Years of Bankruptcy Code and Beyond”.

He added, most assessments of the recovery process today don’t present a complete picture. Insolvency reforms have recast the rules of the game in the interest of the economy.

Sahoo said it is unlikely the losers or gainers blinded by self-interest will make an objective assessment of the outcome. A beneficiary of old order may cry foul of insolvency reform and liquidation of the company, realising precious little for the creditor as against the claims of thousand crore rupees. These companies had absolutely no assets when they entered the insolvency proceedings, he added.

Interested parties reflecting their assessment may represent a distorted image of the process, said Sahoo. We need a framework based on comprehensive and objective assessment and it is extremely important to stay on course, assess performance, identify what continues positively or what is adverse to the outcome and make prompt course corrections, he added.

He explained that the outcome is better when the stakeholders start resolution in the early days of the stress and close it expeditiously. The assessment would indicate if the outcome is good or is it because stakeholders didn’t initiate the process early.

If stakeholders didn’t initiate the recovery process, was it due to a lack of incentive to do so, this will trigger a search for measures to improve the process and consequently the outcome. If we do not have a scientific framework for assessment, the market uses any parameter that is conveniently available, Sahoo added.

According to Sahoo, a systematic assessment would indicate the process design, conduct and capability of the Committee of Creditors (CoC) and insolvency professionals, quality disposals by the NCLT, regulations by IBBI will impact the outcome and what can be done to improve.

He draws parallel of the scientific functioning of the stock market and index, as the index does not reflect the quality of the stock market. Similarly, he said, “Realisation of 0 percent or 100 percent of creditors in the resolution process does not anywhere reflect the working of the code but it used as a default option and we have to move away.”

He adds, it is necessary to have tailor-made objective framework for assessment of the working of the code and move out of the subjective assessment.

IBC provides for reorganisation that prevents the value of value reducing run on the company, it provides reorganization in two ways. First, by rescue through resolution plan and second, by liquidation.

Resolution doesn’t mean rescue of the company, if it is rescueable it should be rescued. The code enables the market to make the choice, market usually choose to resuce a company if the business is viable and close if it is unviable and makes it a positive sum game in both ways, he added.

He stressed upon that the sole objective of the code is reorganisation which has several benefits but reorganisation is the primary objective. The code is not the panaceas of all ill which it never intended and the assessment should focus on the objective of the code.

Sahoo said about 1800 cases of CIRP (Corporate Insolvency Resolution Process) have ended up reaching finish line which is either resolution or liquidation. About three-fourth companies proceeding for liquidation were defunct to start with and of the companies rescued one-third were defunct, meaning two-third companies were defunct when they entered the IBC process, he added.

He said, liquidation per se is not bad particularly in case of unviable businesses. “The resources in the failed firms are released for more efficient uses in the economy and that is the objective of the code and that is the resolution.”

Removing assets from the ‘chakravyuh’ for productive uses serves the purpose of the code, Sahoo added.