Huge ‘Haircut’ During Insolvency!

Insolvency and Bankruptcy code is being said to be very effective in terms of resolving Insolvency as compared to the previous mechanisms prevailing. According to Union Minister of State for Corporate Affairs, Shri Rao Inderjit Singh, he in a written reply to a question in Lok Sabha on Aug 02, 2021 stated, the total of 8 cases have been resolved, 65 have been settled/ withdrawn and 23 cases have been ordered for liquidation in the real state sector out of 212 Applicants.[1]

The Standing Committee on Finance (2020-21) shows the effectiveness of the Insolvency and Bankruptcy Code, 2016. It reflects that out of 4283 cases dealt, 3283 cases have been disposed of and 1000 cases is pending.[2]

According to the RBI report, 1,953 cases were referred to bankruptcy courts involving ₹2.32 trillion, of which ₹1.05 trillion was recovered during fiscal year 2020.[3]

As per the World bank’s Ease of Doing business Index, 2015[4], ranked India at number 135 out of 190 countries on the ease of resolving insolvency based on various indicia. Now India has jumped to 63rd position in the World bank’s Ease of Doing Business 2020 Report.[5]

On the other hand, Mr Sahoo stated that It is axiomatic that a company coming to the IBC does not have adequate assets to repay all its creditors. On an average, the companies, which have been rescued through the IBC till March 2021, had assets valued at 22% of the amount due to creditors when they entered the IBC. This means the creditors were staring at a haircut of 78% to start with. The IBC not only rescued these companies but also reduced the haircut to 61% for financial creditors.” Among other factors, he said, the recovery also critically hinges on at what stage of stress a company enters insolvency proceedings, “as much as at what stage a patient arrives in the hospital.

The haircut is the reduction which a bank makes in the original loan amount during a settlement, it ranges up to 90-95 percent in some cases, leaving only a pittance for the banks at the end of a long and tiring process. As per publicly available data, 240 corporate debtors that have been liquidated till December 2020, had outstanding claims of Rs 33,086 crore, with assets valued at Rs 1,099 crore.

A debate has been arisen, whether resolutions through the National Company Law Tribunal (NCLT) are turning into a loss-making exercise for banks. In Under IBC, the Banks have been seen to have taken a deep haircut, where the company is either acquired by a fresh promotor or the original promotor offers a settlement through one time deal after withdrawing the CIRP under section 12A.

As happened in the case of IDBI Bank- Sivasankaran deal on the settlement of Siva industries and Holdings Ltd (SIHL) loan is a prominent example. After resolution attempts failed, C Sivasankaran offered a one-time settlement (OTS) to banks under which he agreed to pay Rs. 500 crore to banks against a loan of Rs 5,000 crore.

Videocon Industries and its group companies had admitted claims of Rs 64,838.63 crore but banks agreed to hand over the company to new acquirer for a 95 percent haircut.

In the same manner, the Jalan -Kalrock consortium got the troubled Jet Airways for a haircut of 95 percent. In other words, banks don’t have much to show for at the end of long process.

[1] PIB Delhi (August 02,2021), https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1741629 (last visited Aug 08, 2021)

[2] Ministry of Corporate Affairs, Standing Committee on Finance Report (2020-2021)

[3] Reserve Bank of India, Report on Trend and Progress of banking in India (issued on 29th December, 2020)

[4] The World bank, Report on Ease of Doing Business, 2015

[5] The World bank, Report on Ease of Doing Business, 2020

Insolvency & Bankruptcy during COVID-19

Insolvency and Bankruptcy Regimes in India

The Economy across the globe has been adversely impacted as the result of the pandemic pertaining to COVID- 19 spread. The impact of the same is evident in India as well. India has been found to be contracted by more than 10.3 % by the International Monetary Fund, 9% by Asian Development Bank and 9.6% by the World Bank in 2020-21. Many big and small companies across the world have signed for insolvency proceedings.

It is natural for the companies or individuals to face a setback during the course of business. The same could be caused due to any internal or external factor and not every such case should result in liquidation. Insolvency and Bankruptcy resolution frameworks works to restore the dying business back to life. The frameworks gives a new lease of life to a company whose fate was earlier dependent upon a plethora of debt restructuring schemes introduced in the past, the failures of which often resulted in the company being relegated to winding up proceedings or being struck with a situation of sitting over unproductive assets whose value depreciated with time. India in the recent past has developed its own method to encounter and rescue corporates, through its Insolvency and Bankruptcy Code, 2016. And the same has been in constant modification and updation by trial and error.

Corporate Insolvency Resolution Process as called in India is the resolution framework for a Corporate Debtor facing a crisis. It is based on Creditor in Control Model, that is the control of the company is shifted to the Committee of Creditors. It aims to restrain premature liquidation of livable businesses. The minimum threshold for Applying for CIRP has been revised from 1 lac rupees to 1 Crore. The change has been made in the view of large number of stressed corporates and very rigid resolution mechanism.

