The ‘committee of creditors’ must do its utmost ensure that an entity under IBC is revived
The Insolvency and Bankruptcy Board of India (IBBI) is right when it observes that the Committee of Creditors (CoC), vested with huge powers under the Insolvency and Bankruptcy Code, must make a more earnest effort to revive a company over the long run, instead of merely trying to recover its dues. The IBBI has said: “The CoC’s decisions must increase the value of the firm, which is valued 100 at the commencement of the resolution process, to at least 101 the next year, 102 the year after… Such value maximisation…requires strategies much beyond restructuring of liabilities.” Unlike other resolution systems, the IBC is a ‘creditor-in control’ model. Hence, the CoC sacks the existing management and takes over a firm, appointing a resolution professional (RP) to cobble together a plan. The IBC vests faith in the ‘commercial wisdom’ of the CoC; in the normal course, the NCLT or its appellate body is not expected to question its decisions (affirmed in the Swiss Ribbons SC case). The idea here is to lose as little time as possible to get a going concern back on track, by quickly settling its debt and overhauling its management. But with sweeping power comes considerable responsibility. The IBC’s record since December 2016 does not seem to suggest that CoCs have taken their job of revival seriously. Of the 3,400 or so corporate insolvency resolution cases that have been closed since then, just 14 per cent or 480 of them have won a resolution plan, while over 1,600 or 47 per cent of the cases have been packed off for liquidation. If the average time for resolution runs well over the IBC limit of 330-440 days, the CoC is at times to blame, although the bench strength of the NCLT is also a factor. While it is true that three-fourths of these are BIFR legacy cases, the IBBI’s latest observation suggests that the CoC’s approach too is a problem. The IBBI’s meeting with top bankers this week to debate this issue comes as a significant development. With the economy on the mend, the CoCs must apply their managerial acumen to protect assets and jobs.
The CoCs’ role has been under scrutiny for sometime. The Parliamentary Standing Committee’s report on the insolvency process, released last August, makes some pertinent observations. While ensuring a rigorous quality test for RPs, the panel suggests that the CoCs should select them in a more transparent manner. It has observed that the process of accepting bids for resolution plans has come under a cloud. Other experts have elaborated that the CoCs’ decisions should be backed by sound reasoning and information; there should be clear penalties for misconduct; a mechanism for resolution of deadlocks where the CoC is unable to arrive at a consensus decision; and a diverse composition to deal with large, complex cases.
However, the CoCs should be allowed to effect resolution through part sale of an asset to an interested party, which may not be interested in acquiring the entire enterprise. Success at revival also depends on investment sentiment. As a senior banker recently said, revival and debt recovery have to be balanced. A push to take deep haircuts to ensure revival could lead to ‘policy paralysis’ and eventually liquidation. In sum, the IBC is a sound ecosystem, but its actors – CoCs, RPs, NCLT, bidders and other professionals – must play their parts well.
Published on August 21, 2022