The Insolvency and Bankruptcy Code, a new bankruptcy framework that came into effect in 2016, has resulted in more company liquidations than bailouts.
The process involves company creditors or distressed companies first going to the National Company Law Court, which then appoints an insolvency resolution professional.
This person then sets up a committee of creditors to decide on the future of the business.
The NCLT has not received any resolution plans in 525, or about a third, of the 1,514 cases ordered liquidated, according to data from the Insolvency and Bankruptcy Board of India’s newsletter, so far. December 2021. Although insolvency practitioners and creditors have received plans in many of these cases, these never reach the insolvency court.
Also read: Government proposes amendments to IBC for effective resolution of distressed businesses
So what’s going on?
In many cases, the candidates for resolution simply wanted to realize the real estate and other similar assets of these companies and were not too keen on reviving them or interested in working with their employees, said Anil Goel, an investment professional. insolvency based in Delhi.
“This is also one of the considerations creditors have when rejecting plans. I have seen this happen in the case of LML Limited as well. Creditors felt they would achieve more if they pushed the ‘business into liquidation,’ Goel said. DH.
For example, LML Limited received four offers but creditors rejected them all, he said.
Another reason for more liquidation than bailout is the disqualification under IBC Section 29A of promoters from participating in the bidding process, according to Bishwajit Dubey, who specializes in the practice of insolvency and bankruptcy and product liability at the law firm Cyril Amarcand Mangaldas.
Promoters are often at the center of many family businesses and debtor companies have to do all the heavy lifting in their absence. IBC does not allow promoters of such businesses to place bids unless they pay the full amount they owe. Some other proposed plans might not have been commercially viable, Dubey added.
Many companies are said to have disappeared or not been involved in any business activity when they approached the NCLT and therefore could not find a candidate for resolution, said Ashish Chhawchharia, Partner and National Head of Restructuring Services at Grant Thornton Bharat. “There would have been no buyers if they hadn’t seen a feasible option to get the business going again,” he added.
The pre-packaged insolvency resolution program introduced in 2021 to provide respite to micro, small and medium-sized enterprises (MSMEs) affected by the pandemic could help turn things around.
“For small and medium sized cases we expect many more resolutions via the pre-packaged insolvency resolution route and lessons learned from this can then be applied to larger cases. This will reduce the number of liquidations and will result in viable businesses surviving,” Chhawchharia said. there are no viable assets in the business, tangible or intangible, buyers will not bid for these businesses, and it is good for liquidation.
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