Stating that promoters of sick companies are often aware that their company may be headed for a loan default, Chairperson of the Insolvency and Bankruptcy Board of India (IBBI) Ravi Mital has recommended that such promoters should initiate corporate insolvency proceedings on their own under Section 10 of the IBC (Insolvency and Bankruptcy Code) to start the moratorium process and stop piling up of further debt.

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Mital said that promoters may refrain from doing so under the fear of losing control of their company to lenders, which anyway happens once the IBC process starts at the request of lenders.

Speaking at a conference on the IBC in Delhi, he pointed to the successes of the law in settling cases without resolution or admission of cases, with claims of over Rs 7 lakh crore settled under IBC outside the resolution process wherein creditors had withdrawn their claims.

While he stated that there's a perceptible change in the creditor-debtor relationship after IBC, he agreed that problems with the code are also being analysed on basis of the haircuts and delays creditors have to endure.

Pointing to preliminary figures which say that turnover, PAT(Profit after tax), Market cap and EBITDA has increased for sick companies after resolution; he added that an expert committee report expected in a couple of months will give a better idea of what IBC has achieved in resolution.

The Ministry of Corporate Affairs had put a discussion paper in public domain to seek proposals to reduce delays in the IBC process.

Mital rued the delay at every stage of the insolvency process: from filing to taking up of the case to resolution, stating that more time in liquidation leads to decline in an asset's valuation by around 1.8% per month.

The other reasons he stated for delays were instances of creditors taking more than a year to file cases after default and personal guarantee cases worth Rs 12 lakh crores pending litigation under the IBC, which are stuck as there are several petitions challenging the constitutional validity of the law on personal guarantee.

While advising against over-regulation and a one-size-fits-all approach, he lauded a recent verdict by NCLT Chennai for its innovation to revive a sick company, where a part of the company was sent for resolution and another part was sent into liquidation.

He urged for pro-activeness in the process of insolvency, reminding that each month of delay saved in the process will ensure a better value of the companies involved in the process.

Also read: Big changes proposed to IBC — could spell relief for stressed real estate developers

While he said that the recoveries under IBC were improving year on year, he pointed out that the majority of cases undergoing the process are under Rs 1,000 crores in valuation, down from the days of the big cases worth Rs 40,000 crores to Rs 50,000 crores involving steel companies.

He said that despite more experience and judicial precedents from the previous years, tribunals will have to resolve far more number of cases to match the amounts resolved in the past. He concluded by saying that with the power and real estate sectors picking up now, there's an opportunity to get good bids for sick power projects and stalled real estate projects.

(Edited by : Pradeep John)

First Published:Apr 13, 2023 8:39 PM IST