Debt resolution process: Bankers fret over spike in consultants' bills

Bankers say RPs are outsourcing human resources and audit/legal consulting to outside firms so as to plug all loopholes. Bankrupt companies also pay for special forensic audits and legal opinions

The rising cost of debt resolution of several bankrupt companies is worrying bankers, as a substantial part of the income of such companies is going towards compensating resolution professionals and other consultants hired to complete the process.

Bankers said debt resolution bills are rising as resolution professionals are outsourcing the human resources and audit/legal consulting to outside firms so as to plug all the loopholes. Bankrupt companies also pay for special forensic audits and legal opinions, which are conducted when banks feel that funds have been diverted by the previous promoters. As a result, it is the creditors and former employees who have to wait longer to get their dues.

As per the IBC 2016, once a company is sent to the National Company Law Tribunal (NCLT) for debt resolution, a resolution professional is appointed to run the company and find a new buyer while the former promoters of the company and its board are sacked. The company’s income is then used to pay the debt resolution costs.

“It’s advantage big audit firms, which are getting all the contracts. Extensive litigation by previous promoters and other operational creditors just adds to the final bill,” said a source close to the development. “As litigation drags on for years, the company, which is going through the debt resolution process, is paying all the bills, including the cost of legal opinions,” he said. “The net result is huge losses to the bankrupt companies, job losses and lower recovery of dues by the lenders.” 

Citing an example, the official said Aircel’s debt resolution process cost the company around Rs 320 crore for RP process and wages. Similarly, Videocon, which has been under debt resolution process since 2017-end, is paying close to Rs 10 crore a year to the resolution process alone. “As many of the debt resolution companies are under litigation and there is no clarity on closure, the bills of the RPs just keep rising and are paid on priority basis,” the source said. Meanwhile banks are letting go of their notional interest income.

As per the IBBI, since the provisions of the corporate insolvency resolution process came into effect on December 1, 2016, around 3,774 CIRPs have commenced up to March-end this year. Of these, 312 have been closed on appeal or settled, and another 157 have been withdrawn. Around 914 have ended in orders for liquidation and 221 have ended in approval of resolution plans. Banks are recovering on an average 45 per cent of their dues from the bankrupt firms. 

Though the bankruptcy law aims to close the various processes at the earliest and has prescribed timelines, litigation has delayed the resolution. For example, the 221 CIRPs, which have yielded resolution plans till March, 2020, took an average of 375 days (after excluding the time taken by the appellate authority) for conclusion of the process. Similarly, the 914 CIRPs that ended up in orders for liquidation, took an average of 309 days for conclusion, as per the IBBI. But including the litigation time, the average time taken goes up substantially.

Ringing the cash register

• RP/consultant/legal bills touch a new high
• Bankrupt companies paying RPs/consultants/legal bills from its income
• Banks, bankrupt co employees’ dues remain unpaid for years
• Banks' recoveries fall due to higher bills of consultants