Making IBC efficient . IBC rebooted

The Covid impact poses fresh challenges to the recently-restarted IBC process which has been weighed down by delays in the past. The challenge here is two-fold: dealing with the likely spike in the number of such cases referred to the NCLT; and overcoming the limitations of the existing set-up, which appears to have been biased in favour of liquidating the asset and realising a decent value rather than reviving it, even in pre-Covid times. Data from the September 2020 newsletter of the Insolvency and Bankruptcy Board of India show that IBC resolutions have yielded only slightly more revivals than liquidations ( after netting out the BIFR backlog). Stressed assets need a fair shot at revival at a time when economic activity is in the doldrums and there are few investors waiting in the wings. To ward off a ballooning of IBC cases, a restructuring plan should be set into motion at the first sign of default, and resolved much faster than the present time-frame of 180 or 270 days. The IBC process is demonstrated to have worked well for entities where the intrinsic value of the asset is high and tangible (such as steel) – less so for service entities and medium-sized concerns where valuations can pose challenges. The latter cannot easily attract strategic and financial investors today. Hence, the panel set up by the Ministry of Corporate Affairs to revisit the insolvency issue has implicitly raised the question of whether the inherent bias against existing promoters, under Section 29 (a) of the Code, is appropriate for these times.

The January report moots ‘pre-packaged’ resolutions, which are likely to find their way into the IBC process through an amendment. They are being practised in the UK, US and Singapore, among other countries. A pre-pack deal cobbled together with the consent of the debtor and a simple majority of financial creditors is initiated by debtor or existing promoter, and not the creditors. The panel moots the scheme for defaults between ₹1 lakh and ₹1 crore to begin with. This should be expanded. This brings back the debtor-in-possession model, for which the Section 29 (a) will require to be re-read to explicitly disqualify fraudulent players. However, the creditors will have the power to veto such a plan later with a 75 per cent majority, thereby ensuring that the creditor-in-control paradigm of IBC is not sacrificed. The plan can be set into motion within 120 days. For bankers who can discern bonafide promoters who require some balance sheet correction, this is a good option. Pre-packs will restore jobs and prevent asset-stripping.

As for rising large NPAs, the proposed asset reconstruction company (ARC) is expected to deal with these cases. These are not the best of times for ARC takeover of assets, or for one-time settlements, unless the creditors take steep haircuts and borrowers accept high interest rates. The promise of ‘pre-pack’ cannot be overemphasised.

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