Tweaking IBC to facilitate recovery

The Insolvency and Bankruptcy Code (IBC) may be amended to grant banks greater leeway in case a successful bidder pulls out, as well as to allow distribution of proceeds even if there is a pending litigation. This makes sense. It will help achieve the IBC‘s intended goal of swift deployment of productive assets trapped in insolvent companies and also ensure that creditors get their money swiftly. The two options when a successful bidder pulls outs are to liquidate the company or to restart the corporate resolution plan. The latter essentially means making a second attempt for the sale or turnaround of the company as a going concern. However, this could entail further delays in resolution.

IBC mandates completion of the resolution in at least 330 days – against about 5-7 years that it would typically take under the companies law. There is no need to restart the corporate restructuring process from scratch. It makes sense not to repeat some of the processes that include calling for claims, appointment of the resolution professional and calling for expression of interest. Instead, the restructuring process can commence from the date of request of the resolution plan. The resolution of a distressed asset would maximise its value, lower haircuts for lenders, ease the burden on taxpayers and save jobs.

The rationale to allow the distribution of proceeds from recovery even if there is pending litigation is sound. It applies to avoidance transactions – where the promoter is alleged to have siphoned off money from the corporate debtor (CD). The CD ceases to exist when the failed company is liquidated. Views differ on who should be entitled to the recoveries made subsequently. An amendment to allow financial creditors to be the beneficiaries of recoveries from avoidance transactions is not a bad idea. It will enable banks to lend afresh.

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