Banks want IBC proceedings in all pending cases to be suspended for 2 years

Fall in valuation, lack of demand cited as reasons

Citing a sharp fall in valuations and lack of demand for bankrupt companies, Indian banks are considering proposing to the government that insolvency proceedings in all the pending cases be suspended for at least two years.

There were 1,961 cases pending in courts as of December 2019.

If the lenders’ proposal is approved, it will impact big-ticket cases like Videocon Industries, Reliance Communications, and Lavasa Corporation, pending in the National Company Law Tribunal (NCLT). 

Banks have made claims worth Rs 75,000 crore against Videocon Industries, which was on the Reserve Bank of India’s second list of companies sent for debt resolution. Public sector banks have made claims of Rs 76,000 crore against RCom. At the same time, banks are seeking debt resolution of Rs 7,700 crore from Lavasa Corporation.

The banks’ plan won’t impact cases where a resolution has already been approved by the NCLT, such as the acquisition of Bhushan Power by JSW Steel. Bankers said Section 30 of the IBC 2016 (with respect to the submission of resolution plans) and Section 31 of the IBC (which deals with approval of the resolution plan) should be suspended as bidders were either backing out or wanted to make changes in their original plans. 

“There is an internal discussion going on among the banks as barring a few outlier cases in specific sectors where the IBC is a success, in the rest of the cases, banks have taken a massive haircut; promoters have lost companies and employees have lost jobs,” said a banker.

 

 

Bankers said due to the corona pandemic-led disruption, business sentiment is not going to improve for at least another one year. "Due to the shutdown of operations of bankrupt companies for the last one month, the expressions of interest (EoIs) by the prospective bidders will be very low or minuscule, thereby denting the overall expected realisation by banks. Citing recession and downward economy, the bidders will exploit the situation to their best and at the cost of banks,” said another banker. 

Even if the company is sent for liquidation due to lack of bidders, the liquidation value will be far lower as compared to the pre-pandemic value. The oil crash, lack of liquidity and supply chain disruption have impacted the valuation, and even liquidation will not fetch a good price, they said.   

Corporate lawyers, however, warn that a decision to freeze bankruptcy proceedings should not be misused by unscrupulous promoters. “There have been widespread instances of several businesses committing financial frauds and defaulting on their loan repayments before the advent of Covid-19. No exemption should be provided to such defaulters and cases should be filed against them,”’ said Rajesh Narain Gupta, managing partner of law firm SNG & Partners. 

“Though it is necessary that the government makes provisions for providing economic, financial and fiscal relief to the business community which is facing an unprecedented crisis, it will need to engage in out-of-the-box thinking and ensure that only genuine and honest borrowers benefit from this decision,” he said.