Reading the Bad Debt Numbers

Context: While certain critics remain, the Insolvency and Bankruptcy Code (IBC), 2016 still allows the market to make the most efficient choice.

Critics of IBC:

• Not inclusive: Some argue that the Corporate Insolvency Resolution Process (CIRP) rescues only about 25% of companies and leads to liquidation for the rest, the code is not delivering on its mandate.
• Has redefined the debtor-creditor relationship: since the company may change hands.

Debunking the concerns with the IBC:

• CIRP provides various choices: The code enables liquidation to release the assets and the entrepreneur stuck up in an unviable company.
  • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
  • When there is no feasible plan, the company proceeds for liquidation; the market usually rescues a viable company and liquidates the unviable ones.
• Majority value of assets rescued: While only 25% company were rescued, they account for 75% for the stressed assets.
  • The companies rescued had assets valued at 25% of the amount of claims against them, while the companies ordered for liquidation had assets valued at 5% of the amount of claims.
  • 95% rescue rate: As of 18000 resolutions, 17000 were rescued.
• Liquidation is a last resort:
  • Other options available for companies, like the scheme of arrangement under the Companies Act, 2013, the RBI prudential framework,
  • Defaulters’ paradise is lost under the code: as observed by the Supreme Court.
    • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default.

Conclusion: Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value-maximizing outcomes.