Insolvency law's objective is not just recovery of dues

New Delhi: Asserting that the insolvency law's objectives are reorganisation and resolution of a defaulting company, IBBI Chairperson M S Sahoo said that if creditors recover their dues one after another or simultaneously, the company would bleed to death.

Significant amounts of recoveries have been made from defaulting firms since the implementation of the Insolvency and Bankruptcy Code (IBC) which provides a robust framework for market-driven and time-bound resolution process.

Sahoo, who is at the helm of the Insolvency and Bankruptcy Board of India (IBBI), noted that the code does not rule out recovery, but it must be incidental to reorganisation.

"Recovery should happen ideally from future earnings of the reorganised firm," he said. As per various estimates, more than Rs 5 lakh crore has been the direct and indirect realisation on account of the IBC.

Out of the total estimated amount, around Rs 2 lakh crore has been recovered before the cases were admitted for resolution under the code, while recovery through resolution plans is pegged at over Rs 1 lakh crore. Sahoo emphasised that the code is for reorganisation and insolvency resolution of a defaulting firm.

"The objective is reorganisation and not recovery. If the creditors, one after another or simultaneously, recover their dues, the firm will bleed to death. "The question is, does recovery facilitate reorganisation? If not, it is not contemplated in the IBC," he said.

Around 12,000 cases have been filed since the implementation of the code and setting up of the National Company Law Tribunal (NCLT). Under the code, cases can be taken up for resolution only after approval from the tribunal.

Sahoo said that the committee of creditors (CoC) of a company undergoing insolvency proceedings should be guided by feasibility and viability of the plan and not how much the creditors are realising under the resolution plan or how the realisation is shared among different categories of creditors.

The code specifically tells what shall be considered while approving a resolution plan, he said, adding that to him, the key job of the CoC is to distinguish between a viable and an unviable firm.

"If it is a viable (company), it must be rescued, and it is the duty of the CoC to rescue it. If it is not viable, the CoC should allow its closure.

If you rescue an unviable firm or close a viable firm, it is dangerous for the economy. The law expects the CoC, as an institution of public trust, to rescue a viable firm and allow closure of unviable one," he said.