Rescue or Resolution? – Assessing the Success of IBC (Insolvency and Bankruptcy Code)
By - Umang Pathak
source: Financial Express
The Insolvency and Bankruptcy Code, 2016 (“IBC”) has completed 5 years of its existence as the single, most comprehensive code for debt recovery and resolution of distressed assets. Prior to its enactment, the country was ridiculed with multiple laws and procedures, and enormous delays that substantially weakened the credit financing market and lowered the confidence of potential investors. Although IBC is still at a nascent and evolutionary phase, but its success can still be assessed primarily based on whether it was able to achieve its goals and objectives. Many of the reports published in different websites, (for instance, this report), categorically mentions that the liquidation under IBC far exceeds rescue of companies, suggesting that rescue is a parameter for assessing the success of IBC. This is an incorrect assertion, since firstly, its pertinent to note that the benchmark of success for IBC cannot be an exercise of singularity, it must be examined holistically, judging all the factors relevant for an ideal insolvency law; and secondly, although rehabilitation should be the focus of an insolvency law, as per the UNCITRAL Legislative Guide on Insolvency Law, but it should not be mistaken for an objective.
In this piece, the author attempts to emphasize the dilemma of taking rescue of insolvent companies as the yardstick to measure the success or failure of the IBC. The first segment briefs on the reason behind such a dilemma and what is the correct position under IBC. The second part attempts to make a case for liquidation. Finally, the author concludes this piece with a few remarks on IBC.
Rescuing insolvent companies means restructuring its finances, assets and paying haircuts to creditors, to successfully save it from its insolvent, debt-ridden state while keeping it as a going concern, and then selling it off to a Resolution Applicant (“RA”). In the Corporate Insolvency Resolution Process (“CIRP”) laid down in the IBC, an insolvent company is auctioned off to prospective RAs, who then submits their resolution plans to group of creditors of the company, namely the Committee of Creditors (“CoC”). Then, this CoC makes a vote and selects the most viable resolution plan which details out the treatment of all the stakeholders, creditor’s haircut and how the RA seeks to run and keep the company as going concern. Thus, the insolvent company is “rescued,” as its still running and being operated by the RA. It can be said that any insolvency law should focus on rehabilitating the company, and that is also the case with IBC. In landmark decisions such as the Swiss Ribbons v Union of India, CoC of Essar Steel v. Satish Kumar Gupta, the judges have categorically held that recovery is one of the goals of the IBC, and its processes aims to achieve that. But does that mean that IBC is successful if the recovery rates of insolvent companies are high?
Position of law – Resolution of Corporate Persons
The first and foremost emphasizes should be made on the preamble of IBC, which states - An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons. It clearly mentions that the Code aims to amend the laws relating to insolvency ‘resolution’ of corporate persons, thus clarifying that its goal is to resolve. This resolution of distressed assets allows both for – recovery and liquidation. Ergo, it can be said that recovery is one of the goals of the IBC, but not the only measure to evaluate its success. Although, let us say if rescue were treated as a yardstick to evaluate the success of IBC, but then it would be repeating a glaring mistake of its predecessor – the Sick Industrial Companies Act, 1986 (“SICA”). This legislation was enacted for sick companies in distress, where a reference by these companies was made to Board for Industrial and Financial Reconstruction (“BIFR”), which then either rehabilitated the company based on its potential viability or made a reference for liquidation to High court. Due to its prominent focus towards rehabilitation accompanied with long delays, companies began misusing this Act, simply by ballooning its debt and making a reference to BIFR. Creditors would rarely get any payment towards their debt, and the promoters of these companies would go scot free. One of its challenges was that, since the Act was prominently fixated towards rescue, it was a rare phenomenon that the BIFR would refer a company to High court for winding up. Even if it did, a response from the High courts for allowing winding up took a long period, thus litigation was a possibility of once in a blue moon.
Thus, continuing from the above discussion, it is imperative for any insolvency law to make way for liquidating unviable, distressed companies as liquidating its asset would lead to some recovery for its creditors, and contribute to the money in the economy. Rather than keeping the company as is for longer time periods, which was how SICA operated, the IBC allows the CoC to decide on the fate of the insolvent companies – whether it should be rescued or liquidated. Another challenge and why liquidation is an important course of action is the difficulty in repayments of dues to the company’s employees under the SICA regime. If liquidated, all the stakeholders of the companies including its employees, which are quintessential for the company and treated as a priority under IBC, get some haircut from their total dues. Additionally, it is notable that usually when a company is rescued, the amount realized from all the dues is proportionally less (and sometimes the margin is extremely high) in comparison to liquidating a company. For instance – the recent Videocon insolvency, where the creditors took 96% haircut from their dues, and the National Company Law Tribunal (“NCLT”) had to request the CoC and the RA to reconsider the plan. Although this falls in resolution as well, meaning that CIRP had been successfully concluded, but it is believed that liquidation would have been much more beneficial for the creditors and stakeholders.
It is interesting to note as well that, under IBC, even when the company is undergoing liquidation, pursuant to M/s Gujarat NRE Coke Limited’s decision, it still can be sold off to respective buyers as a ‘going concern’. Rehabilitation is deep rooted, even when the company is facing its commercial death, the law and its processes are focused in rescuing the insolvent entity. Thus, it seems that the dilemma of taking ‘rescue’ as a measure of success for IBC comes from its own jurisprudence. But it is to be emphasized that, rescue although one of the goals, but is a sub-set of resolution of companies and that has been clarified throughout different case laws. In this article, the author sheds light on this dilemma, the correct position of law and why liquidation is imperative, since IBC should not repeat the mistakes of the failed SICA. IBC is still at a developing stage, and it will be seen how measures can be laid down to evaluate its success, but it should certainly not only be rescue of insolvent companies. Rather, resolution of corporate persons.
Umang Pathak is a fifth year BBA LLB student at JGLS. You can check his profile on LinkedIn.