Repayment of debt an obligation not an option

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VIS News Service

Addressing the FICCI- IBBI-CGI-HK Conference on IBC in Hong Kong, Dr M S Sahoo, Chairperson, (Insolvency and Bankruptcy Board of India) IBBI said that the repayment of debt is no longer an option, it is an obligation as tolerance for default has disappeared.

He said, “A stakeholder may initiate CIRP of the firm when it fails to service its debt for the first time. If process is initiated, the Code shifts control from the debtor to creditors for resolution of insolvency. Through the process of resolution, the ownership often shifts to third parties. Thus, ownership of firm is no more a divine right and equity is no more the only route to own a company.” Dr Sahoo added that the creditors also need to explain to themselves and their stakeholders why they initiated an insolvency proceeding or why they did not, in case of a default. Consequently, there would never be a high value default if this law exists in the statute book.

Dr Sahoo, highlighted that in addition to rescuing viable firms, which is the sole objective of the Insolvency and Bankruptcy Code (IBC); resolution plans under IBC have yielded 200% of liquidation value for creditors. “They are realizing, on an average, 45% of their claims through resolutions plans under the Corporate Insolvency Resolution Process (CIRP), which takes on average 300 days and entails a cost on average of 0.5%. This is significantly better as compared to the previous regime which yielded a recovery of 25% for creditors through a process which took about 5 years and entailed a cost of 9%,” said Dr Sahoo. 

The chairperson, IBBI  acknowledged the support of the Judiciary, Government and the Regulators in facilitating implementation of the Code,both in letter and spirit.

He also highlighted that the Revenue Department has allowed setting off the aggregate amount of the unabsorbed depreciation and loss brought forward against book profits arising from a resolution plan. The Government has demonstrated the highest commitment to this reform. It subordinated its dues to claims of all stakeholders except equity.

Ms Anshula Kant, MD, SBI added that bankers’ approach to resolution and recovery has been renewed under IBC. Promoters’ behaviour has also changed, and they are reaching out to bankers to resolve their stressed assets. In turn, bankers are open to offer flexibility in genuine cases where the entity has been a victim of circumstances and not guilty of gross negligence or mismanagement, added Ms Kant.

She also explained that banks have also converted debt into equity in businesses facing real problem and lauded IBC for helping it take off stressed assets from SBI’s balance sheet.

Mr Shardul Shroff, Chairman of FICCI National Committee on Stressed Assets and Executive Chairman, ShardulAmarchandMangaldas&Coobserved that the insolvency resolution process under the Code is maturing very fast. He however said there are some issues such as distribution of the resolution amount amongst the secured, unsecured and operational creditor which would need to be ultimately resolved by Supreme Court.

Mr Sumit Khanna, Partner and Leader, Corporate Finance & Restructuring Services, Deloitte India said, that the standout observation has been the behavioural change in both Borrowers and Lenders – the baseline has changed with the new realization that borrower’s need to repay and that the law is secular and no one is above the law. “The journey over the last two years has been exhilarating. It has not only tested the mettle but also the character as a firm and as individuals of all who are part of the journey. Clarity of purpose, absolute commitment and a high integrity quotient were our guiding lights in the process”, added Mr Khanna.

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