To deal with the complexity of CIRP and large number of Debts, a new framework has been introduced, making it flexible and relaxed. It has been termed as Pre-packed Insolvency Resolution Process (PPIRP). It is based on Debtor in possession model, in which the control stays with the same management. As small companies and MSMEs mainly works on individual relations.

Corporate Insolvency Resolution Process (CIRP)

CIRP was introduced through the Insolvency and Bankruptcy Code, 2016 replacing the previous debt recovery mechanism under Sick Industries Companies Act (SICA, 1985). CIRP is a benchmark for debt recovery and highly effective mechanism for treating the stress in the time bound manner. It has different modus operandi for different types of stresses. It has a wider scope giving space for not just credit failure but also allows operational failure and restructuring. It is a blend of debt recovery mechanisms in practice around the globe.

CIRP can be initiated through making an application to the Adjudicating Authority. It can be initiated by Corporate Debtor, Financial Creditors or Operational Creditors. CIRP can be initiated as soon as the default occurs in borrower entity’s account with any lender – singly or jointly – shall initiate steps to cure the default. An Interim Insolvency Resolution Professional is appointed, who manages the business in collaboration with Committee of Creditors. The Resolution Professional constitutes CoC in around next 30 days considering claims of creditors. A resolution Plan is prepared by the CoC and presented before the Adjudicating Authority. If the AA is satisfied by the Resolution Plan as approved by the committee of Creditors under Section 30, it shall by order approve the resolution plan which shall be binding on the CD. Around 330 days are provided for CIRP as per Section 12(3), proviso 1. The Resolution Professional will be liable and responsible for all compliances during a CIRP. As the outcome of the CIRP either the Resolution plan is approved or the debtor is proceeded for Liquidation. The minimum threshold for CIRP was 1 lac as per IBC, 2016, wide its notification dated 24th March 2020, the threshold was increased to 1 crore. For the Debts less than 1 Crore a new PPIRP has been introduced vide Ordinance dated 04.04.2021. The minimum bar being Rupees 10 lacs.

Pre- packaged insolvency Resolution Process (PPIRP)

PPRIP has the main focus on the Micro, Small and Medium Enterprises (MSMEs) whose debts are between 10 lacs to rupees 1 crore. In Indian context, most of the organisations are largely promotors driven and presently IBC under Section 29A bars the company management and its related parties, responsible for pushing the company into insolvency, to regain control over the business of such companies. This results in creating a situation of imbalance which can be best addressed through Pre- Pack schemes.

PPIP can be initiated by the Corporate Debtor only, falling under MSME and eligible under section 54A. (has approval from not less than 66% of the FCs of the CD after providing the FCs with the declaration of filing Application within 90 days). PPIRP can be initiated when an account becomes SMA-0. One cannot initiate prepack till it is classified as SMA-2. RP has a critical responsibility of oversight of the process to ensure that no stakeholder is short-changed, and all dealings are fair and transparent during the PPIRP. His presence instils confidence of the stakeholders who trust him for his professionalism, independence, and integrity. He guides the CD in all tasks prior to initiation and assists the stakeholders in the formulation and approval of a resolution plan. While at the stage of PPIRP, the control over the Corporate Debtor (“CD”) shall be exercised by the Partners or the BoD and they shall take all the decisions and that it is the duty of such BoD or the Partners that while they are controlling the CD, at PPIRP stage, they shall try to protect the property of CD. RP would constitute CoC comprising of unrelated FCs (unrelated OCs where the CD does not have any unrelated FC) within seven days of the prepack commencement date. The CD shall continue to be liable for all compliances under Pre-pack.

For the purpose of PPIRP, Swiss Challenge Model is used. It may entail two rounds of bidding for a distressed company or its assets. It allows a seller to mix-and-match the features of both an open auction and a closed tender to discover the best price for an asset. The total of 120 days are provided with no extension as per section 54D during the PPIRP. The Hybrid of both Informal (out-of-court) resolutions and Formal (Judicial) Insolvency proceedings are done as a part of PPIRP. As the outcome of PPIRP either Approval of Resolution plan takes place or Closure of the process happens. PPIRP can be terminated by the NCLT at any time before the approval of the resolution plan by the CoC, provided the CoC may have the liberty to close the process with 66% of those who are present. To convert the process into CIRP, the CoC, after the commencement of PPIRP but before a Plan is approved under Sub-section (4) or (12), may pass a Resolution, by a minimum 66% vote, deciding to initiate CIRP, if the CD is so eligible under Chapter II of the IBC.

For the purpose of liquidation, the CoC may decide with 75% of voting power to liquidate the CD at any time during the pre-pack process, where the conduct of the CD is not above Board, the CD does not have a viable business, or for any other reason. Termination of PPIRP may also lead to liquidation.

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