“Haircut in the financial terms means a reduction in the value of an asset and this in relation to IBC obviously means that the lenders or creditors have to bear the brunt in such situations.”

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Insolvency and Bankruptcy Code, 2016 (Code) has been hailed by all stakeholders as a remarkable piece of legislation. The main reason for the popularity of the Code comes from its salient features like:

a) Consolidation of all existing insolvency-related laws

b) The shift from ‘Debtor in possession’ to ‘Creditor in control’

c) Time-bound resolution process

d) Clearly defined ‘order of priority’ in the payment mechanism

e) Introduced qualified Insolvency Professional to oversee the process

Owing to these key factors, the number of cases being admitted under IBC has been rising steadily and quite a few of them have been resolved, yet, there are huge concerns. The lenders, that is, the creditors feel that they are bearing the brunt and paying a steep price as they have to take haircuts on resolved cases.

Creditor Haircuts

The Problem of Plenty!

Latest data from the Insolvency and Bankruptcy Board of India (IBBI) also confirms this as out of the 94 cases resolved under the insolvency process, financial creditors took a haircut of 52 per cent of the admitted claims. 

What’s even more troublesome is the fact during the fourth quarter, the haircut raised to as high as 90 per cent on the resolved cases, the only exception being Essar Steel. However, the main reason for the steep increase in the write-offs was mainly due to Alok Industries; in this case, the lenders had to forego as much as 83 per cent of the admitted claims. 

Edelweiss brokerage observes that overall haircut scenario has been dismal, although some accounts have shown superior results and further noted that, “The premium received on resolution (2X of liquidation value) compared to opportunity cost on liquidation is high but decreasing sequentially.”

Financial Creditors vs. Operational Creditors

“While there is no contradiction on huge write-offs faced by the creditors, there is a lot of grumbling by the operational creditors and unsecured creditors as they feel most of the resolution plans leave them high and dry.”

– Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

ICRA, a highly reputed investment information and credit rating agency of India, points out that “One of the biggest successes of the introduction of the IBC has been the power given to the operational creditors to take a defaulting corporate debtor to the National Company Law Tribunal (NCLT).” That these creditors are empowered by the Code is a foregone conclusion now.

Based on the data studied by it, of corporate insolvency resolution plans (CIRPs) up to March 31, 2019, it says that out of all the cases admitted by the NCLT under IBC, 49% of them have been referred by operational creditors.

The deep study of CIRPs that have yielded a resolution plan, ICRA has estimated that the realisation for the operational creditors is in line with the realisation for the financial creditors; operational creditors will realise about 42% in comparison to 44% of the financial creditors.

Based on this study, the total claims of Rs. 81.4 billion (42%) will be realised in favour of the operational creditors, i.e. haircut of 58%, whereas, the financial creditors would not be much better as they will realise total claims of Rs. 1,606 billion (44%), i.e. haircut of 56%.

“If looked at in absolute terms though, the loss to the financial creditors has been significantly higher compared to the operational creditors and thus, it is clear that the operational creditors are not more disadvantaged than their financial counterparts.”

-Shweta Gupta, Founder and CEO, MUDS

Mr Abhishek Dafria, Vice President & Co-Head, Corporate Ratings, ICRA explains and says, “We believe that the reason the operational creditors have not suffered significantly higher haircuts is on account of the criticality of certain creditors to the core operations of the corporate debtors. As a result, the resolution applicants have ensured that relationships with such creditors are maintained.”

Corporate Insolvency Resolution Process Yielding Resolution

Sl. No. Name of Corporate Debtor Total Claims of Creditors Liquidation Value Resolution Amount for Creditors Percentage of Haircut for Creditors (FC+OC)*
1. Bhushan Steel Ltd. 56,022.06 14,541.00 35,571.00 36.51
2. Electrosteel Steels Ltd.  

13,175.14

2,899.98 5320 59.62
3. Orissa Manganese & Minerals Ltd. 5,388.54 301.02 310 94.25
4. Kohinoor CTNL Infrastructure Company Pvt. Ltd. 2,528.40 329.9 2,246.00 11.17
5. Kamineni Steel & Power India Pvt. Ltd. 1,509.00 760 600 60.24
6. Synergies Dooray Automotive Ltd. 972.15 8.17 54.7 94.37
7. Kalyanpur Cements Ltd. 131.05 119.74 98.6 24.76

(All Amount in Crores)

Case Studies

Realisation by the operational creditors among certain large size corporates, in fact, has been much higher than the average realisations. In the case of Bhushan Steel 81 per cent and in Binani Cement 86 per cent of the claims were received by operational creditors.  

