By Neeti Shikha, Urvashi Shahi & Rahul Prakash
Not even four years have passed and many have started questioning the efficacy of the IBC. The IBBI newsletter shows that so far 49.61% of CIRP that were closed ended up in liquidation against 13.41% that got resolved. Though the recovery under the IBC has been close to 42.5% of the amount filed for banks, the question is whether it has been reduced to yet another recovery mechanism, pushing most of the companies towards liquidation? If so, it defeats the very standing jurisprudence of business rescue that winding up of a company should be a method of last resort.
Someone has rightly said that “99% of all statistics only tell 49% of the story.” Similar is the case of data on liquidation. Though at the first glance, it seems the IBC is pushing companies towards liquidation. However, if we analyse the data, we find that 73% of the liquidated firms were already in the BIFR for an average 10 years! Even a firm with positive net present value (NPV) will not survive if it suspends its operation for 10 years. These 73% firms had only their scrap value when they were admitted under the IBC.
Of the 751 companies that were earlier under BIFR and later referred under the IBC, only 57 had resolution value greater than liquidation value. This suggests only 7.5% of firms seemingly having a chance of survival (based on presumption that resolution value was higher than liquidation value) were pushed into liquidation. But one cannot derive a firm conclusion based merely on numbers as there could be myriads of reasons for which a company of such nature be pushed into liquidation such as rejection of a plan by the NCLT, operational inefficiency of resolution applicant, future contentious claims, etc.
Excluding the legacy the IBC got from BIFR, only 24% of firms have gone for liquidation, which is a good number, given that only companies under acute stress come under the IBC. A good insolvency system cannot be judged on the number of companies being liquidated for the very reason that the purpose of insolvency law is to timely liquidate firms that have a low chance of survival. For instance, Germany is known for its efficient insolvency system despite most of the companies being liquidated. Even in the UK and the US where the insolvency regime is well-developed, the number of companies being liquidated is higher compared to India.
Another concern raised by experts is that the Committee of Creditors (CoC) acts in its own self-interest rather than the long-term interest of the company.
Though it’s true that the CoC has been given extensive power under the current regime, to infer that they (financial creditors) will go for liquidation to recover their amount may not be a correct assumption considering that the haircut ranges from 80% to 20%, with the mean of 35%. Any bank would prefer that a company in stress revives than to settle its claim for such a large haircut. The incentive to go for outright liquidation is more for operational creditors and that’s why they have rightly not been given voting rights in the CoC.
While there are several contrary perceptions being made about the IBC, one cannot deny that it has introduced a mechanism suited for India’s business environment. The IBC is a powerful tool to change the lending behaviour by making debtors more accountable to creditors.
Four years old, and the IBC has matured leaps and bounds. Its success is not limited to the number of cases being resolved that are purely under the new regime, free from baggage of the past, but also the fact that hopeless cases under BIFR have also seen 23% recovery in the event of liquidation. Going forward, the IBC needs to prepare itself for future challenges. The recent G30 report ‘Reviving and Restructuring the Corporate Sector Post-Covid’ has highlighted there could be an upsurge of insolvency cases. The IBC must look at ways to mitigate a ‘cliff edge’ of insolvencies once the suspension is lifted.
Shikha and Shahi work with Centre for Insolvency & Bankruptcy, IICA. Prakash is a PhD candidate, University of Texas. Views are personal