IBBI Chief Sahoo hints at development of ‘resolvability index’ for companies

India may in the coming days legally stipulate a minimum threshold of “resolvability” to prevent closure of viable companies and facilitate increased flow of credit to the companies, said insolvency regulator IBBI Chairman MS Sahoo.

Writing in the IBBI’s latest quarterly newsletter for July-September 2020, Sahoo also said that an index should soon be developed to measure the “resolvability” of a company.

Corporate Insolvency Resolution Process ( CIRP) rescues a company through a resolution plan, one often uses the term resolvable in place of ‘rescuable’. The term “resolvability” gained momentum amidst global financial crisis of 2008 in the context of the resolution of large financial firms, who are, in many countries, required to have institutional ability to resolve stress.

Resolvability index

Simply put, “resolvability” reflects the readiness of companies to implement rescue strategies.

Sahoo highlighted that a “resolvable” company would enjoy competitive advantage as compared to other companies in terms of better access to capital, which may even avoid the need for resolution. Every company should vie for higher resolvability index and the market should prefer to deal with a company which has higher index of resolvability, as it addresses “what if” situations, according to Sahoo.

A company should keep itself “resolvable” all the time and having a “living will” on the shelf to guide its resolution should the need arise, he said.

Competitive resolution

Sahoo said that the key purpose of keeping a company resolvable is to increase competition among resolution applicants that increases the likelihood of resolution in case of need. The likelihood is more if the company has value, and such value is free from encumbrances, is visible to a discerning eye, and easily realisable by any resolution applicant. It is less if value resides in informal, off-the record arrangements; personal relationships of promoters; disputed titles, complicated structures, and contingent contracts; or avoidance transactions.

Similarly, an early commencement of CIRP and its quick closure improves the possibility of resolution. If initiation is resisted and/or the process is protracted, for reasons other than merit, the value diminishes making resolution difficult.