Liquidation a legitimate means of resolution under IBC: MS Sahoo

Former chairman of Insolvency and Bankruptcy Board of India (IBBI) MS Sahoo has said that liquidation of a corporate debtor under IBC is not a bad outcome as such. He says liquidation is a legitimate means of resolution of stress for rejuvenating a market economy through ‘creative destruction’.

While writing in a business newspaper, the former IBBI chairman says that beyond the fact that IBC provides for certain facilitation like interim finance and write-off of claims to revive a company if it has a viable business, the Code is agnostic about the outcome — resolution plan or liquidation.

“IBC does not promise to revive every stressed company or recover full money for creditors. One must not fret if it is yielding liquidations or recovering only a part of claims. Even these must be seen in the context,” Sahoo said.

He further says that companies ending up with liquidation had assets, on average, valued at about 6% of the outstanding debt, when they entered the CIRP. If a company has been sick for years and its assets have depleted significantly, the market is likely to liquidate it, he says.

He further cites that companies which are getting rescued by resolution plans had assets, on average, valued at about 17% of the outstanding debt, when they entered the CIRP.

This, he says, means that the creditors were staring at a haircut of 83% to start with. But he says the IBC not only rescued these companies but also reduced the haircut to 68% for creditors. More importantly, it recovered 168% of the liquidation value of these companies.

“These are no small achievements,” MS Sahoo stressed. 

The former IBBI chairman also comes down heavily on critics of the IBC, who he says are trying to malign the code by unnecessarily harping on the fact that most companies under IBC are getting liquidated.

“A law is as good as how it is understood and used by the stakeholders. Negative narratives by vested interests and gaming the law is the worst that can happen to a law enacted with great expectations. The narrative should capture whether the IBC is resolving stress, and if so, with what efficiency in terms of value rescued, cost, and time,” he writes.

Also Read: IBC is not a panacea for all ills: MS Sahoo