Resolution Resolution Plans For Insolvent Companies Should Lead To Sustained Value Creation

The Insolvency and Bankruptcy Board of India (IBBI) has said that resolution plans for insolvent companies should lead to sustained value creation over the years and must involve strategies that go much beyond just “restructuring of liabilities”. The regulator also asked the powerful committee of creditors (CoC) to show great commercial wisdom while endorsing such plans.

It said, “This requires tremendous commercial dexterity and acumen on the part of members of the CoC,” the Insolvency and Bankruptcy Board of India (IBBI) said in a message on its website. It also stressed that the CoC, comprising only financial creditors, needs to be fair and transparent, as its decisions impact the life of a stressed firm and consequently its stakeholders. With responsibility comes accountability.”

It further said that its decisions must increase the value of the firm, which is valued 100 at the commencement of the resolution process, to at least 101 the next year, 102 the year after, and so on.

The regulator’s views comes at a time when focus has shifted to elevated recovery as well as the resolution of toxic firms amid a high degree of liquidations under the insolvency and bankruptcy code (IBC).

In June, the Insolvency Law Committee under corporate affairs secretary Rajesh Verma had suggested that the IBBI issue guidelines, stipulating the standard of conduct for members of the committee of creditors. “This may be in the form of guidance that provides a normative framework to members of the CoC about the manner of conducting themselves in processes under the Code,” it had said. Last year, the IBBI had stipulated that CoC members will come under its regulatory purview.

The CoC decides on the haircut and chooses the best of the resolution plans submitted by market participants, which is different from other options that allow creditors to find a resolution only from existing promoters.

A resolution plan can entail a change of management, technology, or product portfolio and acquisition or disposal of assets, businesses, or undertakings. At the same time, it can also entail the restructuring of the firm, its business model or its ownership, the IBBI said.

The insolvency regulator is in the process of raising awareness about the role played by the CoC, as an “institution of public faith”. It also aims to build the capacity of institutional creditors to ensure that the committee discharges its statutory duties with utmost care and diligence.

As many as 66 per cent of companies that were undergoing resolution had exceeded the 270-day -limit as of end-March, showed the IBBI data. Recovery for financial creditors from the resolution of stressed firms under the IBC crashed to a record quarterly low of 10.2 per cent of their admitted claims in the three months through March. Analysts have mainly blamed the delay in resolution for the value erosion, although other factors, too, served to drag down the recovery.

Cumulatively, about 47 per cent of the closed cases resulted in liquidations until March 2022, against 14 per cent in resolution, mainly due to the fact that a large number of “dead cases”were transferred from the earlier BIFR regime.