Dec 25, 2017

Insolvency law: More firms going for liquidation than resolution; over 20 face closure

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Turning around a stressed company may be the primary objective of the new insolvency law, but official data suggest more firms have gone for liquidation in the new regime so far than resolution. The liquidation process has been initiated in case of over 20 stressed firms under the Insolvency and Bankruptcy Code, 2016, as lenders have failed to endorse any viable plan for their revival. By contrast, resolution plans for only 5-6 companies (including Visakhapatnam-based Synergies-Dooray Automotive) have been approved by the adjudicating authority so far. The National Company Law Tribunal (NCLT) has approved liquidation proceedings against firms such as VNR Infrastructures, Bhupen Electronic, Innoventive Industries, REI Agro, Nicco Corporation, Oasis Textiles, Wind-Ways Packaging, Hind Motors, Hind Motors India, Hind Motors (Mohali), Blossoms Oils & Fats, Healthline Hospitality and Abhayam Trading, official sources told FE. Others include RG Shaw & Sons, UB Engineering, New Tech Fittings, New Tech Forge & Foundry, Micro Forge India, Pooja Tex-Prints, Swift Shipping & Freight Logistics and DCM International. Many of these firms have been stressed for a long time and were among the first batches of cases to be filed under the IBC.

Commenting on the high level of liquidation proceedings in old cases, MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India, said: “The not-so-good results in the initial set of cases is no indication of the performance of the IBC.” However, as and when fresh cases of defaults regularly come up for being admitted, the resolution performance of the IBC will look much more impressive, he added. Analysts, too, concurred with the view. Many of the 450-odd companies where insolvency proceedings have been admitted by the NCLT have been struggling for survival for years, much before the IBC was implemented late last year. Therefore, these are almost ‘dead’ cases where chances of insolvency resolution are very remote, and liquidation is the only natural outcome, they said. The IBC provides for a time-bound and professional resolution of insolvency. Once a case is admitted by the NCLT, a resolution plan to keep the company as a going concern has to be approved in 180 days, which can be extended by 90 days by the adjudicating authority. If the insolvency resolution professional and the committee of creditors fail to come up with a viable resolution plan within this period, the company goes for liquidation. There is, however, no strict time frame to complete the liquidation process.

Hyderabad-based VNR Infrastructures–owned by Vakati Narayana Reddy, a member of legislative council of Andhra Pradesh–was the first company to go for liquidation under the IBC. It owed Rs 1,102 crore in loans and guarantee to a number of banks, led by State Bank of India. Similarly, Innoventive was the first case where a bank–ICICI Bank– had invoked the insolvency law to recover dues. The Pune-base steel products maker owes the lenders Rs 955 crore. A committee of creditors, led by ICICI Bank, Bank Of India and Bank of Baroda, rejected a resolution plan, paving the way for its liquidation proceedings last month. Bhupen Electronic was another interesting case where the committee of creditors was constrained to recommended liquidation, as the company had not been operational for almost a decade with no employee on its payroll. Only land and building were its sole assets. VIP Finvest Consultancy started insolvency proceedings against Bhupen. The committee of creditors did not firm up any resolution plan nor did it receive any from others.

Manoj Kumar, partner and head (M&A and Insolvency Resolution Services) at consultancy firm Corporate Professionals Capital, said: “In case of highly stressed businesses, liquidations may be a valid commercial outcome to realise the assets trapped there but they have their collateral impacts: realisation for lenders would be very low; operational creditors like suppliers would not get much; many jobs would be lost etc. So lenders should try to save as many such businesses as possible rather than letting them go under liquidation.” The IBC provides for the revival of stressed assets or, in case of liquidation, their quick monetisation. Secured creditors, including banks, are placed third in the preference order to receive the proceeds of liquidation, after meeting the cost of resolution and workers’ dues. The insolvency law came into prominence in May after the Centre authorised the Reserve Bank of India, through an Ordinance, to direct banks to resolve specific cases of bad loans by initiating resolution process under the new law, where required. The central bank quickly followed up, recommending 12 large cases of defaults, accounting for bad loans worth around Rs 1.75 lakh crore, for resolution under the IBC.

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