Why do major IBC cases get delayed for years?

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Justice delayed is justice denied, said the British politician William Gladstone. But the significant delays in resolving insolvency cases, which often lead to lower recoveries, can be attributed to differences between lenders and potential buyers on valuation and an inadequate number of judges in bankruptcy courts, experts said on January 11.

For better efficiency, the government should as a first step bring in laws to reduce the timeframe of resolutions at insolvency and bankruptcy courts, they said.

As per official data, it took an average of 560 days to resolve 143 cases in 2021-22, while the average time taken was 468 days to resolve 120 cases in 2020-21.

Long delays in resolution hurt lenders as value gets eroded. In many cases, banks have to take huge haircuts, by as much as 90 percent in many cases.

Apart from differences over value, a big contributor to the delays is the substantial time loss in obtaining formal approval from the National Company Law Tribunal (NCLT) on the plan approved by the committee of creditors, said Ajay Shaw, partner, DSK Legal.

Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, another senior lawyer, added that endless litigations, lack of adequate members at the NCLT benches, issues with the infrastructure and delays and recently, disruptions induced by the pandemic too contributed to the delays.

“Steps are being taken to fill the vacancies at the NCLT benches. However, there is some way to go till the time that the NCLTs across the country start to function at optimal capacity to manage the workload under the code,” Bajaj said referring to the Insolvency and Bankruptcy Code, 2016.

The tribunals are also facing a shortage of support staff like assistant registrars, among others.

Also Read: Reliance Capital Insolvency: Is there a conflict of interest in Hinduja Group’s bid? Here’s what experts say

In the case of debt-ridden Reliance capital too, the case has been pending for over a year. In December 2021, Reliance Capital in a regulatory filing said that the NCLT had admitted its case for the corporate insolvency resolution procedure (CIRP) under the IBC.

In November 2021, the Reserve Bank of India (RBI) referred Reliance Capital for bankruptcy resolution process after it defaulted on bonds worth Rs 24,000 crore. Nageswara Rao Y, former executive director of Bank of Maharashtra, was appointed as the administrator for the process.

But it’s not just the Reliance Capital insolvency that has witnessed delays, as was seen in the instances of DHFL and Srei too, where the process took much longer than anticipated.

Also Read: Reliance Capital: Lenders get to take final call, but maintaining IBC timelines important

This is a common sticking point. The Reliance Capital resolution, for instance, may further get delayed if lenders may not get the valuation they expect, experts said. The lenders to Reliance Capital have approved a second auction in a bid to maximise value of the assets.

“Bids that have been offered are too low, therefore lenders are unable to accept bids leading to delay in the proceedings. Unless the right valuation is arrived at, this may continue,” said Prashanth Shivadass, partner, Shivadass & Shivadass Law Chambers.

“In the Reliance Capital matter, the intent of the lenders is to ensure that value maximisation happens and, therefore, they are ensuring that the bidders up their stake,” said Shaw of DSK Legal.

In December, the UK-based Hinduja Group, Torrent Investments, the Cosmea-Piramal Enterprises consortium and Oaktree Capital submitted their final bids. Since the bids submitted were below liquidation value, the committee of creditors held an e-auction in which bidders were asked to revise bid prices.

In the first round of auction, Torrent emerged as the highest bidder, but the Hinduja Group put in an improved offer after the last date of submitting the bids.

Based on this, Torrent moved the NCLT to stop the second auction arguing that bids submitted after the auction be disallowed.

On the basis of the interim relief granted by the NCLT, Mumbai, to Torrent Investments, the revised offer made by the Hinduja Group was stayed until the next hearing date on January 12.

“The whole dilemma revolving around the case is while dealing with insolvency proceedings, whether one must pay heed to the principle of value maximisation of the assets of the corporate debtor or to operate within the stipulated tenure of the CIRP proceedings,” Bajaj said.

As per PSL Advocates & Solicitors, there are 55 entities in the revised list of prospective resolution applicants for Reliance Capital. Therefore, all 55 of these entities can bid in the second e-auction for Reliance Capital.

Also Read: Torrent Investments challenges lenders' proposal for 2nd auction of Reliance Capital: Report

The acceptance of the Swiss challenge method in the IBC resolutions has helped to discover better pricing than earlier methods.

“It is a price discovery mechanism and under the Swiss challenge method, resolutions are getting better pricing and less haircuts to lenders,” said a senior banker at a private bank.

Under the Swiss challenge process, a bidder makes an unsolicited bid. Once approved, the auctioneer then seeks other bids and chooses the best of the lot.

Bajaj said the Swiss challenge method has helped IBC resolutions as it provides for competitive bidding between resolution applicants which is similar to the auction process under liquidation.

"This in turn ensures value maximisation and maximum recovery for the creditors of the corporate debtor," Bajaj said.