Guidelines for Committee of Creditors

In their infinite wisdom, the guardians of insolvency have issued “Guidelines” for the Committee of Creditors (CoC) on 06.08.2024. A quick read of the 3-page document reveals that the IBBI expects the CoC to demonstrate: (i) objectivity and integrity, (ii) independence and impartiality, (iii) professional competence and participation, (iv) cooperation, supervision, and timeliness, (v) confidentiality, and (vi) the sharing of information. Essentially, the IBBI has tossed around a bunch of action verbs reminiscent of the jargon MBA graduates throw around during vague consulting interviews.

 

This contrasts with the numerous other guidelines, circulars, notifications, and amendments to regulations that the IBBI periodically issues, often leaving everyone unclear about the current state of the law. The IBBI operates on a principle: the best way to train goalkeepers is by constantly changing the rules of the game. And in this grand game of insolvency, Insolvency Professionals are the goalkeepers.

 

However, in every other publication, the IBBI first mentions the specific section of the Code that empowers it to issue such documents. Then the IBBI mentions why such a publication was necessary, often in an accompanied press release. Then there’s a breakdown of steps to be taken to give effect to the publication. However, when it comes to the CoC, the IBBI merely issues guidelines without referring to a single section or regulation in the legal framework. Why? Because the IBBI was never empowered to assign responsibility (blame) to any of the various stakeholders in the insolvency process – CoC, SCC, NCLT, SBoD, or the auditors. So all the “responsibility” falls on the Insolvency Professional who is the country’s new favourite scapegoat. This often leads to professionals being unfairly scrutinized while the real decision-makers remain insulated.

 

This is reminiscent of IBBI’s circular dt. 10.08.2018 which quotes various judgements from benches of the NCLT which mention that the members of the CoC attending the meetings of the CoC should be empowered to take decisions during the meetings. The NCLT had also directed the IBBI to form appropriate regulations on the matter. In this view, the IBBI had issued this circular directing the IRP / RP to include a note in the agenda for the meeting that the meeting must be attended by persons who are competent and authorized to take decisions on the spot without deferring to internal approval. Here again, the responsibility was thrown on the shoulders of the IRP / RP. Interestingly, this circular was rescinded by circular dt. 23.05.2022 which said that the 10.08.2018 circular was no longer necessary as it had been incorporated in regulation 17 of the CIRP Regulations. But regulation 17 made no such requirement for the CoC. And once again, the insolvency process was left at the mercy of the CoC.

 

To be fair to the IBBI, it is not their fault that they do not exercise any control over the CoC / SCC. The Code simply does not provide the IBBI any power to regulate the actions of the CoC, as it gives to regulate the actions of IPs. But the Code does give the power to the IBBI regarding the constitution of the CoC and SCC. IPs face a regular problem of non-contribution of funds from the CoC / SCC. However, the regulations do not provide the IPs any power to take any penal measures against the CoC / SCC. Instead, the IP is left as a beggar at the heels of the CoC / SCC in hopes of future fee payments and new assignments.

 

The past decade of insolvency has indoctrinated a culture where any lacuna in the insolvency process automatically becomes a fault of the IP. When the CoC does not approve a resolution plan for months in hopes of a higher resolution value through negotiations, it is the RP who has to take repeated extensions, exclusions, and enlargements from the NCLT. When the CoC does not furnish its confidentiality undertaking, the RP has to explain to the Board why the Information Memorandum was issued belatedly to the CoC. In doing so, we have built an expectation of the CoC to be cajoled by the IP at every stage of the insolvency process – right from the choice of the RP by the CoC.

 

The legislature, judiciary, and IBBI have consistently failed to assign real responsibility to the CoC and SCC. This has left IPs as the lone rangers in the vast landscape of insolvency. Being the only class of stakeholders that can be regulated by the IBBI, the IP becomes a natural scapegoat in the insolvency process. Perhaps it's time to empower the CoC with responsibilities—or at least some mild consequences—for their inaction. Otherwise, we may soon find that the only IPs left standing are those who couldn't secure employment elsewhere. And that might not be the vision of the profession that the IBBI is trying to create. Isn't it time we redefined the responsibilities of the CoC before we run out of capable Insolvency Professionals?

