The recovery of financial creditors following the resolution of distressed businesses under the Insolvency and Bankruptcy Code (IBC) collapsed to a quarterly record high of 10.2% of their admitted claims over the past three months until March, in another reminder of an urgent need for interventions to prevent the erosion of the value of toxic assets.
In fact, at Rs 1,288 crore, the realization for financial creditors in the March quarter fell below the liquidation value of assets (Rs 1,316 crore) for the first time. This is the second consecutive quarter where collection by financial creditors has remained well below normal — it was just 13.4% in the December quarter.
As a result, cumulative recovery for lenders where resolution has taken place has fallen to just 32.9% through March 2022, from 35.9% through September 2021, according to data compiled by Insolvency and Bankruptcy. Board of India (IBBI).
In absolute terms, the cumulative recovery of financial creditors up to the March quarter amounted to 2.25 trillion rupees.
Analysts blame the decline in market appetite for toxic assets in the wake of the pandemic – in addition to the inordinate delay in resolution, caused by protracted legal wrangling and bottlenecks in the judicial system – for the bad recovery. While they conceded that the IBC should not be judged on its performance in just one or two quarters and that the universe of bidders appears to have shrunk in the aftermath of the Covid-19 outbreak, they were unanimous. to blame the NCLT (National Company Law Tribunal) system for the delay in resolution. This not only erodes asset values, but also discourages serious suitors from bidding for insolvent companies for fear of losing if the process drags out.
Up to 66% of companies in the process of being resolved exceeded the 270-day limit, IBBI data showed. The IBC sets a time limit of 180 days to resolve stress in a business, which can be extended for an additional 90 days with the approval of the NCLT.
This underscores the growing unease among lenders about invoking the IBC for the resolution of troubled assets and adds urgency to addressing systemic issues, experts said.
Of course, an overwhelming number of “dead cases” related to the previous BIFR regime have also contributed to the high discounts so far. Of 480 troubled companies that were rescued by resolution through March and for which data is available, as many as 149 either transferred from the old BIFR regime or disappeared, according to the IBBI. Additionally, the timing of a case referral to IBC is critical. However, the sharp decline in the recovery in recent quarters “still cannot be justified”, analysts say.
Anoop Rawat, Partner (Insolvency and Bankruptcy) at Shardul Amarchand Mangaldas, said: “NCLT is delaying the case as there is a huge backlog of cases. One reason is that during the pandemic they weren’t working at full capacity. Although they are functioning now, given the shortage of members, the backlog has not yet been resolved. This ultimately affects recovery. Moreover, there is a lack of appetite for insolvent MSMEs or low value companies.
Moreover, unlike previous cases, the initial cash payment for distressed assets is increasingly being replaced by a staggered payment mechanism, as part of resolution plans. “These plans involve little upfront cash payment and subsequent payments can be tied to business performance. It weighs on the final replay as well,” Rawat said.
Jyoti Prakash Gadia, Managing Director of advisory firm Resurgent India, said: “The initial euphoria was lost due to lower appetite from new investors due to the overall uncertainties caused by the negative impact of the pandemic on the economy. economy.”
Sector-specific issues related to viability and overall future revenue potential in the most affected sectors like real estate, hospitality, etc. are also to blame for low achievements, Gadia said. Strict adherence to resolution deadlines at each stage must be ensured, Gadia added.
Shravan Shetty, chief executive of consultancy Primus Partners, said: “The government should increase legal capacity to deal with cases while strengthening the IBC process by reducing options for going to court against the process. Moreover, given the uncertainty following the pandemic, it will be necessary for creditors to consider a weaker recovery.
For its part, the IBBI has sought to reduce delays. In a recent discussion paper, he proposed imposing on the creditors’ committee the obligation to share all the documents on the company in difficulty with the insolvency resolution professional and a prescribed time limit for the preparation of the memorandum information and carrying out the evaluation exercise. However, unless the NCLT system is fixed, these are unlikely to be of much help, analysts said.
Last year, seeking to urgently fill vacancies on various NCLT benches, the Parliamentary Standing Committee on Finance pointed out that the tribunal was short of 34 members (judges) compared to the sanctioned complement (63). The situation has not changed much, analysts added.