The insolvency regulator has proposed to encourage resolution professionals to make every effort to maximize the value of distressed assets beyond their liquidation value, and for their timely resolution. The move comes at a time when inordinate delays in resolution have been blamed for eroding asset values and resulting poor recovery for creditors.
The Insolvency and Bankruptcy Board of India (IBBI) has suggested that the performance related incentive fee for value maximization be paid to the resolution professional at 1% of the amount by which the realizable (recovery) value is greater at the liquidation value of the stressed asset.
Also Read: IBBI Offers Separate Insolvency Framework for Homebuyers
Similarly, resolution professionals will receive 1% of the realizable value as an incentive if the resolution of the toxic asset takes place within 165 days of the start of insolvency proceedings. There is a provision for a gradual reduction of these incentives depending on the time required for resolution. Thus, if the resolution takes place between 166 days and 270 days, the incentive will be 0.75% and if it takes place between 271 days and 330 days, the incentive will be 0.5%, according to the IBBI.
For example, a corporate debtor with a liquidation value of Rs 20 crore was resolved and the realizable value to creditors was Rs 100 crore. In this case, if the resolution plan was submitted to the NCLT on the 170th day from the insolvency commencement date, the resolution professional will receive an incentive of Rs 75 lakh for prompt resolution (at 0.75% of Rs 100 crore) and another Rs 80 lakh for value maximization (at 1% of Rs 80 crore).
The regulator has also stipulated a fee of Rs 1-5 lakh for the interim resolution professional for handling the asset resolution process where claims are worth Rs 50 crore and above.
At the same time, the regulator prohibited insolvency professionals from accepting fees or charges or sharing them with any appointed professional or support service provider in insolvency proceedings. This will avoid any conflict of interest. These changes are part of the changes to the IBBI Rules.
Also read: No stigma should be attached to corporate bankruptcies: IBBI chief
The recovery of financial creditors following the resolution of toxic assets has remained well below normal in recent quarters. It stood at just 10.7% of their claims admitted in the June quarter, having barely improved from a record low of 10.2% between January and March. Given that about 61% of distressed businesses that are in the process of being resolved have passed the 270-day limit and an additional 10% have passed 180 days, the recovery prospects for these assets are far from bright, said the analysts. The IBC stipulates a maximum of 270 days (including a 90-day extension with NCLT approval) for toxic asset resolution.
IBBI concerned about not being represented in IBC cases
Separately, in a circular, the IBBI expressed concern that the Ministry of Commercial Affairs and the regulator remain “unrepresented” in critical cases involving legal issues on the insolvency and bankruptcy code. Bankruptcy (IBC) in the Supreme Court and High Courts, as the government and IBBI were not parties to the proceedings.
In light of this, the regulator has now instructed insolvency professionals to “proactively provide prompt information and documentation to the IBBI to enable it to review the provision of the law in question with a view to s ‘involve for proper defence’.
Accordingly, the IBBI advised insolvency practitioners to inform it “promptly of any material question relating to the validity, interpretation and enforceability of the provisions of the code, rules and regulations taken into under it” challenged before the courts of first instance or the Supreme Court of respect for any mission with which they are responsible. The information, IBBI has stipulated, will be submitted by insolvency professionals as such a case is filed in court. Mani Gupta, Partner at Sarthak Advocates and Solicitors, said: “It is a good move by IBBI to ensure its participation in matters of public importance involving the constitutional validity of the IBC and its delegated legislation. (However) It is also likely that insolvency practitioners would err on the side of caution and report even trivial issues in accordance with the circular leading to information overload with IBBI.