Audit Requirements under IBC

• U/r 7(2)(ca) and 13(2)(ca) of the IP Regulations, both an IP and IPE are required to pay 1% of their annual turnover to the Board within 30 days of the end of each financial year
  
  
• U/r 7(2)(cb) of the IP Regulations r/w 31A(2) of the CIRP Regulations, a fee of 1% of the cost incurred in a CIRP must be paid to the Board within 30 days of the end of each quarter
  
  
• U/r 15(1)(b) and 15(5) of Liquidation Regulations, the progress report of a Corporate Debtor will contain audited accounts of the liquidator’s receipts and payments for the financial year. This report needs to be filed with the Adjudicating Authority within 15 days of the end of the fiscal year
  
  
• Tabulating all costs and revenues of the IP, IPE, and the Corporate Debtors at the end of every year / quarter is often a huge task that requires at least an internal audit and ideally a statutory audit
  
  
• Due to the incomplete audit, IPs and IPEs are compelled to submit fees to the Board based on provisional financials to comply with the Board's regulations
  
  
• However, these provisional figures are subject to change, resulting in fees being paid to the Board based on inaccurate revenue and cost estimates
  
  
• It is reasonable to expect that any fee levied by any statutory authority, including the Board, should be calculated based on audited financial statements. That is why most taxes and levies are also based on audited financial statements
  
  
• Surprisingly, the Board only requires IPs to complete audits of themselves, IPEs, and Corporate Debtors within tight timelines of 15 or 30 days
  
  
• This expectation is unrealistic and places undue burden on IPs, leaving room for potential misrepresentation to the Board and potential penalties in the future
  
  
• Therefore, the Board may reconsider its timelines for fee levies until audits of IPs, IPEs, and Corporate Debtors can be appropriately completed

Early Warning Signals of Stress in a Corporate

Stress in the world of banking and finance is associated with sign of  incipient sickness in the conduct of business of borrower. To know the concept of  stressed asset in corporate  we need to look back to couple of decades after  bank nationalization. 

In the early ninety’s of last century prudential norms of asset classification and capital adequacy  were introduced in the country under Banking and Financial sector reforms which together with the industrial sector reforms made a paradigm shift from age old banking practice in India. Prior to that in two tranches nationalization of banks took effect leading to fast expansion of banking throughout the length and breadth of the country. The resultant surge of industrial activities in India due to relatively easy access to fund, deregulation in industrial sector and liberal industrial policies and encouragement by way of incentives & subsidy from both the central and  state governments altogether changed the sloth, slow moving underdeveloped  economy to a rapidly growing developing economy.

The resultant economic activities brought sea changes in social sector gradually shifting large chunk of population from agriculture towards micro, medium and large industries. As a natural consequence service sector started growing by leaps and bounds and India freed itself from  dependence of first world country  in matters of food grains, machineries etc.

In the above back drop, banks, more particularly Public Sector Banks which were the only players gradually shifted their preference in urban and metros from trade and small priority sector lending to industrial advances, advances to service sectors and retail lending. 

To regulate the fast growing  banking activity Reserve Bank of India  was focussed towards honest implementation of  income recognition and asset classification, tight provisioning norms and capital adequacy in banks besides the traditional credit management approach. With the formation of separate Tribunal under the prescription of Narasimham Committee for recovery of Non Performing Assets,  the credit discipline from the point of view of lenders and borrowers were satisfactory. The system started wilting with time as there were stiff competition within the banks for sharing chunk of the pie.

In the midst of unhealthy competition among banks inadequate credit appraisals of new industrial and infrastructure advances became a new norm leading to acceptance of small, medium and large advances proposals from dubious entities having little exposure, knowledge and inadequate investible funds with them. The generous approach of banks by way of relaxations in various norms and securities encouraged fly by night operators to encash the opportunity. The unfortunate result of dilution of norms was quick mortality ( means slippage of an advance facility within one year of disbursement). As a result there were unmanageable pile of suits in   Debt  Recovery Tribunal and locking up of bank funds necessitated new enactment SARFAESI Act 2002 to enable bankers to encash their enforceable securities. 

Post Global Financial Crisis in 2008 saw another new development with the introduction of regulatory forbearance by RBI. The asset classification norms were tweaked in restructured accounts to give relief for temporary mismatch in cash flow in the existing economic slow down throughout the world. The bankers, particularly the PSBs allowed all and sundry including insolvents within the facility thus deferring identification of potential NPAs. At withdrawal of the regulatory forbearance there were flood of slippage and the NPA level of all banks and particularly PSBs went to new height not experienced in previous two decades.

