Creditors have recovered 92% more than value of assets of rescued firms under IBC, says IBBI Chief

The primary objective of the Insolvency and Bankruptcy Code (IBC) is to rescue firms in distress, and that the insolvency code in India since its launch in October 2016 has rescued about 250 firms though resolution, says MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI) in an essay written in the Board’s annual publication — Insolvency and Bankruptcy Regime in India: A Narrative.

Sahoo admits that more corporate debtors (955) have been referred for liquidation under IBC than being rescued, but he says that while the companies referred for liquidation had assets valued at Rs. 0.38 lakh crore when they were admitted to Corporate Insolvency Resolution Plan (CIRP), firms that were rescued under IBC through had assets valued at Rs 1.01 lakh crore and creditors could recover Rs 1.94 lakh crore through the companies which saw resolutions under the insolvency law.

“Thus, in value terms, around three fourth of distressed assets were rescued. Of the firms sent for liquidation, three-fourth were either sick or defunct and of the firms rescued, one-third were either sick or defunct,” he says.

He further says that the resolution plans recovered Rs. 1.94 lakh crore, which is about 192 per cent of the realisable value of these firms. Any other option of recovery or liquidation would have recovered at best Rs. 100 minus the cost of recovery/liquidation, while the creditors recovered Rs 192 under the Code. The excess recovery of Rs. 92 is a bonus because of the IBC, he reiterates.

 Though recovery is incidental under the Code, the financial creditors (FCs) recovered 45 per cent of their claims, which is the highest among all options available to creditors for recovery.

He says that resolutions under IBC are not only much faster than any other legislature earlier, even the cost of resolution is much lower than earlier.

According to him, the 250 CIRPs, which have yielded resolution plans by the end of June 2020, took on average 380 days for conclusion. Similarly, the 955 CIRPs, which ended in orders for liquidation, took on average 312 days for conclusion.

And 88 liquidation processes, which have closed by submission of final reports till June 2020, took on average 296 days for closure. Similarly, 250 voluntary liquidation processes, which have closed by submission of final reports, took on average 336 days for closure.

The cost of a CIRP yielding resolution plan works out on average 0.75 per cent of liquidation value and 0.38 per cent of resolution value.

Rescuing life of firms

The IBBI Chairman says that the IBC empowers creditors, represented by a committee of creditors (CoC), to rescue firms, when they experience a serious threat to their lives.

To rescue firms, the CoC can take or cause a haircut of any amount to any or all stakeholders for rescuing the company and seek the best resolution from the market (unlike earlier mechanisms that allowed creditors to find a resolution only from existing promoters).

The resolution plan, says Sahoo, can provide for any measure that rescues the company.

“It may entail a change of management, technology, or product portfolio; acquisition or disposal of assets, businesses or undertakings; restructuring of organisation, business model, ownership, or balance sheet; strategies of turn-around, buy-out, merger, amalgamation, acquisition, or takeover,  etc. The Code provides a competitive, transparent market process, which identifies the person, who is best placed to rescue the company and selects the resolution plan, which is the most sustainable under the circumstances,” he added.