Author(s) :

Shasta Gupta.

Volume/Issue :

Abstract :

Resolution over the liquidation of a bankrupt company is desirable as it better protects the interests of shareholders and employees. But, the number of liquidations have been reported to be three times of resolutions under Insolvency and Bankruptcy Code of India. Existing literature provides that bankrupt companies should be resolved or liquidated depending on their potential to contribute to the economic growth of a nation. This study attempts to determine whether outcomes of bankruptcy proceedings in India depend on the competence of companies or not. It also delves into other factors impacting the likelihood of survival of companies after bankruptcy proceedings. This study has used logistic regression and independent sample t-test for analyzing 115 responses of insolvency professionals on a questionnaire investigating reasons behind the outcome of resolution vs. liquidation. Additionally, it has also used phenomenological analysis to analyse the interviews of 10 insolvency professionals. Results reveal that the outcomes of bankruptcy proceedings are not being based on the economic efficiency of companies. However, if a company timely files for bankruptcy, it has 1.731 times the chances of resolution over liquidation. Phenomenology has unfolded the plight of insolvency professionals, incompetence of National Company Law Tribunal, and drawbacks of the supremacy of committee of creditors.

No. of Downloads :

18

KEYWORDS:

Economic efficiency, liquidation, resolution, timeliness

INTRODUCTION & OBJECTIVES:

Some scholars define insolvency as chronic ineptitude of the company to fulfill economic, financial and social responsibilities. Others define it as incompetence of the company to act proactively or react aptly to the internal and external forces of the with termination of payments. From the economic perspective, the company is said to be insolvent, if it had been exposed to a series of failures to repay debt or interest thereon or pay dividend or discharge social obligations and thus gets drawn under the bankruptcy proceedings (Levratto, 2013). Under IBC, where insolvency is considered as the short- term inability to pay off the due liabilities, bankruptcy is a longer-term view when company has reached at the brink of financial inability to discharge its liabilities using its to National Company Law Tribunal (NCLT) signifies bankruptcy. The term bankruptcy is made up of two Latin words borrowings to be greater than the market value of assets. Bankruptcy is the determination of insolvency made by a court of law with resulting legal orders intended to resolve insolvency (Levratto, 2013). the financial sector of the economy. Blazy, Chopard, and Fimayer (2008) propounded that the bankruptcy law of the nation is said to have attained ex-ante efficiency if it provides enough impetus to debtors, entrepreneurs, and lenders; and is claimed to have reified ex-post efficiency if financially distressed companies are resolved or liquidated depending upon their potential to create value for the economy. It is the ex-post efficiency that the present paper focuses on. Provided that IBC also aims to timely resolve or liquidate the companies depending on their competence, IBBI (2018) reported that of the 701 companies admitted under IBC, 22 companies have been resolved, 87 companies have been liquidated, and rest are still pending. This study attempts to analyse if economically inefficient or incompetent companies are being liquidated since the enactment of IBC. The present study relies on the quality of its asset base to classify a company as economically efficient (Basu, 2018). Pochet (2002) supported that bankruptcy perturbs all the stakeholders including shareholders, banks, employees, state, customers, suppliers, and managers (Shilpa & Amulya, 2017). The degree of losses can be minimised if bankruptcy law is designed to favour resolution over liquidation. Verma (2018, June 7) exhibited that despite of the strongly held belief that it is better to resolve the company rather than liquidating it, December 2017 data of Corporate Insolvency Resolution Process (CIRP) under IBC unveiled liquidation orders for companies numbering as thrice of the number of companies resolved. PTI (2018, June 10) presented discontent of the Chairperson of Insolvency and Bankruptcy Board of India (IBBI), M S Sahoo, over the current state, who said that the central aim of the code is to protect the interests of all stakeholders and direct the actions to resolve and not liquidate the company, to maximize the value of corporate debtors. K R Jinan, member of NCLT Kolkata bench in an article by PTI (2018, June 10) was quoted to have explained that the implementation of IBC needs to be reviewed regularly for implementing it in a way to achieve its aim. Sahoo specified that more than 75% firms under the NCLT proceedings have been liquidated as a result of the voting results of CoC who found it tough to choose the suitable bidder. Sahoo affirmed that in order to deal with this issue, new ordinance amending IBC has reduced the required CoC voting percentage on resolution plans to 66% from 75% (PTI, 2018, June 10). It is in the best interests of the stakeholders to resolve a bankrupt company. The objective of the present study is to identify the factors which impact the final result of bankruptcy proceedings between resolution and liquidation. Such factors will enable maximum recovery for all the stakeholders.

DOI:

https://doi.org/10.58426/cgi.v1.i2.2019.20-33