Meanwhile, during the last decade RBI felt urgent necessity of implementing stringent credit monitoring mechanism to curb the disproportionate growth of impaired assets and introduced stressed assets concept within the standard asset category based  on period of default in payment of either the principal or interest or for continuous excess of balance outstanding over limit or drawing power or for non renewal of accounts within a definite time frame. Depending upon time period of overdue the stressed assets other than NPA are SMA 0( 1 to 30days default), SMA 1 (31to 60 days default) and SMA 2 (61 to 90 days default). If the default persist on 91^st day accounts turned to NPA. The periodical AQR(Asset Quality Review) of RBI for big advances of Banks to recognise incipient sickness in accounts and prescribe immediate corrective measures is a step towards this direction.

Finally, the Insolvency and Bankruptcy Code 2016 is based on default concept of corporate and has given free hand to bankers to quickly move to the NCLT to save upon time and   value of the impaired assets.   

Insolvency and Bankruptcy Code, 2016 (“IBC”) has been primarily used for Corporate Debtors. 4,593 Corporate Debtors have undergone the Corporate Insolvency Resolution Process (“CIRP”) with initiation of 4,708 CIRPs, closure of 3,068 CIRPs, and ongoing 1,608 CIRPs as on 30.09.2021 as depicted as depicted adjacent.

 

Particularly worrying is the increase in ongoing cases which might soon run to unmanageable levels. This is also because that many cases for which IBC is not an ideal fit get dumped in the IBC process indiscriminately.

 

We see from the adjacent figure that most of the CIRPs discussed above end in liquidation which is not the end of the IBC process nor is it the end of the litigation process. In fact, many cases linger on without end in liquidation offering no exit since unlike CIRP liquidation is not a time-bound process. Only 14% of the closed CIRP cases have seen resolution.

 

Of all the CIRPs admitted, there is wide variation in the admission, settlement, resolution, and liquidation in terms of the sectoral distribution. This is well shown in the adjacent graph.

 

We see that while the manufacturing sector is most likely to get resolved, and the real estate sector is most likely to enter into settlement and withdrawal. The electricity sector is also highly likely to get resolved and undefined sectors are most likely to be liquidated, seeing no resolution. Most of the discussion of the IBC has been centered around big real estate and manufacturing units since they form the bulk of the cases. However, the efficacy of the IBC as a blanket solution for distressed assets is really tested in the face of other sectors. We see that even though the real estate sector is most likely to be settled, accounts which are not settled are highly likely to enter liquidation thus causing distress to many home buyers.

 

Of the 4,708 CIRPs admitted till September 2021, 1,419 have concluded in liquidation with 1,640 still ongoing. Of the 1,419 liquidations, only 164 have been concluded accounting for only 5% of the total CIRP closures. Hence, liquidation is a limbo process not beneficial for every kind of corporate debtor. However, the very kind of corporate debtor which is most likely to enter into liquidation is the same kind which should not have been admitted into CIRP in the first place.

 

The starkest difficulty of IBC is seen in the case of infrastructure companies. Generally these are large corporate houses building infrastructure projects for various government undertakings such as road, railways, bridges etc. The banking facility availed by such companies is a non-fund based facility viz. a “Bank Guarantee”. In case of default, this bank guarantee comes due as a liability providing no relief on the asset side of the corporate debtor. The assets are future receivables from the project which has failed. So the possibility of any receivables are remote. The government generally has a clause inherent to the contract of such companies that in case of insolvency or bankruptcy of such a company, the contract gets automatically terminated. The infrastructure asset being an immovable construction is seized by the government along with its roadways and waterways and the company is left without any recourse. In this scenario, the company enters the IBC with nothing but a myriad of litigation and a bank guarantee liability running at least hundreds of crores in rupees. This is an impossible situation to navigate through and the company inevitably falls into unsolvable litigation and liquidation, with some scrap value getting preserved. Certainly IBC is not the appropriate way to go about resolving such a company.

 

Contrast that with a real estate company without any liquidity to service its bankers. The bankers invoke the IBC which risks this real estate borrower to lose not only the project at hand, but also the control of all lands acquired in the company. The company has value and it has been seen that the management becomes surprisingly resourceful in finding the liquidity in view of incoming insolvency. Where even the threat of a “creditor in control” model results in the resolution of the corporate debtor.

