Insolvency professionals that FE spoke to said cash flow of such firms has been badly hit in the aftermath of the Covid-19 outbreak and the lockdown.
The government may have decided to insulate fresh defaulters from insolvency proceedings for six months, but stressed companies that are already facing resolution under the Insolvency and Bankruptcy Code (IBC) are finding it difficult to mop up resources to remain afloat.
Insolvency professionals that FE spoke to said cash flow of such firms has been badly hit in the aftermath of the Covid-19 outbreak and the lockdown. This will not just threaten their continuance as a going concern, but also impact value maximisation of stressed assets. While interim finance from lenders could save the day for some of these stressed assets, given the risk-aversion among bankers, raising funds would be a gigantic task for many.
“RPs managing the entities under the insolvency process are facing tight cash-flow situation which has further aggravated due to current lockdown impacting their operations. So, it is going to be a challenge for them to manage operations and keep them as going concerns. The situation would also impact value maximisation of the corporate debtors,” insolvency professional Sumit Binani told FE.
“The RPs can get interim finance from the lenders to deal with the situation. But, I have not seen many cases where interim finances have been disbursed. However, considering the existing situation, banks may think of approving it,” Binani said.
The Union Cabinet on Wednesday cleared a proposal to promulgate an ordinance to suspend insolvency proceedings against new defaulters for six months, with the prospect of several companies turning bankrupt looming large in the wake of the Covid-19 outbreak. However, proceedings in the insolvency cases that were already admitted earlier would remain unaffected by the latest move. Notably, as on December 31, 2019, there were around 1,960 ongoing CIRP matters in the country.
Dhaivat Anjaria, a resolution expert, said, “For cases currently under CIRP, resolution professionals face the challenge of adapting to the dynamic uncertainty posed by the environment. On one side, they must maintain operations as a going concern with frugal workforce and funding. Additionally, they need to reassess value drivers for the business based on diverse industry and market scenarios that could potentially emerge during the year. Undoubtedly, all of these have compounded the challenges.”
According to Daizy Chawla, managing partner, Singh & Associates, it will be easy for entities which are not under CIRP to survive due to their reputation and credit-worthiness, but for corporate debtor, it will be difficult to survive as lenders/vendors will not be inclined to help. “The option left with IRP/RP is to receive interim finance from lenders or any third party with the permission from committee of creditors,” Chawla said.
The stance of the Indian law is hard timelines as 180, 270 or 330 days for resolution, and one year for liquidation. However, as everyone knows, the present scenario is not only stressed for funds, it is also very low on investment appetite. Hence, pursuit of hard timelines at this stage may not only lead to practical difficulties, it may also cause much lower value realisations, leading to a loss to all stakeholders. In any case, we expect the proposed abatement of insolvency filings to be accompanied by extension of existing timelines for resolution too,” resolution expert Vinod Kothari told FE.