Nearly half of insolvency proceedings led to liquidation rather than rescue

IBBI latest data suggest only 14 per cent yielded resolution plans since the inception of IBC

Nearly half of all corporate insolvency proceedings led to liquidation rather than rescue of companies owing to better valuation. Experts attributed the trend to inordinate delays in resolution process and lesser appetite to acquire stressed assets.

Only 14 per cent of corporate insolvency resolution processes (CIRPs) yielded a resolution plan between December 1, 2016, and March 31, 2022, according to the latest data from Insolvency and Bankruptcy Board of India (IBBI).

47 per cent of CIRPs ended in liquidation during the period. Out of a total of 5,258 corporate insolvency proceedings initiated, 3,406 have been closed.

Out of the closed ones, 1,609 have ordered liquidation, and 480 have ended in approval of resolution plans, data showed.

Diwakar Maheshwari, Dispute Resolution Partner at Khaitan and Co, said this is because at times better value is realised for the stressed asset in liquidation rather than in resolution as there are huge haircuts (total claims minus the amount of realisation/amount of the claims) to be agreed by the Committee of Creditors (CoC). “Also, untimely delays have some attribution to the increase in liquidation cases,” he said.

Of 480 companies rescued through resolution plans, 159 were either with the Board of Industrial and Financial Reconstruction (BIFR) or defunct. Besides, 731 CIRPs have been closed on appeal, review, or have been settled and 586 have been withdrawn.

Since the launch of IBC in 2016 up to March 31, 2022, the cumulative recovery for lenders where resolution took place dropped to 32.9 per cent against 36 per cent around September last year. In absolute terms, the realisation for financial creditors till end March 2022 stood at Rs 2.25 trillion, much higher than liquidation value of Rs 1.31 trillion. The cumulative admitted claims of financial creditors till end March 2022 were Rs 6.84 trillion.

“The buying capacity of companies participating in the resolution process has gone down during the pandemic. “The bid amount of companies during the resolution process is less than the liquidation value so lenders opt for the latter,” said Abhishek Swaroop, partner at Saraf and Partners.

However, delay in the entire resolution process may also be a reason for lenders opting for other legislation, he said.

Lenders see more value realisation and a quicker resolution through other existing routes such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The SARFAESI Act cannot be invoked when CIRP is in the process, but it can be invoked after the liquidation process,” Swaroop explained.

Liquidation was never the intent, object, and preamble of the Code, said Maheshwari. “The time gap of 330 days for wrapping up the CIRP has also put pressure on NCLTs to order for liquidation of assets,” he added.

Besides, the lack of inherent value of the stressed assets itself may be one of the reasons behind the absence of bidders.

“Most of the assets going into default, particularly gas-based power plants, do not fetch good value as the cost of running such a plant may be high in the light of soaring natural gas prices. A conventional power plant may be cheaper to run. On the other hand, assets of companies such as Essar Steel and Bhushan Steel, though debt-ridden, fetched a handsome bid during the resolution process because the bidders saw value in the assets,” Swaroop said.