Financial creditors , especially banks, which had high expectations that the Insolvency and Bankruptcy Code (IBC), 2016 would help resolve the non-performing asset (NPA) problem, are deeply concerned over inordinate delays.

The RBI, in its efforts to resolve NPAs, recently proposed in a draft paper, “revisions in the guidelines for handling wilful defaulters”. It mandates review and finalisation on wilful default within six months of an account being classified as NPA. The success of such a major step also rests on timelines.

The need to stick to timeliness cannot be overemphasised. Even the ‘Report of the Bankruptcy Law Reforms Committee’, which gave birth to IBC, states: “From the viewpoint of creditors, a good realisation can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay”.

Some of the radical changes required to achieve the twin objectives of timeliness and asset maximisation are: delink the resolution process and liquidation process; in the resolution process, delink “ the assets and business” from “determination of claims and other litigations”; and delink the promoters from CIRP (Corporate Insolvency Resolution Process) and the liquidation process.

First, it should be recognised that “resolution and liquidation” are two distinct and separate paths, each requiring different processes, people with different expertise and following different timelines.

Also, any litigation and determination of claim should run parallel without affecting the resolution process.

Need for stricter timeliness also arise from Section 25 of the Code which deals with the duties of the resolution professional (RP), where the RP is expected to perform certain duties which include preservation and protection of the continuous business operations of the company. Keeping a CIRP company as a “ going concern” for a long time not only escalates CIRP expenses but also accelerates value erosion. This is because once a company slips into CIRP: (a) the employees look forward to greener pastures; (b) the suppliers prune their credit terms as they are not sure of getting the dues in time; and (c) customers delay/default payments, etc., taking advantage of the situation.

All these make the day-to-day management harder as time goes by, which calls for quicker resolution to arrest value erosion.

It is important that the RP is insulated from all litigations, which may be initiated by creditors or others, till the resolution plan is approved. Once the plan is approved, the successful resolution applicant (SRA) may deposit the consideration into a separate escrow account of a secured creditor to the benefit of entitled creditors. The SRA can take over the unit and keep it as going concern, unmindful of any litigations.

As far as liquidation process is concerned, Regulation 31A of the IBBI mandates the formation of Stakeholders Consultative Committee (SCC) consisting of various classes of stakeholders — namely, secured financial creditor, unsecured financial creditor, operational creditor, etc. While the liquidator is responsible for earlier realisation of the assets, “disputes amongst SCC members for their claims and other litigations” should run parallel without affecting the liquidation process.

Escrow account

Similar to the resolution process, in the liquidation process also the realisation should be deposited in an escrow account and the liquidator — on determination of the percentage of distribution to each creditor, with the approval of NCLT — can distribute the same.

Another change to be implemented is to keep the promoters away from the entire CIRP and liquidation process. Today most of the litigations are initiated by the promoters, mainly to: (i) scuttle the CIRP and liquidation process; (ii) obtain “stay” from the judiciary. Their mala fide intention to get back the company through the backdoor at a cheaper price is the root cause of all litigations. Once the promoters are kept away from the entire process, there would seldom be a “stay” either in the “resolution or liquidation” process.

The very act of reference to CIRP itself is a clear vindication of the failure of erstwhile promoters to enable revival in any reasonable terms. After exhausting all such reasonable efforts, once a company is referred to IBC, the umbilical cord with the erstwhile promoters must be severed completely. This single amendment would reduce the time, effort and cost of all stakeholders in the IBC.

Another major impediment which is ubiquitous in almost all CIRP cases is the non-availability of key records like audited accounts and fixed asset register for many years. Non-filing of audited accounts with the Ministry of Corporate Affairs is an indication of many serious issues within a company, and hence warrants severe action against the directors/promoters. Absence of those key records also affect the determination of the claims of the Creditors & the Valuation of the Company.

Banks should freeze the account of the companies if the audited accounts and fixed asset register duly certified by the auditor along with IT returns are not submitted every year within the timeframe. The PAN and DIN of the directors should be blocked so that the promoters do not carry on business in another name until audited accounts are filed.

Constant changes are key to the success of IBC.

The writer is an Insolvency Professional

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