Covid shadow hangs heavy over insolvency proceedings

V Rishi Kumar Hyderabad | Updated on April 06, 2020

Besides denting valuation of assets, lockdown seen delaying resolution

The hiatus in insolvency proceedings could have an adverse impact on the valuations of already stressed assets and possibly lead to a further delay in finding a resolution.

Lokesh Vasudevan, Partner, Brahmayya & Co, told BusinessLine, “The IBC has seen its ups and downs. With the current Covid-19 sensitivity, further delays on ongoing insolvency proceedings cannot be avoided. The Insolvency and Bankruptcy Board of India (IBBI) notified Regulation 40C on March 29. The regulation specifies that the period of lockdown shall not be considered for the mandatory 330-day timeline under the IBC. These delays are force majeure situations, but will certainly have a significant impact on liquidation value and fair value of the stressed assets”.

“The country is in for a long period of silence and we can only hope that there still are bidders who would be interested in participating in resolutions under the IBC,” he said.

The Insolvency and Bankruptcy Code, 2016, is in its third year of operation. The Economic Survey 2019-20 indicated that the realisations achieved under the IBC is significantly higher compared with other recovery processes adopted earlier. The recovery under the Code for 2018-19 was pegged at 42.5% against 14.5% under the SARFAESI Act and 3.5% through the Debt Recovery Tribunal (DRT) route.

Data as on December 2019 revealed that out of 1,351 cases which concluded, only 14% resulted in resolution; significantly, 58% were closed by liquidation. The average time taken for completion — relating to the 14% yielding resolution — was 394 days, much higher than the statutory timeline of 330 days.

Time to think outside IBC?

The potential realisation of the liquidation cases is uncertain, including the time for closure. This experience of higher chances of liquidation, litigation complexities, uncertainties involved due to the evolving framework and interpretational issues in the code have resulted in increased instances of financial creditors opting for settlements outside the IBC.

“It is time for the lenders to look at a more realistic approach towards evaluating the feasibility and viability of resolutions, as realising monies through liquidation is a longer process and uncertain as well,” Vasudevan said.

Added Varghese Thomas, Partner at J. Sagar Associates, Mumbai: “The lockdown will impact in two ways — high pendency of piled up cases, which will lead to a rush once the situation turns normal, and the potential of defaults going up further. It is to be seen how many cases the tribunals would be able to handle when the lockdown is lifted.”

The government has been proactive in addressing the grey areas in the code, which has been amended for the fourth time by way of the Insolvency and Bankruptcy (Amendment) Act, 2020. This amendment clarifies aspects relating to insolvency commencement date, minimum threshold criteria for triggering the CIRP (Corporate Insolvency Resolution Process) by the financial creditor, non-termination/suspension of licences, grants and concessions, among others.

Additionally, the amendment opened the door for the much required relief by way of insertion of Section 32A that ensures that prospective bidders are protected against liability for prior offences and chances of prosecution.

This amendment was a fallout of the attachment of assets of Bhushan Power & Steel Ltd by the Enforcement Directorate after approval of the resolution plan by the National Company Law Tribunal.

Published on April 06, 2020

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