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The insolvency regulator has proposed a “two-part resolution plan” structure to ensure swift takeover of the stressed firm by the winning suitor to keep it as a going concern without delay, which, in turn, will prevent asset value erosion.
In a discussion paper, the Insolvency and Bankruptcy Board of India (IBBI) has said the first part of the resolution plan will enable the National Company Law Tribunal (NCLT) to approve the rescue plan giving control to the acquirer so that the sick firm can quickly resume or accelerate its operations.
The second part, it said, should deal with the usually-contentious issue of the distribution of resolution proceeds among various stakeholders. Given that this issue often leads to litigation and delays the resolution process, separating the two critical parts of the rescue plan will, therefore, ensure the sick firm doesn’t sink further, the regulator reckons.
Under the extant system, the resolution plan has to be approved in one part and in its entirety.
So, the first part will include the resolution amount and the terms of the plan and its feasibility, viability and implementation schedule, among others. The second part will stipulate how the plan has dealt with the interests of all stakeholders and the payments to be made to them against their admitted claims.
The new proposal, the IBBI said, aims to “streamline the resolutions and prevent delay in the implementation of the resolution plan”.
Experts have often blamed inordinate delay in resolution for poor recovery from stressed assets. As many as 67% of the insolvency cases, where resolution is being pursued, have exceeded the 270-day time-frame. The Insolvency and Bankruptcy Code (IBC) stipulates resolution within 180 days, which can be extended by 90 days with the NCLT approval.
The recovery in 808 resolved cases, since the insolvency regime came into force in late 2016, stood at Rs 3.16 lakh crore as of September 30, 2023, or just 31.85% of the admitted claims of the creditors. Of course, the cumulative proceeds were 86.31% of the fair value of the companies (when the IBC was invoked) and 168.5% of their liquidation value, according to the latest IBBI data.
The paper dated November 1 proposes seven changes to regulations to make the insolvency resolution process more effective and transparent. The regulator has sought public comments on them by November 22.
Share of dissenters
In another important change, IBBI has suggested that dissenting financial creditors be entitled to lower claim of the resolution amount or the liquidation value.
“To provide clarity with regard to entitlement of dissenting financial creditors, which shall be lower of the: (i) amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53; or (ii) the liquidation value as defined under these regulations been distributed in accordance with the order of priority in sub-section (1) of section 53,” it said.
The paper proposes to make it mandatory for the committee of creditors (CoC), which decides on resolution plans for bankrupt firms, to hold meetings at least once a month to review progress. It noted that in several cases, they haven’t held regular meetings, delaying decision-making involving the rescue plans.
In a bid to generate greater investor interest, the regulator has proposed that the fair value of a stressed firm be made part of the information memorandum for the potential suitors. At present, the information on such valuations is available only to the insolvency professional and the CoC, in addition to the valuers.
“It (the current system) creates an information asymmetry. It dissuades resolution applicants to participate who fear that some other resolution applicants may have better information on value. This (proposed) transparency ensures that all resolution applicants operate with the same set of information, fostering trust and encouraging participation. So, a proposal for disclosure of fair value is deemed to attract more serious bidders and may result in better value,” the discussion paper said.
It has also recommended that registered valuers estimate both the fair value and the liquidation value of an insolvent company in accordance with “internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor”. They must also explain the valuation methodology to the CoC members.
Seeking to remove any ambiguity in the current regulations, the paper states explicitly that the insolvency professional must seek approval from the CoC for all the expenses, including the expenditure incurred in running the stressed firm as a going concern.
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