IBC check: In 3 years, just 6 per cent of 3,312 cases have seen resolution

The latest data put out by the Insolvency and Bankruptcy Board of India (IBBI), for the October-December 2019 quarter, continues to highlight the slow progress of resolution under the Insolvency and Bankruptcy Code (IBC).

Of the 3,312 cases admitted till date, 246 have been closed on appeal/review, while only 190 have seen the approval of a resolution plan. The pace of resolution has been very slow in certain sectors, which is also a concern. Barring the basic metals and chemicals sectors, where a little over 10 per cent of the cases admitted so far have been resolved, the traction in the other sectors has been very weak.

The sectoral distribution of corporate debtors suggests a marked skewness with respect to the cases that have been resolved so far. Of the 190 cases resolved, half pertain to the manufacturing sector, of which 26 cases alone are from the basic metals space. While sectors such as textile, construction and wholesale and retail trade have also seen a large number of cases being admitted (equal to or more than in the metals space), the proportion of cases resolved is less than 5 per cent of the cases admitted.

Undue delays

Under the Code, the stipulated time for resolution of cases was initially set at 180 days (with 90 days extension). However, the extended 270-day deadline did not include the time taken in interim litigations, causing undue delays in the IBC process.

In the amendment to the Code last August, the resolution time was capped at 330 days. Importantly, this deadline was to include the time taken in interim legal proceedings, leading to more timely resolution. But so far, the track record of cases under resolution has been poor.

Also, in its landmark judgment in the Essar Steel case (that dragged on for nearly two-and-a-half years), the Supreme Court had struck down the word ‘mandatorily’ in the 330-day timeline laid down in the August amendment. This could be a step back in ensuring time-bound resolution.

A large number of cases undergoing resolution currently have been in the IBC process for over 180 days. Of the 1961 cases undergoing resolution as of December 2019, 635 have been in the system for over 270 days, and 247 cases, for 180-270 days.

Long delays in the resolution process lead to erosion in the value of the underlying assets.

The bigger worry is the substantial number of cases being pushed into liquidation. A company goes into liquidation if resolution fails. Of the 3,312 cases, liquidation has been ordered in 780. There are also undue delays in the liquidation process. Of the 780 cases where liquidation has been ordered, only 40 have been closed by dissolution. Nearly half of the liquidation cases have been awaiting closure for over 270 days.

As of December 2019, 22 liquidation cases have been in the system for over two years.

Poor recoveries

One of the other key concerns has been the poor rate of recovery under IBC in most of the cases.

Data compiled for cases where resolution plan has been approved from the October-Dec 2017 to October-Dec 2019 quarter reveal that the overall recovery rate so far works out to a dismal 35 per cent. If we exclude big cases such as Electrosteel Steels, Bhushan Steel, Binani Cements and Bhushan Power & Steel, the recovery rate falls further to 20-25 per cent.

In the latest October-Dec 2019 quarter, lenders have recovered just 12 per cent of the admitted claims amount, implying a steep 88 per cent haircut.

Notable 12A cases

Section 12A was inserted in the IBC in June 2018 to allow the withdrawal of insolvency application by the applicant with the approval of CoC (committee of creditors) members with a 90 per cent voting share. In other words, the section allows the corporate debtor another chance to make good on the default, and regain control over the company.

There has been a rapid rise in the number of cases withdrawn under Section 12A. According to the latest IBBI data, as of December 2019, of the 3,312 cases admitted, 135 were withdrawn under section 12A. The IBBI report also lists the reasons for the withdrawal under 12A. Here, of the 135 cases withdrawn, only 37 saw full settlement with the applicant (lenders), while 44 saw other settlements with creditors. In nine instances, there were agreements to settle the cases in the future, while in two, the corporate debtors were not traceable.