Effectiveness of IBC’s institutional structures – IBBI, IPs, AA, and IUs

As per IBBI Newsletter of June, 2021, IBC had enabled recovery of Rs. 2.5 lakh crore, against admitted financial claims of Rs. 7 lakh crore – translating to a recovery rate of 36% – for the 396 cases resolved out of the total 4,541 admitted. Of the remaining cases, 1,349 were under liquidation; 1,114 were closed under appeal/ review/ settled or withdrawn, and 1,682 were outstanding. A closer look at the data shows, however, the recovery rate and resolution timelines have a lot more room for improvement. This makes a continuous strengthening of the Code and stabilisation of the overall ecosystem imperative. In respect of 396 resolved cases, actual recovery rate was 36%.

Firstly, out of these 396 cases, the recovery rate, excluding the top 15 of the 396 resolved cases, estimated actual recovery rate was 18% in respect of remaining 381 cases. Estimated actual recovery rate for 1349 liquidation cases was 5%. Secondly, average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days.

Notwithstanding these challenges, the IBC has played a key role in resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets² in the Indian financial system. In this milieu, the government has been proactive in addressing issues being faced by various stakeholders. In August this year, the Standing Committee on Finance made recommendations to reinforce the IBC and the associated ecosystem. The critical recommendations include: 1) developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters; 2) establishing professional code of conduct for committee of creditors (CoC); 3) strengthening the role of resolution professionals; and 4) digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

 

However, after all said and done, there seems to be a lot to be done at the Code enforcing agencies, which are IBBI, IPA, CoC, IPs, IU and AA.

Firstly, some words about AA may be stated. IBBI has been a silent spectator of the AA encroaching into its jurisdiction. While IBBI has been stressing the need of observing timeline of the IBC processes, the AA never seems to be bothered about the timeline when it comes to their obligation in the adherence to timeline. AA liberally allows adjournments on flimsy grounds or blank requests by the parties or on its own accord without any reasons. AA liberally allows time for filing pleadings in spite of the non-compliance by delinquent parties to the case. AA entertains arguments by senior counsels for hours together on a particular law point when the IBC is all about the necessity of the business-like attitude of all concerned in resolving the cases. AA frequently takes views beyond the IBC on the pretext of natural justice and even dares to remove the RP on the application of the Suspended BOD, ignoring that RP had filed application under section 66 of the IBC for several hundred crores of rupees  and also ignoring the specific direction of the Supreme Court. It seems that the AA acts more on the wisdom of the judge than on the letter and spirit of the statute. AA even delays the cases where CoC files application for replacement of RP and also when the RP files application for liquidation. Even after the completion of timeline, the AA does not pass the order of liquidation even when the case is fixed for the same for hearing and adjourns abruptly.

Secondly, IBBI, itself adds to agony to effective management of the IBC. IPs are being supervised by IPAs and also by IBBI. For same information, multiple information is to be filed by IP separately to IPA and also to IBBI in different time based and event based forms. IBBI, liberally, amends regulations without any value addition to the IBC system. One such example was the introduction of Form CIRP-8 by inserting Regulation 40A in the CIRP Regulations. The RP, who complied with the requirement of intimation of determination to the IBBI as per CIRP Regulation 35A long back, was also required to file the Form. Instead of requiring to file additional information over the earlier or requiring the updation of earlier information, a whole new Form is asked to be filed by both IPAs and IBBI. IP is forced to keep the IBBI informed every 30 days about the delays in the any event of the IBC, even when the delay had nothing to do with the RP’s action, in Form-8 and is made liable for penalty on lapses. IBBI makes a panel of IPs for providing the same to AAs. These empanelled IPs are rendered eligible for allotment for assignment by the AA for a period of 6 months. Most recent such panel has been released on 31.12.2021 for validity from 01.01.2022 to 30.06.2022. Such panel suffers from some inherent discrepancies since it allows only those IPs to apply for empanelment, who hold the valid AFA for the full period of the stated period. Out of 3500 and odd IPs, only about 900 IPs were empanelled. Similarly for the immediately preceding 6 month period, only 500 IPs were empanelled. Such stipulation for AFA holding was illogical and impractical as it denied the opportunity to even an IP, whose AFA was subject to renewal at the far end of the period and the IP could renew the AFA only within 45 days prior to the expiry date. Further, the guidelines for empanelment stated that the IPs with existing assignments were less eligible for assignment than the IPs with no existing assignments, but such information was not forwarded to the AA by IBBI. The CPE hours earned by IPs, have to be claimed by them in the IBBI website within a week. Such information on the IBBI website has to be approved by the IPA. IPA takes 3-4 months’ time in approval and sometimes rejects the claim without any communication to the IP.

