IBC's Aim Is Reorganisation, Not Recovery, Says Bankruptcy Regulator
Insolvency and Bankruptcy Board of India Chairperson MS Sahoo. (Source: BloombergQuint)

IBC's Aim Is Reorganisation, Not Recovery, Says Bankruptcy Regulator

Citing the Tinbergen Rule, bankruptcy regulator MS Sahoo said the only objective of Insolvency and Bankruptcy Code is resolution of the corporate debtor. Named after Nobel laureate Jan Tinbergen, the rule says one policy tool should be used to address one specific problem, Sahoo said.

The IBBI chief was speaking at a webinar on June 30 organised to mark five years of the Insolvency and Bankruptcy Code, 2016.

Pointing to the loan recovery rate under IBC, Sahoo said the criticism doesn't take into account the objective with which the Code was introduced. Massive haircuts taken by financial creditors in insolvency resolution cases of Videocon Industries Ltd. and Jet Airways (India) Ltd. among others have led some to question the efficacy of IBC.

But Sahoo said the insolvency law isn't a recovery tool. He said when a firm or creditor opts for insolvency resolution, satisfying claims of all creditors at the same time isn't possible.

It's a situation where claim of an individual creditor is consistent with the assets of the company but the claims of all creditors together is inconsistent with the assets of the company. If every creditor sticks to its pre-insolvency rights, then neither the resolution of stress is possible nor can a creditor realise its dues.
MS Sahoo, Chairman, IBBI

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The IBC objectives, as laid down in the Act, are

  • to consolidate/amend laws relating to reorganisation and insolvency

    in a time bound manner

  • for maximization of value of assets of such persons

  • to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders

  • alteration in the order of priority of payment of Government dues

When it comes to IBC, the sole target is reorganisation of a company while discharging the claims of the creditors to the extent realistically possible, Sahoo pointed out. If creditors want to focus on recovery, he said, there are other avenues available to them.

It is not easy to kill more than one bird with one stone when particularly the parts are flying in different directions. So there can be many tools for reorganisation and in fact there are. One may do it under the RBI prudential framework, under Section 230 of Companies Act. But you cannot have more than one target for one policy.
MS Sahoo, Chairman, IBBI

He also said the IBC doesn't use the word "recovery" except when it mentions the Debt Recovery Tribunal.

Where the stakeholders are interested in recovery they must not use the IBC. There are many incidental benefits that come up from the process but the core purpose is reorganisation.
MS Sahoo, Chairman, IBBI

Sahoo also mentioned the first case to be resolved under the Code where the lenders had to take a 94% haircut. But, he pointed out, the critics forgot that if the company would have gone into liquidation, the creditors would've received only 1% percent of the value.

The first resolution plan approved by the National Company Law Tribunal was for Synergies Dooray Automotive Ltd. - it involved a 94% haircut for financial creditors.

There are many laws for recovery, please go and use them. IBC is not one among them. Beneficiaries of the old order want us to believe that the purpose of the Insolvency and Bankruptcy Code is recovery and then condemn the code.
MS Sahoo, Chairman, IBBI
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