The twin objectives of the Insolvency and Bankruptcy Code (IBC), 2016 are timeliness and value maximisation. While value maximisation depends on timely resolution, the latter depends on seamless Corporate Insolvency Resolution Process (CIRP).
Section 12 of the IBC mandates that CIRP must be completed within 330 days. However, courts have upheld that the timeliness is directory and not mandatory. While the time delay is inevitable in the case of large corporates or those of a complex nature, for other cases, time delay erodes the value of the company substantially and, thereby, defeats the very objective of IBC.
One of the main reasons for the delay is the spate of litigations by the promoters. Once the CIRP order is passed, the promoters get into action with the sole objective of getting back the company at a cheaper price. To achieve their objective, they require time and in order to gain time, they resort to litigation. The first litigation starts by appealing against the very first order of the National Company Law Tribunal (NCLT) ordering commencement of CIRP and it continues till the completion of CIRP . Even if the Committee of Creditors (CoC) decides to liquidate the company, due to non-receipt of resolution plan, the promoters appeal against that decision also to gain further time.
As per Section 17 of IBC, the management of the company vests with the resolution professional (RP) once CIRP commences. Unable to come to terms with the loss of their position, the promoters don’t co-operate with the RP, affecting the day-to-day operations in the process.
The promoters inform the employees that they will be back in the company soon and instigate employees not to co-operate with the RP. The employees, being unaware of IBC, do not want to risk their job if the promoters are back and extend no cooperation in the CIRP. By making the day-to-day operations murkier, the promoters also try to convince financial creditors and other stakeholders that no one else can manage the day-to-day operations.
Being in the business for several years, the promoters have a strong relationship with their customers and vendors. Like the message to employees, the promoters inform customers that they will be back in the company soon and direct them not to make any payment for their purchases/services rendered by the company during CIRP, until they are back.
The promoters also tell vendors not to extend the credit period for payment, since the company is under CIRP. This is a double whammy for the RP, since non-collection of debtors and immediate payment to vendors would affect the working capital and, consequently, the day-to-day operations. On the other hand, the promoters may get the dues from the customers if they get back the company.
If the appeal against the first order is not successful and the CIRP continues, the next step is to stop third parties from becoming resolution applicants. Once the expression of interest (EoI), inviting ‘Resolution Plan’, is called for through advertisement in newspapers, the promoters shift their gear to the next level. Since the promoters are part of the CoC meetings, they come to know the details of Prospective Resolution Applicants (PRAs) and hence, they are able to easily thwart any attempt by the PRAs in submitting their resolution plans.
The PRAs, in order to ascertain the value of the company before submitting their EoI, rely on the document Information Memorandum (IM), provided by the resolution professional. IM is the document which contains all the vital details about the company. In most of the companies, only the promoters have this information. Unless they co-operate and furnish all relevant information, the PRAs, due to insufficient details in IM, are not able to submit their EoI or submit by quoting a very low value for the company due to insufficient details in the IM.
If no resolution plan is received pursuant to the first advertisement, CoC is compelled to explore the possibility of obtaining a resolution plan by publishing advertisements for the same a few more times, which again gives more time to promoters. The promoters continue their efforts to ensure that the company neither receives any EoI nor any resolution plan from the PRAs, despite repeated advertisements.
The financial creditors, who pin their hopes on IBC, expect faster resolution and higher realisation for their stressed assets. However, with the time delayand consequential expected lower valuation for their assets, their hopes start waning.
Delay in the CIRP, disruptions in the company’s operations, devoid of Resolution plans, lead to diminution in the value of the company. That drives the financial creditors to go for undesirable compromises including massive haircut, eroding the nation’s wealth in the process.
Financial creditors, prior CIRP, would have extended all possible support to keep the company afloat by extending various credit facilities, restructuring of the loans. Financial creditors approach NCLT only after exhausting all options with the existing promoters. Hence, again extending the opportunity to the promoters to get back the company again at a cheaper price will do more harm to the economy. The root cause of all the problems in CIRP is due to the mens rea of the promoters to get the company back at a cheaper price.
Necessary amendments in the IBC to prevent such actions is the need of the hour.
The writer is an Insolvency Professional