Thirdly, the IPA also contributes its own role in the frustration of the IBC system. The IPA enrols the IPs. IBBI registers the IPs. Thereafter, IPA allows the AFA. IPA requires IPs to file monthly returns and half yearly returns. The IPA requires the IPs to file the disclosures of the relationships with the professionals; CoC members etc. even if there are no related parties or connected parties and require that NIL statement has to be filed. At the time of AFA renewals, it requires the IPs to file Forms with IBBI even if those are not required to be filed. These specific requirements are made by the IPAs when renewal of AFA is being applied, delaying the AFA approval, sometimes, leading to missing the important timelines, like IBBI empanelment etc. Such requirements could be asked by the IPAs in more frequent manner and not to delay on such reasons. CPE hours should be approved more regularly as it expects from the IPs.

Fourthly, the CoC is more concerned on recovery and not resolution. In most of the cases, the CoC consciously drives the CIRP to liquidation. CoC is L1 driven and non-committal of reasonable professional fees for the IPs, forensic audit for quality work, interim finance and extending further credit line to prospective resolution applicants. In many cases, the CoC constituents act through their senior employee officers, who delay the CIRP process by not deciding on the matters in the CoC meetings. In some strange cases, it has been found that such senior officers seem to be more on the sides of the Suspended BOD, who bled the CD in the past. 

Fifthly, IP, who acts as IRP or RP, is not less responsible for the effectiveness of the IBC system. A chain is as strong as its weakest link. The RP is required to interact with the Suspended BOD (SBOD), who was primarily responsible for the stressful condition of the CD. The SBOD was not, prima facie, desired that there should be any CIRP or at least the IP, who was in the driving seat, should be rendered helpless by not providing information, records and encumbering the assets etc. aided by the senior lawyers, who represent them forcefully before AA and prove that the IP was not doing his duty properly and unnecessary harassing the SBOD. If the IP was not strong enough to sustain the pressure of the less supporting CoC and over pressurising SBOD, would not be able to prove the fraud and avoidable transactions conclusively, leading to the delinquent SBOD getting scot free.

Last but not the least, the IU, has been moving at snail’s pace in providing the much needed support system to the IBC system. The IU has not been pro-active in spreading the services, which it could extend at economical cost competing with market forces providing similar services.

Need for Developing a Market for Distressed Assets

With the onset of the Insolvency and Bankruptcy Code, 2016 (“Code”), much focus has shifted to distressed assets and opportunities in the same. As developed economies realize, there is a wealth of opportunity in the markets for distressed assets and have structures to optimize the same. India is still in a protective stage where the market for distressed assets is scattered with neither a coherent information platform, nor a way to inform investors regarding all aspects of the assets.

 

The scattered nature of stressed assets may be seen in several avenues – (i) assignment of distressed loans by lenders to asset reconstruction companies, (ii) sale of physical assets under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), (iii) resolution by means of a resolution plan under the provisions of the Code, (iv) sale of assets under liquidation etc. All such avenues use a myriad of marketing and technology platforms including the website of the Insolvency and Bankruptcy Board of India (“Board”), the website of National E-Governance Services Ltd (“NeSL”), MJunction Services Ltd, AuctionTiger.net, newspaper advertisements, local dealerships etc.

 

Over time, the market for distressed assets has grown bigger and more scattered. Every attempt to streamline the process ends up creating a choice for a new process versus an old one, which results in further dispersion of information. For example, in a typical auction for an assignment of a loan account, the bid documents are only distributed to asset reconstruction companies (“ARCs”) having an ‘agreement’ with the assignor lender. Such assignor, being typically a large public sector bank, does not go out to explore the market for more financial institutions but restricts the search to ARCs having an agreement with itself. Given that information inadequacy omnipresent in all stressed asset cases, the ARCs take their time while doing their due-diligence by when the assignors’ auction process may be over. There is no single platform where the list of all such loan accounts may be listed with basic details about them. Most such deals then happen bilaterally rather than exploring the wider market. So while the process may give an illusion of a ‘Swiss Challenge Method’ being followed, in practice it is simply a negotiated deal. Even then, the cooperation of the original management of the borrower is actively sought by the assignee to the debt in order to effectively resolve the company. In most such cases, the assignee is reduced to be a backdoor vehicle for the borrower to enter into a settlement with its lender. And the entire process happens without any transparency or regulation.

