IL&FS model could set a new paradigm for bankruptcy resolution
The latest model of resolution proposed by the IL&FS board is interesting, but its practically working is yet to be tested. Under the new model proposed, the Committee of Creditors (COC) will only have the powers to vote on the highest bidder. All other decisions pertaining to distribution of proceeds of the assets will be taken by the board. Let us first look at where the IL&FS issue stands as of today.
Rewinding the IL&FS saga
The problems at IL&FS first emerged in early 2018 and by mid-2018 IL&FS had begun to default on its loans and ICDs. This triggered a crisis of confidence as IL&FS was also viewed as a quasi state enterprise. Subsequent to the default it emerged that there were serious lapses in governance and connivance by the board of IL&FS. This led to the board being dismissed and the government appointed an independent board under the chairmanship of Uday Kotak. As the situation stands today, IL&FS has total debt to the tune of Rs.94,000 crore of which nearly 50% is housed in the subsidiary companies. Commercial bank exposure to IL&FS is to the tune of Rs.44,075 crore while employee related PF and pension dues are to the tune of Rs.10,173 crore. The rest are in the nature of private lenders and other operational creditors. In the past, the COC had an inordinate influence in deciding the best bids and the modus operandi of distribution.
What IL&FS has proposed
What IL&FS has proposed is essentially 3 changes. Firstly, it has proposed that all resolution related costs including legal and administrative fees will rank on first priority. Secondly, after that the average liquidation value will be arrived at and distributed to the creditors and anything that is left will be distributed pro-rata among creditors. Last and most important, the COC will only have a say with reference to voting on the highest bidder. Specifics pertaining to the actual distribution of the liquidation and the methodology adopted will be decided by the board and not by the COC. This will address a major anomaly as, in the past, operational creditors had typically got a raw deal in NCLT cases. Curbing the wide powers of the COC will address this to some extent.
Practical problems remain
While this is technically feasible, remember that IL&FS is a unique case! A professional board was specifically brought in to manage the dissolution, which is not the case with other similar bankruptcies. Even in the IL&FS case, this is subject to the NCLAT approval and they may be wary of setting a precedent, which may be hard to replicate. But the point is taken that the operational creditors must get a better deal. How it should be done and who should take the final call would still have to be addressed in a better way.