Thus, the responsibility that operational creditors receive a fair share of their claims lies on financial creditors since they are a part of the Committee of Creditors (CoC), which is bestowed with the power of evaluating resolution plans.

Dafria explains this factor elaborately, “As the operational creditors do not form part of the Committee of Creditors (CoC) that evaluate the resolution plans, it is the responsibility of the financial creditors who are part of the CoC to ensure that the operational creditors receive a fair share of their claims so as to maintain their financial health.”

Inequitable Distribution=Litigations & Delays

“A short-sighted vision of the financial creditors to enhance their own realisation from the resolution applicant could impact the sustainability of the businesses of the operational creditors which would thus have a bearing on the going-concern status of the corporate debtor itself in the long run.”

Mr Abhishek Dafria, Vice President & Co-Head, Corporate Ratings, ICRA

If any discrimination is made between unsecured and trade creditors in a resolution plan, then it will naturally derail the resolution process and lead to multiple litigations and unlimited delays.

KK Maheshwari, managing director of UltraTech Cement, stresses on the need of CoC to be unprejudiced and unbiased towards all stakeholders. He says, “It is the fiduciary duty of the resolution professional and the Committee of Creditors to make sure that all creditors are paid.”

In most of the cases, the disgruntled operational and unsecured creditors take the fight to the Supreme Court to get their dues, if the resolution plan of bidders takes care of only secured creditors.

As an example, we can look at the case of Essar Steel Limited which is at present under dispute due to the extent of funds to be paid out to the operational creditors as part of the resolution plan.  

In the case of Binani Cement, the resolution plan has led to multiple litigations as it is partisan in nature and has taken into account the full dues of only one unsecured creditor.

The case of Bhushan Steel is also facing almost the same fate as its unsecured creditors were left high and dry, to fend for themselves. As a result, Larsen & Toubro, one of the unsecured creditors, seeking Rs 9 billion in dues from Bhushan Steel, has moved the National Company Law Tribunal’s (NCLT) Delhi Bench.

“Litigations and Court cases have led to ruined and blighted the spirit and real purpose of the Code!”

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Conclusion

ICRA is very correct in pointing out that the most positive outcome of the introduction of the IBC has been the empowerment of the operational creditors. They now have the power, which they have been using proactively and effectively, to take a defaulting corporate debtor to the National Company Law Tribunal (NCLT).

The data shows that out of the 1,858 corporate debtors referred to the NCLT up to March 31, 2019, 920 cases (i.e. 49%) have been referred by the operational creditors. Notwithstanding the hassles, the hurdles and the roadblocks, the operational creditors have been steadfastly with the process and have been continuously taking corporate debtors to the task.

With 52 percent of closed cases, liquidation has come out as the most favourable closure of all admitted claims under the insolvency resolution process.  

Edelweiss, the brokerage firm, points out that a major point of concern comes out of the fact that of 378 liquidated cases, 64 cases witnessed higher resolution value than the liquidation value. It goes on to say, “Under such circumstances, the number of cases facing liquidation will see a significant increase in the next few quarters.”

KK Maheshwari, managing director of UltraTech Cement, very rightly points out, “The preamble to the Insolvency and Bankruptcy Code (IBC) called for maximising the value of an asset and balancing the interests of all stakeholders. But the way the resolution process is moving, it would only lead to litigation.”

“To be successful, a resolution plan should not be worked out to ‘please’ someone instead, must be ‘fair’ to all!”

– Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Latest data of the Insolvency and Bankruptcy Board points out that creditor haircuts under Insolvency and Bankruptcy Code remains a matter of great concern as it is as high as 52 per cent.

“The withdrawal of Jaiprakash Power Ventures insolvency application is a positive outcome which should be applauded as standing up to the established purpose of IBC. Even more, it shall be beneficial for all stakeholders in the long run.”

-Shweta Gupta, Founder and CEO, MUDS

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