As a relief to Covid-19 affected industries, petitions under Section 4 of the Insolvency and Bankruptcy Code (IBC) cannot be filed in respect of defaults below ₹1 crore as against the earlier limit of ₹1 lakh. Also, no new cases will be entertained for six months with suitable amendments in the IBC if Covid continues beyond April 30, 2020. Further, the lockdown period will not be counted for the 330 days to complete the resolution process in respect of about 2,000 cases in pipeline. IBC will have to come back with few more changes in its new avatar to serve its intended purpose, post Covid.

The results achieved under IBC till date in respect of about 3,300 cases have been abysmal. Around 2,000 cases are still not concluded even after the stipulated and extended deadlines. Of the remaining, only190 cases are stated to be resolved and others (about 780) are either dissolved or withdrawn or in different stages of appeal. It does not speak well of the efficiency of the professionals or the Committee of Creditors who are entrusted with this responsibility. It is also painful to note that of the creditor claims amounting to about ₹8.2 lakh crore, only about ₹1.7 lakh crore has been recovered and the balance ₹6.5 lakh crore is the loss to them. Perhaps, even in normal course the creditors would have recovered this much if not more.

In view of the uncertainties created by Covid in the underlying cash flows of the IBC cases, the assessment of their valuation is going to be tougher for all those involved in the process. As such the bidders are thinning down, demanding extension of time or changes in the already agreed terms in view of the global economic slowdown.

Litigations on the increase

Based on its experience so far, IBBI (Insolvency and Bankruptcy Board of India) may have to introspect whether professional qualification with just 10 years of experience is sufficient enough to handle this task, which demands a high degree of competence. Unfortunately, the results so far indicate the lack of entrepreneurship and managerial skill, resulting in large-scale failure of the IBC process even before Covid and the economic slowdown. There were litigations at every stage on every aspect, increasing only the prospects of the professionals involved. The professional fee is not related to performance and, therefore, there is no accountability for their failures.

Lack of skill

‘Evaluation Matrix’ (EM) is one of the important criteria adopted for selection of the successful applicant. The preparation of EM requires sound knowledge of corporate finance as the calculation of NPV (net present value) is based on time value of money and the discounting of future flows with the cost of capital. It is proved time and again that not all the RPs (Resolution Professionals) and CoC members are trained in evaluating properly the resolution plans and that results in wrong decisions and litigations.

Also, many a times the Information Memorandum (IM) prepared and submitted by the RPs are the subject of litigation as the RPs do not provide complete and latest information in the IM. There is lack of clarity between IBC and Tribunal decisions as to whether RPs can only collate claims or have the power to adjudicate them, too.

The responsibility of monitoring the implementation of the resolution plan is given to a monitoring committee headed by the RP. There are instances of the committee managing the day-to-day affairs instead of monitoring. There is no clarity in this aspect. For any failure of implementation, does it mean the RPs will be responsible and not the new management under company law, SEBI, and RBI regulations?

There are many instances of a professional being appointed as RP for half a dozen cases. When there is a restriction in the Companies Act on appointment of MDs and limits prescribed under the IBC also, why is it not followed in letter and spirit? It is not feasible for a professional to run the day-to-day management of many large complicated IBC cases at the same time.

For a new avatar of IBC post Covid-19, the IBBI should come out with suitable changes with respect to the criteria for RPs, limit their engagements to a maximum of two, engage industry experts for monitoring committees, make RPs responsible for litigations arising out of them, and appoint independent professionals to review their performance.

The writer is a management consultant

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