Success of resolution plan critical for investors under Insolvency and Bankruptcy Code

Jyoti Structures, which was the first of the 12 big defaulters to be given the go-ahead by the National Company Law Tribunal (NCLT) for insolvency, has no doubt brought relief to lenders hoping for a quick resolution.

But for investors saddled with such stocks, the success of a resolution plan is the only hope to realise value from their dead investments.

At the Assocham’s national conference on Insolvency and Bankruptcy Code (IBC) held recently, many bankers and resolution professionals felt that only 10-20 paise to a rupee could at best be recovered under liquidation.

Hence, investors may not get paid anything if the company goes into liquidation (on failure of a resolution), as they rank way down in the pecking order for distribution of proceeds.

The IBC that opens up room for competing or hostile offers, can come to investors’ rescue if the new management turns around the fortunes of the company.

After the case is approved by the NCLT for insolvency, the resolution professional prepares a resolution plan within the stipulated time (180 days with 90 days extension). This has to be approved by the committee of creditors — 75 per cent of financial creditors by value.

So, what could the resolution plan entail?

“If it’s a running company, not able to service its debt, the first step is to arrive at what the sustainable cash flow is and hence, the sustainable debt. The insolvency resolution professional will also prepare an information memorandum to seek potential acquirers. Depending on the best of these alternatives, the impairment that needs to be taken by various stakeholders will be determined,” says Nikhil Shah, Managing Director at Alvarez and Marsal, an expert in turnaround management.

According to Pramod Jain, a chartered accountant, also an insolvency professional, “The resolution plan will essentially involve some haircut by the creditors and the promoters, so as to make the operations commercially viable whether through the exiting promoters/management or through a new applicant.”

Jain says that when, as per the resolution plan, a new investor infuses capital and the company starts to turn around, the value of shares can move up, though it could take two to five years.

Given that most of the listed stocks are trading at very low prices in the secondary market, the new entity can acquire stake at dirt cheap price, say market players.

Among the cases that have been approved by the NCLT so far, many of the corporate defaulters are listed companies. Jyoti Structures, Monnet Ispat & Energy, KS Oils, Deccan Chronicle Holdings, Ennore Coke, Educomp Solutions, Gujarat NRE Coke, Unity Infraprojects, and Clutch Auto are some of them. Most of these stocks have already been beaten down by the market, quoting at less than ₹10.

“One of the most important aspects of the resolution process under IBC is that it opens up room for competing offers. What also makes the IBC extreme for the promoters is that a third party can come in and make a hostile offer,” says Damini Marwah, Senior Vice-President, General Counsel, Axis Bank.

If the resolution fails, and the company goes into liquidation, in most likelihood, shareholders will not get anything, say experts.

“In foreign geographies, we have been able to recover every penny through liquidation. In India, though the situation may be different as companies are over-leveraged,” says Farooque Shahab, Chief General Manager at SBI.

Under IBC, on liquidation, insolvency resolution and liquidation costs will be paid first, followed by secured creditors and workmen, employee dues, unsecured creditors, government dues and then shareholders, in that order.

At best, secured creditors and workmen may get paid to some extent, leaving investors in the lurch.