Should we worry that the working of the Insolvency and Bankruptcy Code (IBC) has produced more liquidation than sale or turnaround as a going concern? We should not. Over December 2016-September 2020, of the 4,008 insolvency cases raised, 800-odd were closed midway, leaving 3,200, of which 1,900 are still ongoing. Of the 1,300 that had outcomes, 1,025 (73.5%) ended in liquidation and 277 (13.1%) ended up in resolution.
The liquidation realised an abysmal 5% of the outstanding amount. Most of the liquidation cases were either under the erstwhile Board for Industrial and Financial Reconstruction (BIFR) or defunct. The relatively faster decision to liquidate these companies against the 10-15 years it typically took under the BIFR is welcome.
IBC’s purpose is to swiftly redeploy the resources trapped in sickly companies under better management. So, if a company that goes into distress is reported fast, it has a better chance of a turnaround and being sold as a ‘going concern’. This will maximise the value of the asset being resolved, lower the haircuts for lenders, and also reduce the ultimate burden on the taxpayer. The domination of operational creditors in filing insolvency petitions must end.
Nearly half of the 4,008 applications were filed by operational creditors, while financial creditors triggered 43%, and the remaining by the corporate debtors. Most often, unsecured creditors use IBC to arm-twist managements into coughing up.
An amendment in the IBC to bar operational creditors from filing insolvency petitions is in order. Although the IBC has been held in abeyance for nine months now due to the pandemic, the government must review its decision to prevent debtors from filing for voluntary insolvency if the company cannot be run as a going concern.
India also needs to get pools of patient capital to buy out stressed assets, and create a competitive market for these assets that will lower haircuts for bankers. But bankers will act to restructure debt only when they are insulated from arbitrary incrimination for their actions.