For India’s overwhelmingly complex legal system, the Insolvency and Bankruptcy Code (IBC) is billed as the silver bullet that would help lenders recover about Rs 9 lakh crore of sticky loans. But the law has an unwanted side effect — loss of jobs.
Since IBC was used by lenders to slice through the thicket of procedures and bureaucracy, about a dozen companies have gone into liquidation, with no viable resolution plan in sight. This may have led to at least 2,400 permanent employees losing their jobs, according to an estimate provided by Insolvency Professionals, a Delhi-based firm.
“The Code has enough incentives to motivate the committee of creditors to invariably opt for a resolution if enterprises value exceeds liquidation value,” said MS Sahoo, chairman at Insolvency and Bankruptcy Board of India. “If a firm is left with only liquidation value, the resources stuck in the firm need to be released through liquidation for fresh allocation to the most competing use.”
“Such reallocation would bring higher employment, ultimately,” he said. The law does not allow direct liquidation. It has to go through a corporate insolvency resolution process. The 12 companies, including Innoventive Industries, VNR Infrastructures, Hind Motors, REI Agro, and Abhayam Trading, collectively failed to repay more than Rs 10,000 crore of loans, and could not offer successful resolution plans.
Typically, when a company goes for liquidation, permanent employees, part-time workers and outsourced members of the staff are affected. Therefore, the impact is far beyond the documented payrolls of companies being liquidated.
“There could be social unrest due to rising job losses in liquidated companies,” said Mamta Binani, former president of the Institute of Company Secretaries of India, and an insolvency professional herself.
“The objective of the Code is not to liquidate any company, but find a revival plan,” said Pavan Kumar Vijay, founder of Corporate Professionals that employs IPs. “Companies employ both permanent and part-time or contractual workers…The problem of job losses becomes acute for smaller companies.” In the first resolution case involving Synergies Dooray, the NCLT Hyderabad had examined the point of employability, as about 2,000 families of workers were dependent on the company.
