Potent tool: Insolvency threat triggers loan recovery of Rs 5 lakh cr

As many as 14,510 cases involving defaults of Rs 5.13 lakh crore were withdrawn by July 31 from various benches of the National Company Law Tribunal (NCLT) before the applications were admitted by the adjudicating authority, since the Insolvency and Bankruptcy Code (IBC) came into being in late 2016, according to the latest official data.

This suggests, in most cases, creditors have recovered money from debtors by just applying for insolvency proceedings, reinforcing the efficacy of the IBC as a potent tool for bad loan resolution even before its actual use. As for defaulting promoters, the fear that their companies will change hands once the IBC is applied, has forced them to pay up.

As of end-July, 2,789 cases – with a combined default of Rs 1,96,171 crore – filed by financial creditors under section 7 of the IBC were withdrawn. Similarly, 11,581 cases, filed by operational creditors under Section 9, with a total default of Rs 1,63,927 crore and 140 cases (default of Rs 1,53,372 crore) under Section 10 (meant for initiation proceedings by corporate debtors), were withdrawn from the NCLT since 2016.

Interestingly, these gains to creditors are much higher than what they gathered from the resolution or liquidation of stressed companies where insolvency cases were fully pursued. According to the latest data compiled by the Insolvency and Bankruptcy Board of India (IBBI), financial creditors – the most important group among the class of creditors – realised Rs 1,88,893 crore from resolution/liquidation of defaulting firms until June 30 this year, against their admitted claims of Rs 4,22,609 crore, marking a recovery of 44.7% since late 2016.

Replying to a debate on the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, in the Rajya Sabha on Saturday, finance minister Nirmala Sitharaman said the IBC’s priority had been to “keep the companies as going concern rather than liquidating them”. She also highlighted the IBC’s role in anchoring default resolution even before its actual use.

Citing the RBI data, Sitharaman said in FY19, the recovery under the IBC was as much as 42.5% of the admitted claims, way better than that through other tools, such as Lok Adalat (5.3%) , Debt Recovery Tribunals (3.5%) and the SARFAESI Act (14.5%). The recovery under the IBC has since improved to 44.7%, show the IBBI data.

A top executive with a state-run bank told FE: “Some legal purists may scoff at the perception that the IBC is being used more as a tool for recovery rather than resolution. But the fact is that it has helped enforce some discipline in the country’s credit culture. Even if it’s used purely as a recovery tool – which it’s not – it’s still fine. For far too long, defaulters had it too easy at the cost of lenders.”

“That said, the challenge is to stick to the mandatory 270-day time-frame, and this is where more work needs to be done,” said the banker. Most high-profile insolvency cases, including Essar Steel and Bhushan Power and Steel, have been mired in litigation, thanks to dogged pursuits of defaulting promoters to hold on to their firms.

Data available with the IBBI show, of the 2,108 ongoing cases as of June 2020, the resolution of as many as 1, 094 has been dragging on beyond the mandatory 270 days, primarily due to legal hassles.

As FE reported earlier, to cut delay, the government is planning to soon notify a special insolvency resolution framework for stressed MSMEs, which is likely to reduce the mandatory time-frame for submitting a resolution plan for such businesses to just 90 days.

The Rajya Sabha has already approved the Bill to suspend insolvency proceedings for up to a maximum of one year against fresh Covid-related default from March 25. The Bill seeks to replace an ordinance that was promulgated in June to provide relief to thousands of firms battered by the Covid-19 pandemic.

Since the pandemic has hit every industry, it’s difficult to find suitors if a large number of companies are put on the block for resolution, hence the move to suspend insolvency against Covid-related default. The government, however, has made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.