Our bankruptcy code deserves credit for what it has achieved

Source: Live Mint

Synopsis: An examination of the IBC’s record on resolving cases of business insolvency reveals greater success than critics acknowledge

Background

Analysis of IBC’s performance: Added points

• A good insolvency system cannot be judged by the number of companies being liquidated.
• Because the purpose of insolvency law is to swiftly liquidate firms that have had value erosion and stand a low chance of survival.
• For instance, Germany is known for its efficient insolvency system despite a very high liquidation ratio.
• Even in the UK and the US, where the insolvency regime is well-developed, the number of companies being liquidated is higher than in India.
• According to data from the ministry of corporate affairs, there are nearly 1.35 million active companies in India, with 6,893 under liquidation as of 31 March 2021.
• After the coming into force of the IBC, liquidations can take place under the Companies Act, 2013, or the IBC.
• Under IBC, only 26% of the IBC-referred firms have gone for liquidation.
• Of the 1,270 liquidations ordered under the IBC, 944 were already defunct or BIFR cases (i.e. 74%) till 31 March 2021.
• Of the non-defunct 318 companies, 170 did not receive any resolution plan.
• This could be for reasons such as unviable business models, no market for their products, or just lack of a well-developed market for such assets to be bought and turned around.
• There was also another set of companies that received up to six resolution plans, but none was found suitable in the commercial wisdom of the committee of creditors (CoC).
• In fact, there are companies such as Raman Ispat Pvt Ltd and Infinity Fab Engineering, which were defunct but their resolution plans received value greater than the admitted claims.
• Examining details of the 363 companies yielding resolution under the IBC until 31 March 2021, it is observed that 123 of them were defunct or with the BIFR.
• The total realizable amount by financial creditors was 34% of their admitted claims, even in these companies. Their financial creditors actually realized 160% of the liquidation value.

Other reasons that hamper realisation of recovery rate: Added Points

• The lack of a developed market for distressed assets can help discover competitive prices for companies.
• There is a dearth of resolution applicants ready to take on the challenge of turning around a distressed company.

Conclusion:

In a short span of time, the IBC has created a discipline in the market, formalized an insolvency framework, offered a one-stop solution for companies to undergo insolvency resolution, and created a new cadre of insolvency and valuation professionals.

One must appreciate these nuances, which will only strengthen in the long run.