IBC: A Debt Trap for Entrepreneurs Explained

IBC: A Debt Trap for Entrepreneurs Explained

I ran Su-kam Power Systems Ltd for 30 years and gone through the process of liquidation of Su-kam.
A Landmark Judgment on COC Conduct
The Delhi High Court’s verdict in the case of Kunwer Sachdev vs. IDBI Bank and Ors. is indeed a significant development in the Indian insolvency landscape.
Key Points from the Judgment
* Lack of COC Guidelines: The court highlighted the absence of specific guidelines governing the conduct of the Committee of Creditors (COC) under the Insolvency and Bankruptcy Code (IBC).
* Erosion of Company Value: The judgment emphasized the potential for company value erosion during the Corporate Insolvency Resolution Process (CIRP) due to the actions or inactions of the COC.
* Need for COC Guidelines: Recognizing the importance of ensuring fair and efficient insolvency proceedings, the court directed the Insolvency and Bankruptcy Board of India (IBBI) to formulate a code of conduct for COCs.

The Insolvency and Bankruptcy Code (IBC), India’s ambitious attempt at a comprehensive insolvency framework, has, in practice, fallen short of its intended goals.

While designed to balance the interests of investors and borrowers, the code has instead become a labyrinthine process that often ends in despair for entrepreneurs.

A core issue lies in the valuation process.

The code mandates two valuations – fair value and liquidation value – at the outset of insolvency proceedings. Paradoxically, these valuations are irrelevant to the eventual outcome, as the company is either sold or liquidated. The exercise becomes an expensive and time-consuming formality, draining resources from the already stressed company.
The original intent of valuation was likely twofold: to prevent asset erosion by the Committee of Creditors (CoC) and to provide a fair exit value for the entrepreneur.

However, the code fails to operationalize either of these objectives.
The absence of a clear link between valuation and subsequent proceedings has far-reaching consequences.

Without a valuation-based benchmark, the entrepreneur bears the brunt of the entire debt, regardless of the company’s actual worth. This disproportionate burden, coupled with the aggressive tactics often employed by creditors, can lead to mental anguish and even suicide.
The valuation should be pivotal, determining the recoverable debt and halting interest accrual. This would simplify calculations and reduce the scope for arbitrary actions. Furthermore, forensic audits, fraud investigations, and defaulter declarations should be anchored to these valuations, streamlining the process and minimizing harassment.
The IBC, as it stands, is a system in crisis. It has morphed into a tool of oppression rather than a mechanism for recovery. To salvage its purpose, the code must be radically overhauled. The valuation process needs teeth, and the entrepreneur must have a fair chance at redemption.
Having personally endured the harrowing ordeal of insolvency, the author underscores the human cost of these systemic failures. Their experience serves as a stark reminder of the urgent need for reform. The IBC must evolve to prioritize the entrepreneur’s dignity and the sanctity of human life over mere financial considerations.
Only then can India genuinely claim to have a bankruptcy code that fosters entrepreneurship and economic growth.

Kunwer Sachdev
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinions of any organisation.