Insolvency And Bankruptcy Law Amended To Speed And Maximize Collections

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Insolvency And Bankruptcy Law Amended To Speed And Maximize Collections

September 20, 2022: Several amendments and clarifications to the Bankruptcy and Bankruptcy Code by India’s Bankruptcy and Insolvency Board (IBBI) will help creditors increase the value of distressed assets and help lower recovery rates, advisers and bankers said.

In another announcement over the weekend, IBBI allowed creditors to sell sub-assets if they received more value.

More importantly, the regulator also announced a performance-based salary structure for payments professionals (RPs). Both moves would make a big difference to the recovery, consultants say.

“Incentivizing RP based on recovery value aligns with the goals of all stakeholders. Creditors have so far been reluctant to work with a success-based fee structure, which has led to lower quality settlements and thus lower recovery values.

The incentives will boost resolution professionals to optimize the value of corporate debtors,” said Nikhil Shah, his director of managing Alvarez & Marsal (A&M) India. In the statement, IBBI set a fixed floor rate for RP for the first time.

RP can now earn between ₹1,000 and ₹5,000 per month depending on the level of billing approved. More importantly, incentives are built in for both timely resolution and maximizing value.

If the resolution plan is filed with the National Corporation Law Tribunal (NCLT) within 165 days, RP is entitled to 1% of the realizable value.

Conversely, if a plan is submitted beyond his 330 days, he gets nothing. RPs are also entitled to receive 1% of the difference between realized value and liquidation value as an incentive to maximize value.

This change will take effect on October 1st. Advisors said the change would encourage creditors to select better quality professionals and place a burden on RPs to speed up the process.

“Rates should not be a barrier to achieving the best value for money. Lenders have shown reluctance to opt for performance-based incentives, often leading to lower quality work.

However, this is a welcome move. I think it should be considered separately in the resolution plan because it makes a difference in the financial services EY.

IBBI also maximizes value by allowing creditors to sell their assets individually if no resolution plan has been entered into for the debtor as a whole.

Bankers and advisers say there have been cases where selling assets piecemeal was a better option. As was the case with his DHFL, which was completed last year, there has been high demand for the public book due to its high yields, strong asset quality and broad network.

However, the lender chose to sell it along with its bad debt-plagued wholesale business, devaluing it. There were cases where the total could have been higher, but was not achieved.

These two changes are important and will help us achieve a better outcome for all parties involved in the insolvency process,” said Shah of A&M India.

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