Liquidation cases may rise as resolution plans fall short on valuations

Industry:    2019-03-08

Liquidation cases are likely to rise as resolution plans fail to give a reasonable valuation, said bankers at the Mint India Investment Summit. They also said liquidation numbers are high due to legacy issues.

“If we really look into the number of liquidation orders, the ratio is 1:4. Partly, we need to understand these figures in the right perspective, because many of these were old Board for Industrial and Financial Reconstruction (BIFR) cases. When Sick Industrial Companies (Special Provisions) Act (SICA) was removed and all the BIFR cases were told to go to National Company Law Tribunal (NCLT), they were given a six-month window. Many of those 300-400 cases came into liquidation stage,” said R.K. Bansal, chief executive officer, Edelweiss Asset Reconstruction Company.

“The second reason it’s happening is that many resolution plans are not even giving liquidation value,” he said.

Some bankers said the insolvency process has created a lot of noise with very little outcome leading to liquidation.

“Because of either objections or the issues around it, we are seeing a lot of liquidation as opposed to resolution,” said Ravi Chachra, co-founder, Eight Capital Management.

“My sense is that more and more liquidations will happen and a lot of it is because resolution professionals are not great. Promoters who are not able to get the company because of section 29 are managing the resolution professionals and potentially CoC (committee of creditors) to get these companies to liquidation,” Chachra said.

Bankers and lawyers also said liquidation was the best option for engineering, procurement and construction (EPC) companies.

“There are EPC companies and there are no solutions. I have asked so many experts like Big four or Big six or people working in the EPC sector, there is no solution other than taking it to the NCLT,” said J.K. Shivan, chief general manager, stressed assets management group, State Bank of India.

“We are seeing the trend. This is probably the only hope for some of the EPC companies,” said Ameya Khandge, partner, Trilegal.

“There are good quality arbitration claims or claims that have been triggers for some of the cases they have been in. Patel Engineering is one example. We have been working with lenders in the case of HCC. These deals can realistically can turn the companies around and prevent them from NCLT, and pave the way for a genuine turnaround,” he said.

Anurag Das, managing director and CEO, International Asset Reconstruction Co., said liquidation allows for cherry-picking the right strategies instead of cheap assets.

“Some part deserves to go as going concern business. Some require new capital to try and turnaround before liquidation. Some merit liquidation. The problem is resolution is not getting enough bids. It’s not creating a market that banks can credibly point to as offering a fair solution whether they like it or not.”

Omer Erginsoy, senior managing director, business intelligence and investigations, Kroll said companies that end up in liquidation are those where the promoter has not been forthcoming to resolve the problem.

“Lenders are in a tough situation because they have to rely on the IBC process. They can explore strategies of suing, pre-tribunal, going after money gathering intelligence, getting litigation funding, and hiring corporate investigators, looking at assets abroad.”

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