HOW IN­SOL­VENCY STAKE­HOLD­ERS ARE LEARN­ING ON THE JOB

Business Standard - - FRONT PAGE - SUDIPTO DEY Since De­cem­ber 1, 2016, when the Code came into ef­fect, more than 200 cases have been ad­mit­ted by the Na­tional Com­pany LawTri­bunal and over 900 in­sol­vency pro­fes­sion­als reg­is­tered un­der the IBC frame­work. Op­er­a­tional cred­i­tors ac­count for almo

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.”

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