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Saturday, January 28, 2023

Don’t spook banks further from IBC

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GoI reportedly wants to amend the Insolvency and Bankruptcy Code (IBC) to separate the process of resolution of a bankrupt firm from the distribution of funds received from a successful bidder to enable its faster takeover. Letting bankruptcy courts give approval in two stages is only a second-best solution. The more efficient way is to strengthen the National Company Law Tribunal (NCLT). Disputes over distribution of proceeds hold up the takeover and revival of the distressed firm as a going concern, causing erosion of asset value. An approval of the transaction should encourage a successful bidder to swiftly deploy productive assets trapped in the insolvent firm. Funds received from the bidder can be kept in an escrow account, and distributed to creditors once disputes are resolved.
IBC offers primacy to banks over unsecured creditors in a resolution plan that entails the sale of a company as a going concern. A two-stage process could discourage banks from taking the IBC route. They are taking steep haircuts in the resolution of bad loans and would baulk at slower progress in recoveries. The original IBC had stipulated a deadline of 180 days to decide on the fate of the distressed firm, plus a 90-day extension if creditors agree. Now, the upper limit is 330 days, including litigation time. The resolution must ideally be ahead of the deadline.

Cutting delays in the insolvency process and raising recoveries call for a more robust legal infrastructure. This includes expediting the setting up of multiple benches of the adjudicating authority. There is also a case to bifurcate bankruptcy-related legal issues and other corporate law-related procedural matters to ease NCLT’s load. Banks must also report defaults as soon as they happen.



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