Delays in top 12 corporate insolvency cases cost lenders Rs 40 billion

The resolution of corporate debtors under the Insolvency and Bankruptcy Code (IBC), nearly two years since its inception, is facing a significant challenge to resolve cases in a time-bound manner.

Delays in the Corporate Insolvency Resolution Process (CIRP) and the significant rise in the number of applications being moved against defaulting corporations, are a burden on the existing infrastructure of the National Company Law Tribunal (NCLT), an Icra report has stated.

“…the growing number of applications has already challenged the infrastructure of the NCLT, thereby raising concerns on the effectiveness of the resolution process if it continues to face significant delays,” Abhishek Dafria, vice-president at Icra, said.

As of November 12, 1,272 cases have been admitted under CIRP against companies, of which 973 are still undergoing the process, according to the Insolvency Bankruptcy Board of India (IBBI) website.

Around 241 companies were sent for liquidation under the IBC by various NCLT benches and in only 58 cases have the resolution plans been accepted by the NCLT, the IBBI data shows.

“In certain instances, the final approval by the NCLT on the proposed resolution plan has also been delayed due to shortfall in the requisite bench strength,” states Icra.

In case of the top 12 large corporate defaulters, identified by the Reserve Bank of India (RBI) in June 2017, there has been a resolution only in four cases. The other cases remain open even after 450 days since they were admitted by the NCLT (except for Era Infra Engineering, see table 1 below).

Delays in the top 12 corporate insolvency cases are estimated to have cost the banks Rs 40 billion of additional income due to the delays in the resolution process beyond the 270-day period, according to Icra.

One of the main reasons for the delays in the CIRP is the significant number of litigation challenges to decisions taken by lenders. Some of the appeals are genuine, but in many cases appeals to the appellate tribunal or dissents by interest parties against certain decisions are frivolous and are in pursuit of undermining the competitive bidding process.

“Some of these entities have been entangled in litigations emerging out of new areas, such as factoring in late bids by resolution applicants, interpretation of Section 29A on eligibility of applicants,” says Icra.

Two recent examples of promoter interference include the CIRP for Uttam Galva Steels and its former promoter ArcelorMittal, and the Essar Steel and its former promoters, the Ruia family. The Ruias recently offered to pay its obligations (Rs 54.5 billion to clear out the dues, even after bankers had voted in favour of the bid and a resolution placed by ArcelorMittal).

The CIRP process for Uttam Galva Steels was delayed as the former promoter made an offer to lenders to repay its dues, and cure its ineligibility under Section 29A, to bid for Essar Steels.

There are delays even in the admission of a corporate debtor by the NCLT under the IBC, as the rules require the tribunal to admit or reject an application against a corporate debtor within 14 days of its submission.

However, “given the significant number of applications pending, the cases are taking significantly longer time to be admitted by the NCLT”.

Icra’s analysis finds that the average duration from the date of admission to the final approval by the NCLT liquidating a company is about 260 days, “which could be shortened”.

At the end of September, there were 1,198 corporates admitted under the IBC, with 816 CIRPs initiated, according to IBBI.

Of this, about 244 cases extended beyond the permitted timeline of 270 days and 163 cases took 180- 270 days to resolve, with CIRPs for the rest not extending beyond 180 days. See table 2.

“Ensuring completion of the resolution process in a time-bound manner would strengthen the confidence in the IBC, encourage creditors to file applications earlier, protect the assets of the corporate debtors from deteriorating further, and enable lenders to enhance their earnings by redeploying the cash flows received through the resolution process,” says Icra.