Bankruptcy:Corporate Obituaries Can Be An Economic Fillip
Akshat Khetan
5 Oct 2024 11:05 AM IST
In an era where sustenance and longevity are sought-after virtues, the remote consideration of a corporate losing life is considered a taboo. The pursuit of enabling start-ups, providing loss-making entities to wind-up, and paving a structured exit for investors, pushed India to operationalize its Insolvency & Bankruptcy Code (2016). It was anticipated to be a transformative legal framework. But, eight years later, well, the glass is half-full.
An optimist would focus on the fragmented workings of insolvency in the pre-IBC days. In the not-so-digital era, delays and inefficiencies would erode investors off their precious capital. A convoluted process meant years spent in court-rooms which would subsequently erode patience and asset-quality. As of 2024, the IBC admitted 6,000 cases resulting in the resolution of nearly ₹10 lakh crore worth of distressed assets. Although much seems to have changed for the good, there's scope to make the glass full.
Pending case-load, limited expertise of resolution professionals, huge frivolous cases, and the lack of experienced and specialized professionals are some areas that need immediate attention. The tribunal, tasked with handling all insolvency cases, is facing an increasing backlog. Statistics available as of 2023 suggests that over 22,000 cases were pending at the NCLT, creating bottlenecks undermining the time-bound nature of the IBC. Additionally, the possibility for any party to challenge the decision of the Committee of Creditors (CoC) although in line with legal conventions may result in prolonged litigation which in turn could slow down the resolution.
ECONOMIC IMPERATIVES
Often it is perceived that corporate bankruptcy affects capital health. But it also impacts invaluable customer relationship, loyal work force, and other stakeholders. Swift liquidation of bankrupt company assets such as landholdings, office buildings, tangibles and intangible assets such as intellectual properties such as software patents, trade rights, or even flight-routes could mean capital realisation. Delay in tackling bankruptcies could cause depreciation and even degradation of asset quality.
Providing an exact figure on the economic imperative from tackling a bankruptcy is beyond imagination. RBI DGM, Rajeshwar Rao in a 2022 conference remarked that resolving 19,803 cases percolated into recovering underlying defaults of Rs 6.1 lakh crores. Speaking about the legal evolution he seemed optimistic; but he also expressed concern about the legal turnaround. He emphasized that on papers, the IBBI code prescribed a duration of 14 days for a creditor to file a complaint; but the ground-reality was that the admission took over 650 days in FY22. A delay of two years places creditors and debtors at grave operational and credit risk.
If one can surmise that the financial liability of 19,803 cases is equivalent to Rs 6.1 lakh crores. Then, a two-year delay on receiving interest on that the principal component stands at Rs 20,000 crores - calculated at a simple interest of 10%. This is the amount of money that is essentially wiped out for a creditor or debtor. The extent of damage is steeper given complexity in banking calculations, taxes, and other vagaries.
During the launch of IBC, industry observers were quick to point out at how a bankruptcy law could improve ease of doing business (EODB). Reports have emerged of IBBI targeting 300 resolutions in a year. However, the post-pandemic global business outlook has been disappointing. Statistics show bankruptcies rising - countries such as France (60,700), United Kingdom (31,000) and United States (24,230) saw far higher applications. India's official count is on the lower end, but there is a need for a legal structure that is faster, swifter, and devoid of loopholes.
Opportunities for Strengthening the IBC
There are clearly two lessons for India's IBC. An optimist could compare the time it took to resolve the world's biggest financial misadventure. It took creditors and debtors an excruciating 14-year wait to get some money post the Lehmann crisis. Lehmann is expected to have delivered back $60 billion – a number on the lower side but still higher than the initial estimates of barely 10% recovery. This is a useful backdrop for investors that legal structures can take time.
But there is also another observation - countries such as France have resolved to tackle as many cases from its annual case-load of 60,000 as possible. More importantly, America has clearly outlined that a Chapter 11 bankruptcy can be expected to be resolved within a timeframe of 1.5 to 5 years. In such geographies, the availability of dedicated courts, resources, and infrastructure allows enforcement to discharge more cases. In corporate board-room meets, one ideally should discuss these aspects, because in India wind-up processes can take longer.
An area of potential growth lies is the development of a secondary market for distressed assets. There are asset-reconstruction companies in India but with more clarity around the resolution process, investors need to have a digital avenue where things could be bought and sold. Imagine, a simple portal like an Olx or a Facebook where distressed assets could be sold off. This could create a more liquid market. This would not only help banks offload their bad loans but also revive companies that otherwise might have been left to perish.
PAVING FOR FASTER RESOLUTIONS
To the delight of India Inc, the government recognising the need for reforms has introduced amendments to address shortcomings. For instance, the introduction of the pre-packaged insolvency resolution process (PIRP) for MSMEs allows for a more cost-effective resolution of for small enterprise insolvency cases. Like any government, ours also understands that debt resolution is a win-win. If executed well it helps not only create a congenial business environment but also betters investor confidence and definitely more jobs. In the broader picture, a robust and efficient insolvency process is not just for the business community but a step toward a more resilient economy.
Author: Akshat Khetan is a distinguished corporate and legal advisor. (Twitter @akshat_khetan). Views are personal.
Sources:
- Ministry of Corporate Affairs Report, 2023
- National Company Law Tribunal Data on Pending Cases, 2024
- Reserve Bank of India Report on Non-Performing Assets, 2023
- Economic Survey of India, 2024
https://www.statista.com/statistics/1096794/largest-bankruptcies-usa-by-assets/
