IBC: Avoid intricacies, raise awareness to check liquidations

The Centre must brace for a surge in fresh corporate bankruptcy filings after the ongoing pandemic-induced freeze lifts by the end of the financial year. The Insolvency and Bankruptcy Code (IBC) was suspended for six months from March last before being extended to December and subsequently for the full financial year.

Latest Insolvency and Bankruptcy Board of India (IBBI) statistics reveal that at least 73.8 per cent of the Corporate Insolvency Resolution Processes (CIRP) initiated till date has ended up in liquidation. This is attributed to avoidable legal complexities and a lack of matching stakeholder ecosystem and awareness.

Bijoy Pulipra, Company Secretary and Insolvency Professional, told BusinessLine here that it is high time industry chambers and associations launched a nationwide campaign to create mass awareness on IBC since basic minimum knowledge has not filtered into even the intermediate judiciary level and the larger bureaucracy.

Ignorant commissioners, collectors

“Police commissioners and district collectors aren’t aware that an insolvency professional (IP) acting as a Resolution Professional (RP) or a liquidator is vested with an array of statutory and legal duties. The RP manages operations of the company as a going concern and protects the value of its property,” said Pulipra.

Analysing the IBC universe, he said that the judicial mechanism has not evolved fully to catch up with the fast evolution of the parent law. This affects not just companies involved but also claimants, which include individuals too. Promoters need to know that they stand to benefit by saving precious time otherwise lost.

“They are there because of failure to resolve the debt. If they at least cooperate, they can come out with clean hands. If lucky enough, they might go on to generate additional money from the proceedings. But most are not aware of this and tend to see an RP as an intruder in their own private space. This must change.”

Operational creditors in lurch

Balancing the interest of stakeholders, including the alteration in the order of priority in payment of government dues, is one of the professed aims of the IBC. Stakeholders include all creditors – financial (banks); operational; government or employees. An RP has to see that a balance is properly established.

Another anomaly with the system is that the Committee of Creditors (CoC) is open only to financial creditors (banks). This leaves operational creditors (suppliers and service providers) in the lurch, especially after the courts have ruled that there is an intelligible differentia between the two.

Banks have given out their money to the corporate and have security over the assets. Operational creditors do not have this advantage and are therefore not allowed to enter the CoC. But the hard reality is entirely different, says Pulipra. A receivable of even ₹20 lakh, for instance, can make or mar an operational creditor.

Tweak ‘waterfall’ mechanism

The ‘waterfall’ mechanism for distribution of the amount should be tweaked to allow operational creditors a say in the matter as also alter priority in favour of government dues (now fourth in the order). Similarly, Pulipra roots for automation of claim submission and verification process into a simple web form for the benefit of the common man.

“Complexity adds to failures and is one reason why most CIRP cases slip into liquidation or elicit fewer than required resolution plans. There are also cases where only one plan is generated which puts the RP in a quandary, even with a moral hazard. Ideally, a normal OTP-based process on a simple government portal displaying eligibility criteria and IBBI matrices should seek bids for a minimum amount.”

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