Crack this code at liquidation, assets=5% dues

New Delhi: Stressed companies ending up with liquidation orders under the insolvency law, including large ones, have had assets worth less than 5% of the amount they owe to their lenders, showed the bankruptcy regulator‘s data.This brings to the fore the question of due diligence by banks while lending, on top of value erosion caused by late filing, admission of insolvency cases and eventual liquidation, analysts said.

The data showed that as of September, 2,630 liquidation candidates together owed ₹9.51 lakh crore to creditors but they had assets worth only ₹45,000 crore on the ground. These companies included 211 large ones, each of which had dues of at least ₹1,000 crore.

The data covers the bankrupt companies that were ordered to be liquidated since the Insolvency and Bankruptcy Code (IBC) was introduced in late 2016. These exclude the 43 cases in which liquidation orders were set aside by the courts, according to the Insolvency and Bankruptcy Board of India (IBBI) data.

“Most of the services companies, including EPC (engineering, procurement, and construction) ones usually have very low assets, which lead to limited recovery in case of liquidations,” said Anoop Rawat, partner at Shardul Amarchand Mangaldas & Co.

Recovery prospects are typically better in the case of asset-heavy companies, especially in manufacturing, he said.

‘Greater the Delay, Lower the Realisation’
“But the value of all these stressed companies starts eroding if the insolvency proceedings prolong, as operations get hit and interim finance is hard to garner,” Rawat said. “So the greater the delay in resolution or liquidation, the lower the realisation from the assets.”

“The discrepancy (between asset value and default amount) may arise from an overvaluation of the company’s assets when the debt was secured. This gap could also result from the deterioration of assets over time,” said Manmeet Kaur, partner at law firm Karanjawala & Co.

To be sure, over three-fourths of companies ending in liquidation involved “dead cases” that were transferred from the erstwhile Board for Industrial and Financial Reconstruction regime or were already defunct when the IBC was implemented, experts said. These firms barely had realisable assets, as they had been sick for years, they added.

Some liquidation cases where the realisation was estimated at a fraction of the outstanding debt were Lanco Infratech and Athena Energy Ventures. The liquidation value of Lanco Infratech was estimated at just ₹320 crore, against its consolidated debt of over ₹45,000 crore.