 

Similar inadequacies are faced in other processes of sale of distressed assets as well. The reasons being lack of transparency and lack of a coherent market for distressed assets. Time and again the government has tried to implement systems to build such a system. The Board has enabled the listing of all auctions under liquidation on its website and has encourages the use of NeSL to conduct the auctions so that all such activities at least till the fold of the Code may remain organized, and hence measurable. However, the Board made no means available to convert the data into metrics. Further, the technology platforms recommended turned out to be ineffective at the time of their launch losing much confidence in the eyes of the stakeholders, who resorted to using private platforms for their needs. Today, there are over 15 auction service providers marketing themselves and rendering services to insolvency professionals with no means of collating data amongst themselves.

 

Another major distressed asset in the country is in the form of companies looking to be resolved. This happens both within the framework of the Code and outside it. And is met with the highest level of customization possible for distressed assets in the country. The resolution plans may be as simple as refinancing or settlement via equity infusion to revive the corporate debtor. Or may include parts of mergers and acquisition, dissolving parts of the business, tax optimization, and refinancing using long-term debts which themselves may run into stress in due course. In this scenario we realize why stressed assets have customarily been a very disorganized space. Different borrowers may require a variety of different solutions, which may not always be available in the market. Of course the lack of information availability does little to help standardize the process. But fact remains that there’re no “standard solutions” when it comes to stressed assets.

 

The National Company Law Tribunal that acts as an adjudicating authority for insolvency cases in India might be the greatest repository of data for insolvency cases. All insolvency cases at some point need to refer to the Adjudicating Authority for a variety of reasons and if not for anything else, then at least for obtaining final orders on their cases. Further, the Adjudicating Authority requires the insolvency professionals to regularly report the progress of the cases, creating a large repository of regularly updated information. However, all this information is never converted into any knowledge due to the lack of any metrics. The information keeps getting rusted into back alleys of old courtrooms (or in a modern sense, in cloud storages). But no real value is ever derived out of them. It is no surprise that the number of cases pending to be adjudicating before such forums itself is an undefined number with no metrics for that as well. The judicial system works without accountability, or worse – measurability.

Ineligibility of IPs for submitting EOIs

On 01.06.2021, IBBI published a circular bearing File No. IP-12011/1/2020-IBBI wherein an Insolvency Professional ("IP") may submit his EOI to be included in the panel selected by the NCLT for allotment of assignments. To be included in this panel, the IP must submit the EOI on the IBBI web-portal.

However, IPs who did not have a valid AFA till 31.12.2021 will not be allowed to submit the EOI.

Error message: "You are not eligible to apply for EOI as your AFA is not valid till 31-DEC-2021"

As per the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2019, u/r 12A(3), “an application for renewal of an authorisation for assignment shall be made any time before the date of expiry of the authorisation, but not earlier than forty-five days before the date of expiry of the authorisation.” The same has been adopted by all 3 IPAs.

Hence, IPs whose AFA is expiring during July-December 2021, will not be allowed to submit the EOI on the IBBI web portal. In fact, IPs whose AFA renewal falls during July-December every year will never be eligible to submit their EOIs for the June-December cycle. The same happens if an AFA renewal falls during February-June where he will be ineligible to submit the EOI for the January-June cycle.

As of 06.06.2021, there are 1,452 IPs registered with the Board whose AFA expires during 01.07.2021 to 30.12.2021. As per IBBI rules, these IPs will not be able to submit their EOI for the July-December cycle.

AFA expiring on	No. of IPs
Jul 2021	44
Aug 2021	43
Sep 2021	32
Oct 2021	28
Nov 2021	300
01.12.2021-30.12.2021	1005
Sub-total	1,452
31.12.2021	18
Jan 2021	190
Feb 2021	129
Mar 2021	125
Apr 2021	177
May 2021	109
Jun 2021	13
Total	2,213

U/r 7A of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“IP Regulations”), an IP needs to hold “a valid authorisation for assignment on the date of such acceptance or commencement of such assignment, as the case may be.” The EOI is a submission for acceptance of a potential assignment and my AFA is valid as on the date of submission of such acceptance. Hence there should not be any problem to be considered eligible to submit the EOI.

