Insolvency and Bankruptcy Code works, but it could work better

The National Company Law Tribunal’s (NCLT) move to allow Piramal Capital and Housing Finance to take over bankrupt Dewan Housing Finance (DHFL) shows that the Insolvency and Bankruptcy Code (IBC) works. It will help achieve the intended goal of swift redeployment of productive assets trapped in insolvent companies. The Piramal group received 94% of the votes in the committee of creditors (CoC) for its offer of Rs 37,250 crore to ‘s creditors. The bid amount will enable creditors to recover about 40% of the total admitted claims of around Rs 87,082 crore. The NCLT has advised lenders to show some ‘gesture’ (reallocation of funds) towards fixed depositors and small investors in debentures.

Public depositors have claims worth Rs 5,375 crore against DHFL, the first large non-bank lender to be resolved under IBC. Debenture holders with dues up to Rs2 lakh will receive full payment on their principal amount. Those with claims over Rs2 lakh will face a haircut of at least 60%. Why should all debenture holders get at least Rs 2 lakh on their secured credit? DHFL’s unsecured creditors are also part of the CoC. The resolution plan that has been approved is binding on all creditors. There is a way out. If banks recover more by exercising the personal guarantee (a civil contract liability) of the erstwhile promoter, Kapil Wadhawan, they should share a slice of it with debenture holders.

IBC allows the proceeds from liquidation of the company to be distributed first to secured lenders or banks and to pay off workmen’s dues before payments are made to unsecured and operational creditors. The priority of payments in a resolution plan that entails sale of the company as a ‘going concern’ is decided by the CoC, the Supreme Court has reaffirmed.