Saving viable cos more important than liquidating unviable ones: IBBI chief

MS Sahoo backed the decision to bring in the IBC amendment ordinance to suspend triggering of corporate insolvency resolutions against cos for any default for at least six months, starting March 25

Insolvency and Bankruptcy Board of India (IBBI) Chairman M S Sahoo said on Sunday it made no sense to save an insolvent firm when one could not save the economy. He said rescuing a viable firm was more crucial than failing to liquidate an unviable one during the current Covid-19 crisis. 

Addressing a webinar, Sahoo said there were 13,000 pending applications for admission of corporate insolvency resolution process filed with the National Company Law Tribunal. There were 2,000-3,000 insolvency processes which will continue under the Insolvency and Bankruptcy Code (IBC).

The IBBI chairman backed the decision of the government to bring in the IBC amendment Ordinance to suspend triggering of corporate insolvency resolutions against companies for any default for at least six months, starting March 25, when the national lockdown kicked in.

He said many of the fundamentally sound companies were failing due to the lockdown. 

"The corporate insolvency resolution process looks for a white knight to rescue a firm. The likelihood of finding one is low. Rescuing companies is the prime objective, not taking away their lives prematurely," said Sahoo. 

He said the markets should not fail to rescue a viable firm. "If you fail to liquidate an unviable one it is bad, but it can be rectified the following year," he said. 

Companies require breathing space till normalcy is restored, he said. He said only the corporate insolvency procedures have been suspended and that individual insolvency could still be triggered against a personal guarantor of the corporate debtor and that defaults before March 25 were not exempt from the new provision. 

He said IBC was never a recovery mechanism and several other options, such as the Reserve Bank of India's June 7, 2019, circular, were still available to creditors. "The best use of the Code is not using it at all," he said.

On whether the insolvency cases would pile up after the Covid situation was resolved, Sahoo said he did not see this possibility. "The increase in the threshold of default will reduce the number of such applications and there will be several other options, besides the IBC, that will still work," he said. 

He said a special mechanism for micro, small and medium enterprises would address the issues facing nearly 95 per cent of companies in the country. 

He said there have been reforms in the country where "we have at times taken one step back, two steps forward, moved sideways, stood still, and yet reached the destination".