As per the Press Release dt. 23.07.2019 bearing No. IBBI/PR/2019/19, Para 2(b), the AFA "enables an individual to seek registration as an IP even when he is in employment". Hindering in obtaining assignments for never the intent of the AFA. Many practicing IPs have left full time employment to practice the Insolvency profession and AFA is renewed as a matter of routine as per prescribed timelines. Denying opportunities due to such bureaucratic red-tapism, is against the spirit and concept of the profession.

We request IBBI to rectify this error which threatens our livelihood and allow the IPs, including myself, bearing a valid AFA to apply for the EOI. In all fairness, the NCLT may check the AFA of an IP at the time of allotment of an assignment, which is freely accessible on the IBBI website.

Reinvestment Risk Rate

There is often a significant risk involved for the holders of bonds when it comes to reinvesting. It is important to understand that the rate of return is going to be less if the rates drop. This is because that process prevents most investors from successfully being about to invest at the assumed rate.

Investors need to be very careful with this when there is a trend of interest rates continuing to drop. Knowing your reinvestment risk rate will help you to calculate the overall risk that is involved with particular types of investments. The fact that the dividends from the initial investment may not be invested at the same or a higher rate is something you will have to be prepared for.

The issue of the reinvestment risk rate pertains more to those that engage in long term bonds than short term investments. This is because they may have to be reinvested after rates have dropped from what the purchase price was. This is one of the main calculations that investors look at when they want to predict what their risk is for a given investment.

Liquidation as a Going Concern

IBBI vide notification dt. 25 Jul 2019 inserted Regulation 32A in the Liquidation Regulations whereby the Liquidator may sell the Corporate Debtor, or the business thereof, as a going concern. This was supposed to be a welcome move, as it is generally known that the economic value of a going concern business is higher than the value of assets. Hence, this move was supposed to increase the economic worth of national assets under Liquidation.

However, it has been repeatedly mentioned in the Regulation that under such a mechanism, the “assets and liabilities” of the business will be sold as a going concern, which opens a Pandora ’s Box for the buyers under such a scheme.

As per the data published by IBBI[i], as of 30 Jun 2020, 957 cases had resulted in liquidation with a total liquidation value of Rs. 40 kCr. Against this, the total claims were Rs. 5.46 lac Cr, i.e. the total liquidation value of the 957 cases in liquidation was a mere 7% of the total claim amount. If these companies were to be sold as going concerns, what would happen to the remaining 93% of the claims being Rs. 5.07 lac Cr? Does the company as a going concern get sold with all those liabilities? Assuming the proceeds of this liquidation value are distributed among the creditors in the Waterfall mechanism of Section 53 of the IBC, what action would the creditors take to recover these remaining dues, which have been sold to a new buyer? Are we staring at another round of CIRP for these remaining dues?

The Corporate Debtor in liquidation is already one which has gone through the process of insolvency and has failed to find a resolution. If the Corporate Debtor is left again in the economic playing field with 93% of its liabilities, it is highly unlikely that it’ll survive and won’t fall into the trap of insolvency again.

 

Our view is that once the liquidation process is initiated and completed, either by sale of assets or sale of business or sale as going concern, and the proceeds have been distributed to the claimants as per Section 53 of the IBC, the Liquidator cannot take responsibility for any pending claims. The liabilities of the Corporate Debtor are already converted to claims under the CIRP and Liquidation processes. The liabilities, if unclaimed or unsettled, cannot turn live again because their claims had not been submitted in the insolvency or liquidation processes.

 

But more important than that, the sale of liabilities under liquidation as a going concern is in complete violence to Section 53 itself, which speaks of settlement of claims under liquidation. If the liabilities were to come live once again even after receiving proceeds from liquidation, then the liquidation process itself is deemed to have been failed. However, one may still argue that in case of liquidation as a going concern, Section 53 of the IBC does not apply and the proceeds of liquidation shall simply be used to reduce the liabilities rather than to settle them completely.

It should also be understood that at certain times, the assets are inherently linked to certain liabilities and their separation is not possible for a going concern. Examples include long-term supply contracts where the goods are to be called off over a period as required, certain infrastructure contracts which require submission of performance guarantees, indemnification obligations etc. These are pecuniary liabilities which are essential for the operations of the going concern. Such liabilities cannot be settled under Section 53 of the IBC if the Corporate Debtor is to be sold as a going concern.

