Investors likely to revise offers under IBC as virus alters plans3 min read . Updated: 05 May 2020, 12:30 AM IST
- IBBI has already said the lockdown imposed by the government will not be reckoned in the resolution timeline
- Since its inception, the IBC process has been mired in last-minute litigations with promoters trying hard to retain control of their firms
MUMBAI : MUMBAI: Investors who have bid for assets under the Insolvency and Bankruptcy Code (IBC) are expected to reassess their offers as cash flow projections have gone awry amid the covid-19 pandemic and the ensuing nationwide lockdown, experts said.
The Insolvency and Bankruptcy Board of India (IBBI) has already said the period of lockdown imposed by the government will not be reckoned in the resolution timeline. The lockdown has been in force since 25 March and ends on 18 May, if not extended further.
Karan Mitroo, partner at law firm Luthra & Luthra said, the entire thought process of investors has changed due to covid-19 and investors are trying to assess its potential impact on businesses.
“There is a likelihood of resolution applicants, who have already submitted bids, negotiating the pricing again, since the financial assumptions on which they had bid may have changed on account of covid-19," said Mitroo, adding that bidders may also use clauses like Material Adverse Effect or similar clauses, if the same have been provided in the resolution plans for such negotiations.
Since its inception, the IBC process has been mired in last-minute litigations with promoters trying hard to retain control of their companies. Take for instance - the case of Essar Steel. While IBC prescribes any asset resolution within 330 days, Essar Steel’s resolution and sale to ArcelorMittal took 866 days.
“I think bidders will soon approach the committee of creditors (Co) to revalue their bids, citing covid-19. If these are within reasonable limits, the committee of creditors (CoC) could approve them. However, if these revised deals are substantially lower than the original offer, lenders will challenge them and one can expect further delays," said an insolvency resolution professional, also a former banker, on condition of anonymity.
The insolvency professional quoted above said that most re-negotiations are expected in manufacturing companies where factories have been shut and also in construction companies where projected cashflows have taken a beating. Benches of the National Company Law Tribunal (NCLT) are only hearing urgent matters through video conferencing at the moment.
Sutanu Sinha, partner, BDO Restructuring Advisory LLP, said that although IBBI has exempted the lockdown period from calculating timelines, practically running the companies under this situation is more difficult.
“If it continues further after the third extension, sustainability threat would be inevitable for many firms as value erosion is happening rapidly," said Sinha, adding that the number of pending IBC cases piled up is now another challenge and that has direct impact on value of such assets or enterprises.
Till December 2019, the bankruptcy tribunal has admitted 3,254 companies for resolution under IBC. Of this, resolution plans have been approved for 190 cases, 246 cases have been closed on appeal or review and liquidation proceedings have begun in 780 cases.
About 57.74% of the resolution processes, which were closed, ended in liquidation, as compared to 14.06% ending with a resolution plan. However, 72.48% of the resolution processes ending in liquidation were earlier with Board of Industrial and Financial Reconstruction (BIFR) or defunct.
The head of a large asset reconstruction company (ARC) said that when things open up, buyers will want to rethink their offers especially if the business has lost value through the lockdown.
“We expect this to happen in stressed assets in construction and real estate, auto components and hotels. But until the NCLT courts open up again and we hear buyers make demands, we won't know what's happening," the ARC chief said on condition of anonymity. The ARC has exposure to stressed assets in steel, auto and infrastructure sectors.
"Wherever we are doing settlements or restructuring or recovering under IBC or Sarfaesi, everybody's is asking for a moratorium. There's no option but to give it. We don't expect any large revenues to come in this year," he said.