HOW INSOLVENCY STAKEHOLDERS ARE LEARNING ON THE JOB
Nine months from the time the Insolvency and Bankruptcy Code has come into effect, all the stakeholders, including creditors, promoters, insolvency professionals and regulators, are becoming familiar with the operation of this new piece of legislation. Take the case of an insolvency resolution professional (IRP) managing the turnaround of a large manufacturing company. On a visit to a factory site at a remote location, he receives a call from the promoter of the business. The message is something to this effect: “Get out of the factory at the earliest. I will not be responsible if workers turn violent.”
The resolution professional narrating the incident says such threats, both veiled and unveiled, or other similar efforts by some creditors and promoters are something he and many of his peers are learning to deal with as part of their job to keep a distressed business going.
According to the Insolvency and Bankruptcy Code, once the National Company Law Tribunal (NCLT) initiates the process of insolvency resolution against a company, the stakeholders have 180 days — extendable by another 90 days — to finalise a turnaround resolution plan that is acceptable to all creditors and shareholders. Otherwise, the business heads for liquidation, with assets being sold to pay off creditors’ dues. For these 270 days, the promoters cede control of the business to a committee of creditors (CoC). A court-appointed resolution professional runs the day-to-day operations with measures to turn the business around.
Apart from facing reluctant and non-cooperating promoters, resolution professionals also deal with challenges of raising interim finance to keep a business going. “Availability of interim finance is critical to a successful resolution,” says Shailendra Ajmera, partner, restructuring and turnaround services, EY India. However, it is not easy for resolution professionals to find lenders for such distressed assets.
Bahram N Vakil, founding partner, AZB & Partners, points out that credit is essential to maintain critical supplies, such as electricity and raw material, to keep a business going. Given the stringent timelines under the Code, the CoC plays a crucial role in taking timely decisions in running a company. And for that, banks that sit at the creditors’ table have to be quick on their feet while taking decisions.
A banker closely associated with the CoC process in a distressed company says they have developed internal guidelines to enable faster decision-making. “Decisions that usually take weeks are now being processed in days,” he says. Still many resolution processionals feel the CoC attendees should be adequately empowered to take sound commercial decisions in a timely manner.
A way forward could be for the regulator and courts to permit one-year clearance for maintenance of essential supplies that are critical to keep a business running, suggests Alok Dhir, managing partner, Dhir & Dhir Associates.
Some stakeholders feel few resolution professionals have experience in managing companies. “One needs to know the business to keep it a going concern. Resolution professionals should be like chief restructuring officers,” says Atul Sharma, managing partner, Link Legal. Resolution professionals agree that they are new to the job. “We will mature with the growth and development of the nascent insolvency ecosystem,” says one of them.
The sector regulator, the Insolvency and Bankruptcy Board of India (IBBI), too, has been on a learning curve. Over the last six months, the IBBI has come out with over a dozen notifications and clarifications to deal with various aspects of the Code. Setting up of information utilities and putting in place cross-border insolvency laws are high among its priorities.
From an investors perspective, a key concern has been the tax implications while selling any stressed asset. “An exemption may have to be made for income tax on book profits due to write-off of liabilities under the resolution plan,” says Ajmera. Most experts feel that the learning curve for stakeholders is likely to last for twothree years. A recent EY-Assocham report on the Code’s progress aptly notes: “…at the heart of practical issues of implementation lies the insecurity with various stakeholders. Over time we expect to see these insecurities diminishing.”