In conclusion, the transfer of liabilities in liquidation as a going concern does not do justice to the spirit of the IBC. However, there is a need of clarity from the IBBI whether the liabilities are necessary to be required to be transferred during sale as a going concern. Meanwhile, all eyes will be on the future course of legal proceedings on this issue. The Adjudicating Authority may take a view that is contrary to ours, which it has the right to do and settle the matter. However, the same Adjudicating Authority may make use of its generic powers under Section 60(5) of the IBC to clear the matter and bring a unique opportunity of liquidation as going concern giving a real resolution to the strained Corporate Debtor.

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[i] https://www.ibbi.gov.in/uploads/whatsnew/a98a313021b1250be5ca3b9301626f25.pdf

Pricing Jet

Aviation in a tough industry. Globally we have seen time & again that the industry is prone to bankruptcy. A significant amount of capital expenditure is required upfront & then there are very high fixed costs. This means that unless we get a high degree of customer stickiness, it becomes very difficult to make a profit. This is a factor we’ve seen play out in India where a lot of airlines have gone bankrupt despite the fact that there is tremendous growth in traffic & the projected growth is also very high. As a result, there’re a lot of airlines investing in growing capacity because they want to cater to this growing market. As they invest in growing capacity they also have to ensure that the capacity gets utilized. That builds a pressure on the airlines to keep pricing at a level where more customers join the band of flyers. This has been a big pain for Indian airlines despite the huge growth margins. India has the lowest airfares in the world[i]. Because the airfares are so low, the airlines are unable to make profits while operating. It is often said that oil is a big factor in aviation but oil has been volatile for over 6 years now. Despite that, the global aviation industry has returned a profit consistently for the last 10 years. It is expected that the industry will hit a profit of $ 36B in 2019[ii]. Looking just at the APAC, the profitability is expected to be $ 10B[iii]. These numbers show that airlines have been on a positive growth trajectory for the last 10 years.

Despite this backdrop, the Jet fallout did happen. The airline industry in India is suffering from very high ATF prices. The tax imposed by the central & state governments on ATF in India make it a very expensive fuel in comparison to their international peers. Further, ATF is not a part of the GST. Hence, airlines are unable to take the set-off of the GST that they pay. Also, there’re a lot of congestions are airports which adds to the operating costs of airlines. Apart from the infrastructure issues, there’s a pursuit for growth & market share resulting in lack of discipline in pricing.

In a distressed situation, the first question asked during valuation is the possibility of a turnaround, i.e. the steps to be taken to make sure that the airline can operate at margins that are remunerative. There has been a history of turnarounds in the airline industry globally as well as in India. Spicejet was almost grounded about 5 years ago & today is one of the best aviation stocks in the world[iv]. Any incoming investor looks at the possibility of a turnaround when they are evaluating a distressed business & try to figure out what is the best they can do with the business. They would always put a higher degree of risk in to the future cashflows of the company because they’re not sure whether they’ll be able to achieve those projected cashflows. One of the most valued assets for any airline is parking slots, which guides an airline’s ability to land at a certain airport. Jet’s parking slots are only available to it till June. If the airline is not revived till then the slots will be up for auction and then the airline will have no value left. Another factor the investors will look at is the flexibility of the lenders in taking a haircut. The equity value of a business is the total value of the business minus the total debt of the business. If the value of the business is less than the value of the debt, then theoretically there is no value to equity. Then an investor would not bother coming in. The only reason an investor would come in is if the lenders are willing to bring their value down to a reasonable number.

From a lender’s perspective, it’s important for them to maximize their recovery. In order to maximize recovery, tough questions need to be faced. If they invest some more money one may argue that it is putting good money after bad. Another argument is that by making a relatively small investment, the lenders may be able to recover a significantly higher sum later. When this starts to play out, the lenders need to have a lot of comfort with the new investor and their business plan. If the lenders have that confidence, things may work out for the airlines.

It remains to be seen if any new investor will perceive value in the airline. However, as the age old adage goes, at the right price, everything is a good asset.

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[i] https://www.telegraph.co.uk/travel/news/revealed-cheapest-countries-for-flights/

[ii] https://www.travelagentcentral.com/running-your-business/stats-airline-profits-to-hit-35-5-billion-next-year

[iii] https://www.iata.org/pressroom/pr/Pages/2018-12-12-01.aspx

[iv] https://www.livemint.com/Companies/T2BOBSwziSYSnEDPMJ2xEM/The-SpiceJet-turnaround-story-and-how-it-became-worlds-best.html