The Insolvency and Bankruptcy Code allows the market to make the most efficient choice

 WHO FACILITATES THE INSOLVENCY RESOLUTION UNDER THE CODE?

1. Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
2. The Insolvency Professionals: These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
3. Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
4. Insolvency Professional Agencies: insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance.
5. Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.

 

 

ISSUES:

1. Corporate insolvency resolution process (CIRP) enables the market to attempt to resolve stress through a resolution plan whereby the company survives. When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
2. The market usually rescues a viable company and liquidates an unviable one. There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
3. Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
4. In such cases, the code enables liquidation to release available resources to alternate uses. One should not fret over liquidation in such cases.
5. It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.
6. Second, on the face of it, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation. In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
7. Importantly, of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.
8. The companies rescued had assets, on average, valued at 25 per cent of the amount of claims against them, while the companies ordered for liquidation had assets valued at 5 per cent of the amount of claims against them. In terms of these facts, the extent of liquidation under the code does not appear worrisome.
9. Third, the stress that a company suffers is like an illness which can be treated by a variety of options. Code is one of the options for resolving stress of a company, others being, the scheme of arrangement under the Companies Act, 2013, the RBI prudential framework, etc.
10. The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship. In the words of the Supreme Court, “defaulters’ paradise is lost” under the code.
11. Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default to prevent filing of application for initiation of CIRP.
12. Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP. There are also examples of settlement with the approval of the apex court.

 

CONCLUSION:

1. Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes.
2. The stakeholders decide whether to seek resolution and, if so, the mode of resolution. They weigh various options and choose the one that best suits their needs.
3. They will not use the code if they find that the outcome under it is not consistent with market realities. When they use the code, they have a choice between rescue and liquidation. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.