Resolution professionals latch on to older cases, new restructuring windows

Over 13,000 IBC applications are currently pending in NCLT, where only matters seen as urgent are being heard

The government’s move to temporarily halt fresh insolvency proceedings has offered some respite to stressed companies but it has created an unexpected problem for resolution professionals: Loss in business.

Many firms, industry experts said, had expanded their insolvency division in the last year with a rising number of Corporate Insolvency Resolution Process (CIRP) applications being filed. “While the big ones will not see much impact, smaller firms will face issues,” said Pavan Kumar Vijay, founder, Corporate Professionals.

The government earlier this month suspended Insolvency and Bankruptcy Code (IBC) provisions that trigger insolvency. A person who did not wish to be named said many who had got the statutory clearance to work as RPs are exploring other avenues. “One of the sources of revenue was the notices for debt that were sent to companies on behalf of vendors and banks. With the threshold also being increased to Rs 1 crore, fewer notices are now being sent by lawyers,” an IBC expert said.

While many banks are trying to push for internal restructuring of loans instead of going the IBC way, companies, too, are exploring such options. “IBC is like a bloodless coup... This buffer time that companies have got due to suspension could be used by them to put their house in order. They will not want to risk losing ownership by getting drawn into IBC,” Vijay added.

While this may suggest there will not be a surge in insolvency cases once the Covid-19 crisis is over, many feel differently. “The loss of revenues and fixed costs incurred by the businesses are real and cannot be recouped in the short term. The problem has not gone, it has just got postponed. It is widely predicted that there will be a big jump in new insolvency filings once this period of ‘moratorium’ is over in 6 or 12 months,” said Ashish Chhawchharia, partner & head - restructuring services, Grant Thornton.

There are more than 13,000 applications for IBC pending in the NCLT, where cases are being heard only if they are urgent. With such a large number of cases still in the pipeline, RPs feel there is still a lot of work to go around.

“This short-term suspension will not make a huge difference to the insolvency business of firms... there are a lot of cases already filed and are pending admission by the NCLT. In fact, this may just help unclog the courts and make the process smoother,” Chhawchharia added.   

The IBC suspension only applies to defaults that have happened for a six-month period starting March 25 and an application can still be admitted for defaults before that. However, extension of deadlines for insolvency proceedings has created another challenge for RPs. “Costs have risen… Meeting the expenses and keeping the operations going has become a problem…. People start invoking bank guarantees which becomes an issue,” an RP said. Many of such RPs pride themselves on the network they have built with lenders and investors, and feel they may still have a role to play in liaisoning and bringing third parties to the table. “There seems to be a shift from the mandated IBC proceedings to more operational restructuring... People have to keep their ears open and be open to other possibilities as well such as operational restructuring by firms.”

With the Centre planning to bring in a special resolution framework for MSMEs, and with pending applications and huge demand for restructuring, the pool of around 3,000 RPs is likely to see busy days ahead.