Important lessons from 96% haircuts under the Insolvency and Bankruptcy Code, 2016

Five years of Insolvency and Bankruptcy Code, 2016 (IBC) has certainly been a road with a few hits and many misses. It is evident that IBC is relatively newer legislation and still at its nascent stage. However, one cannot ignore that the legislation is still trapped under its drawbacks. Whether it is the complex and time-consuming process for revival or the fact that it takes 459 days[1]on average for any resolution plan to conclude instead of the usual 330 days mentioned under the Act, these fallacies have certainly led to a loss of trust of creditors on the mechanism provided. Despite being a ‘fast-track’ solution, the pile of debts continues to mounts, especially for Indian Banks. It is true that IBC majorly focuses on shifting the regime from ‘debtor in possession’ to that of ‘creditor in control’, however, the recent case of Videocon Industries which saw a high amount of haircut seems to cast a shadow on this and raises concern as to how much protection is granted to creditors under the code. In financial terms, a haircut means a reduction in the value of an asset. A haircut is often seen as the last resort when there is no hope for recovery and when the loan may be written off for a one-time settlement.

THE VIDEOCON CASE

The total admitted claims of Videocon Industries and its 12 group companies amounted to Rs.64,8383.63 crore. The NCLT approved Twin Star Technologies resolution bid of Rs.2,962.02 crore for debt-ridden Videocon Industries. It was also observed that the resolution plan gave 99.28% to the operational creditors. Out of total claims presented for Rs.71,433.75 crores, claims admitted amounted to Rs. 64,838.63 crore. Out of the aforementioned claims only an amount of Rs.2,962.02 crore, which amounts to only 4.15 % of the total outstanding claim amount, and the total hair cut was calculated to be 95.85%. The NCLT raised a cause of concern over the same and requested the CoC formed to increase the payout. It was noted that operational creditors only received 0.72% of the total admitted claim. In its order passed on 8 June 2021, The NCLT emphasized that many operational creditors in the present case were MSMEs and these may face insolvency proceedings shortly if their position continues to remain like this.

The CoC-approved resolution plan stated that secured financial creditors would get only 4.89% while dissenting secured financial creditors would get 4.56%. Assenting unsecured financial creditors received a very meager amount of 0.62% whilst dissenting unsecured financial creditors received nil amount. The order mentions that the resolution plan elaborates that Twin Star Technologies will infuse funds through equity or convertible securities or convertible loans as a means to make payments in full and by priority. It has further mandated the merger of all 11 companies of the group.

ARE HAIRCUTS THE NEW TREND?

It cannot be denied that haircuts have certainly become a new fear for creditors. Cases of liquidation are on a high and it seems that IBC may be failing in its true objectives. The case of Alok Infrastructure Ltd. which was taken over by Reliance saw a haircut of 83% while the case of Monnet Ispat saw a haircut of 75%.  An analysis of the Videocon case reveals that creditors had to accept 4 cents for every dollar they spent.[2] Bankers in the case of Siva Industries had approved settlement while accepting a haircut as high as 93.5%. Globally, this figure is about 30-40% in average cases. This is hard-hitting to the Indian Banking Sector; especially as Indian banks continue to bear the brunt of mounting NPA’s. The IBC, which was expected to provide relief to a certain extent to banks has failed in several instances. The main reasons for high haircuts could be owed to the fact that once CIRP starts it may be revealed that companies do not have any assets to rely on and hence the creditors cannot bid for the same. Where there is no asset, there is no bidding and when there is no bidding, there is no recovery and hence a high haircut. The recovery mechanism itself is time-consuming and complex and requires a commitment to a complex process that many creditors, especially government-owned banks who have written off loans, may be unwilling to go through.

LEARNING LESSONS

The trend of haircuts has certainly generated worries in the Indian Banking sector. One cannot deny that this, in turn, can cause a large impact on the economy. It doubles non-performing assets, dissatisfies creditors, and forces MSMEs into insolvency. We need to stop defending the IBC with the usual ‘developing’ law statement. It has been five years and drawbacks have been sufficiently pointed out. It is high time that we correct these drawbacks through a stricter lens by removing possible ambiguities and charting mandatory timelines. The CIRP mechanism needs to be drafted in a more organized and less complex manner. It needs to equally protect both parties, i.e. the corporate debtor and the creditor. Till the aforementioned changes take place, banks need to commit to the revival process. Further, the NCLT should carefully scrutinize resolution plans as has been done in the Videocon case.

The IBC can truly be a table-turning law for the Indian Economy but that is only possible when drawbacks are addressed and the ticking time bomb off debts is diffused.

[1]. Recovery From IBC Keeps Falling; Bankers Take 60% Hair Cut In 348 Resolved Cases So Far, NEW INDIAN EXPRESS (1st July, 2021, 6:00 P.M), https://www.newindianexpress.com/business/2021/may/29/recovery-from-ibc-keeps-falling-bankers-take60-hair-cut-in-348-resolved-cases-so-far-2309311.html.

[2]. Andy Mukherjee, For a 90% haircut, try India’s Bankruptcy Salon, MINT (2nd July 2021, 7:00 PM), https://www.livemint.com/companies/news/for-a-90-haircut-try-india-s-bankruptcy-salon-11625443411590.html.