IBC And The Unfulfilled Promise Of Timely Resolution. The Story In Numbers
As of July 31, 2020, a total of 19,844 cases were pending admission before NCLT including 12,438 cases under IBC
On average it takes around six to 12 months for an insolvency case to be admitted by the National Company Law Tribunals. In one instance—Reliance Naval & Engineering Ltd. —it took the Ahmedabad bench 16 months to admit IDBI Bank’s application. And appeals by Reliance Communications Ltd. delayed the initiation of insolvency against it by almost a year.
Citing such cases, restructuring consultant firm Alvarez & Marsal has raised an alarm about the systemic delays under the Insolvency and Bankruptcy Code and how the promise of a time-bound resolution is still a distant dream for stakeholders.
“As of July 31, 2020, a total of 19,844 cases were pending admission before NCLT including 12,438 cases under IBC. In FY20, approximately 480 cases were admitted every quarter which, if continuing at the existing pace, may take six years to complete the backlog.” – Alvarez & Marsal
The pandemic-led suspension of new insolvency cases had provided the NCLTs a golden opportunity to improve efficiency by moving hearings online, digitising applications, submissions, orders, etc. during the pandemic, but unfortunately that didn’t happen, says Nikhil Shah, managing director at Alvarez & Marsal. NCLTs have been functioning at around 20-30% capacity. The size of the backlog of pending admission cases is already huge, he adds.
The largest delay is occurring from the promoter or the corporate debtor challenging the admission of an insolvency application. Applications can be admitted after a default is established and the corporate debtor is given a short hearing. There is no reason to hear every other stakeholder.Nikhil Shah, Managing Director, Alvarez & Marsal
Confirmation of the default can be easily provided by the information utility, NeSL, post which the case should be admitted immediately, Shah explains.
In the report, Rajeev Sinha, chief general manager at IDBI Bank, too emphasises the urgent need for time-bound admission of applications.
Considering that there is sufficient documentary evidence of default and acknowledgement of default by the corporate debtors, 14-day time for admission of case should be strictly adhered to. CIRP needs to be commenced immediately to transfer control to Committee of Creditors and to avoid asset stripping/siphoning.Rajeev Sinha, Chief General Manager, IDBI Bank
Delay in admission isn’t the only problem. Resolution of admitted cases too has far exceeded the 270-day timeline under the Code.
Multiple litigations, administrative delays at NCLT and inconsistencies in judgments across benches have been some of the key driving forces for the slower resolution process, the report points out.
“The rate of filing of new cases has far exceeded the rate of closure of ongoing cases, resulting in nearly 75 percent of the 1,942 ongoing cases having aged more than 270 days.” – Alvarez & Marsal
Add the appeals before the National Company Law Appellate Tribunal and the Supreme Court, the true time for the resolution increases sharply.
The average time of resolution for the sample 23 cases which escalated beyond the NCLT, aggregating financial creditors’ claim of Rs 1.02 lakh crore, increased from 445 days to 751 days.
IBC Delays: Commercial Implications
Alvarez & Marsal analysed recovery patterns for 246 cases where the resolution plan was approved by the adjudicating authority as of September 2020. Barring two cases of Essar Steel and Binani Cement, the highest recovery is seen in the resolution cases that have been closed within 300 days.
“As the resolution time increases, recovery percentages fall sharply to 15–25%. The average recovery observed for the resolved cases for financial creditors has been 41% as of September 2020.” – Alvarez & Marsal Report
The report also throws light on the financial performance of 10 resolved cases while the insolvency process was ongoing. These cases went on for more than 270 days and had claims by financial creditors exceeding Rs 2,000 crore each.
Comparison of average revenue over four trailing quarters before insolvency started to average revenue of all quarters during which the company was under IBC showed a revenue decline for most companies.
“Alok Industries – 64%; Orchid Pharma – 16%; Ruchi Soya – 17%; Uttam Value Steel – 23%. Only three companies showed revenue increases, namely, Bhushan Steel (22 %), Electrosteels Steel (55%) and Monnet Ispat (35%), largely driven by an increase in steel prices.”– Alvarez & Marsal Report
For an investor, the range of litigation outcomes in commercial matters has been large and unpredictable. ‘Systemic delays have exposed the investors to risks of exchange fluctuation, inflation, deterioration of cash flow, etc. Uncertainty and suboptimal value preservation due to the above factors make it difficult for investors to underwrite these investment cases,’ the report points out.
Sharing his views in the report, Ravi Chachra, executive chairman at Eight Capital Management, says unless the resolution time is reduced, investors will not be interested in bidding in NCLT but instead will prefer to use out-of-court restructuring.
Perhaps why, as Indranil Ghosh, managing director and and India Head of Cerberus Capital Management points out, pre-pack has become the prime ask by investors because it is essentially a one-time settlement with a whitewash on liabilities provided by NCLT.