Sluggish bankruptcy resolution takes a heavy toll on creditors

Representative image (Source: ShutterStock)

Essar Power MP Ltd was admitted for resolution under the Insolvency and Bankruptcy Code (IBC) during the COVID-19 pandemic in October 2020.

Financial creditors of the company had admitted claims of over Rs 12,000 crore under the Code. While the resolution in this case was one of the quickest – taking just 13 months for completion – creditors will still lose four-fifth of the value of their claims.

In November 2021, NCLT had approved the resolution plan of Adani Power Ltd for this company.

Essar Power MP was one of the 35 corporate insolvency cases which were resolved in the December quarter of 2021. But the average realisation of creditors from these cases was just about 13 percent of the admitted claims. In other words, creditors lost at least three-fourths of their investments in these stressed companies. The realisation percentage in the last quarter of calendar 2021 has been the lowest yet. Since the IBC’s inception in 2016, realisation has been nearly 33 percent of the admitted claims.

According to the latest data with the Insolvency and Bankruptcy Board of India (IBBI), Kumars Metallurgical Corp. Ltd was another case resolved during the quarter. This one, however, was long drawn out since it was admitted in 2018 and the creditors here were literally able to realise a mere pittance. Admitted claims were over Rs 5,600 crore but only Rs 41 crore was realisable for these creditors after three years.

By the end of December last year, the total number of admitted cases under the IBC had swelled to 4,946, with 195 new insolvency admissions in the quarter.

Liquidation

While IBBI data show that two of three cases admitted over the years have been closed, a majority of the cases closed are in fact of companies that have gone into liquidation. Of  3,247 cases closed, 1,514 ended with orders of liquidation. The IBBI has said that a majority of the companies which were sent for liquidation had already completely eroded their net worth. In the December quarter of 2021 alone, 95 companies were earmarked for liquidation.

Apart from the usual admissions under the IBC, the IBBI has also spoken of the progress in the resolution of the 12 large cases of insolvency that had been initiated by various banks as part of the resolution of non-performing assets. These 12 companies together owed Rs 3.45 lakh crore while their liquidation would have yielded just Rs 73,200 crore.

The IBBI said that resolution plans have now been approved for eight cases. Two others have been sent for liquidation while the resolution process of the remaining two is ongoing.

The Board has neither revealed the actual realisation, nor has it identified the two which are to be liquidated. It has merely said that in each of the eight cases where resolution has been completed, the realisable value for creditors (banks and so on) is more than the liquidation value. The resolved cases are Essar Steel Ltd, Amtek Auto Ltd, Monnet Ispat and Energy Ltd, Alok Industries Ltd, Electrosteel Steels Ltd, Bhushan Power & Steel Ltd. Bhushan Steel Ltd and Jyoti Structures Ltd.

IBBI data also shows that since 2016, 457 cases under the IBC have been resolved, involving Rs 8.3 lakh crore of outstanding amount to creditors. But the resolution process yielded just about Rs 2.6 lakh crore.

Delays in resolution 

“Resolution plans are yielding on an average 84% of the fair value of corporate debtors,” the IBBI has said.

The data also showed massive delays in the resolution process: 73 percent of corporate resolution cases have been ongoing for more than 270 days, far longer than the 180 days provided for in the Code. The investigation and resolution of corporate disputes as well as the detection of fraud is the job of a few designated agencies, including the National Company Law Tribunal (NCLT) and the Serious Frauds Investigation Office (SFIO). These are understaffed and lack required powers; both are administered by the Ministry of Corporate Affairs.

A parliamentary standing committee had pointed out earlier that the NCLT is facing  a severe staff crunch, does not even have a permanent president and at least 20 of the 62 member positions lay vacant.

The situation at the National Company Law Appellate Tribunal (NCLAT), was not much different since only 38 of the 59 sanctioned staff positions had been filled. A counsel at NCLT said that not even one in three cases listed at the NCLT daily are taken up; each case is re-notified multiple times. The SFIO too suffers from severe staff shortage. It also lacks the necessary powers to prosecute large economic offences.