Money & Banking

3 years of IBC: Only 6 per cent cases resolved so far

Radhika Merwin BL Research | Updated on October 28, 2019

Long delays leading to erosion in value of assets; sale proceeds remain poor

The latest data put out by the Insolvency and Bankruptcy Board of India (IBBI), for the July-September 2019 quarter, underlines the growing concerns over the slow progress under the Insolvency and Bankruptcy Code, 2016.

Of the 2542 cases admitted till date, 186 have been closed on appeal/review, while only 156 have seen approval of resolution plan. In a substantial 587 cases, liquidation has been ordered. What is interesting is the fact while of the 1497 undergoing resolution, 535 have been in the system for over 270 days (existing timeline for resolution is 330 days), even cases under liquidation are seeing undue delays.

Of the 587 cases where liquidation has been ordered, only 24 have been closed by dissolution. Nearly half of the liquidation cases have been awaiting closure for over 270 days.

Undue delays

Under the Insolvency and Bankruptcy Code, 2016, 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 recent amendment to the Code in August this year, the resolution time has been capped at a maximum of 330 days. Importantly, this deadline includes the time taken in interim legal proceedings. The amendment is aimed at bringing in more timely resolution. While it needs to be seen if the timeline is adhered to, for now the track record of cases under resolution has been poor.

 

According to the IBBI data for the September quarter, over 850 cases under resolution have been in the system for more than 180 days. The average time taken for completion of the 156 resolutions thus far is 374 days. Long delays in the resolution process lead to erosion in value of underlying assets. A company goes into liquidation, if resolution fails. Even the process of liquidation has been long-drawn, further eroding the sale value due to stakeholders.

As of September 2019, of the 587 liquidation orders initiated, eight cases have been in the system for over two years. The sale proceeds from the liquidation process has been poor. In the latest July-September 2019 quarter, in case of Orchid Health Care Private Limited, which owes lenders Rs 3500 crore, there has been no realisable asset for liquidation----even to cover the Rs 5.98 lakh cost incurred by the CoC (committee of creditors).

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 Oct-Dec 2017 to July-September 2019 quarter, reveals that in about 38 per cent of the 156 resolved cases, realisation has been less than 30 per cent (as against claims). A fifth of the cases have less than 20 per cent recovery rate. Most of the cases where recovery rate is high at over 70 per cent are small ticket---under Rs 100 crore (claims) cases.

Also read: Rapid rise in cases withdrawn under IBC, raises concerns over the misuse of section 12 A

The overall recovery rate so far works out to a dismal 37 per cent. If we exclude big cases such as Electrosteel Steels, Bhushan Steel, Binani Cements and Bhushan Power & Stell- the recovery rate falls further to 24 per cent.

Important to note is the fact that the data put out by IBBI pertains to cases where the resolution plan has been approved by the CoC (Committee of Creditors). These may not have translated to actual recoveries for banks as many of the cases have been stuck in endless litigations. Bhushan Power & Steel is a case in point.

Rapid rise in 12 A cases

Section 12 A was inserted in the IBC Code in June 2018 to allow withdrawal of insolvency application by the applicant with approval of members of CoC (committee of creditors) with 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.

Also read: Tweak in resolution process to open window wider for original promoters

There has been a rapid rise in the number of cases withdrawn under Section 12 A. According to IBBI latest data, as of September 2019, of the 2542 cases admitted, 116 were withdrawn under section 12A. The IBBI report, also lists the reason for withdrawal under 12 A. Here of the 116 cases withdrawn, only 34 cases saw full settlement with the applicant (lenders), while 35 cases saw other settlements with creditors. In eight cases there has been an agreement to settle in future while in two cases the corporate debtors were not traceable.

Published on October 28, 2019

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