Debt settlement process: bankers concerned about soaring consultant bills

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The rising cost of resolving the debt of several failing companies is worrying bankers, as a substantial portion of these companies’ revenues are spent on compensation for resolution professionals and other consultants hired to carry out the process.

Bankers said debt resolution bills are rising as resolution professionals outsource human resources and audit/legal advice to outside firms to fill in any gaps. Bankrupt companies also pay for special forensic audits and legal opinions, which are carried out when banks believe funds have been misappropriated by previous promoters. Consequently, it is creditors and former employees who have to wait longer to obtain their due.

According to the 2016 IBC, once a business is sent to the National Company Law Tribunal (NCLT) for debt settlement, a resolution professional is appointed to run the business and find a new buyer while the former promoters of the company and its board of directors are fired. . The income from the business is then used to pay debt settlement fees.

“That’s the advantage of the big audit firms, which get all the contracts. Numerous disputes with previous developers and other operational creditors only add to the final bill,” said a source familiar with the development. “While the litigation has dragged on for years, the company, which is going through the debt settlement process, is paying all the bills, including the cost of legal opinions,” he said. “The net result is huge losses for bankrupt businesses, lost jobs and lower dues collection from lenders.”

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Citing an example, the official said Aircel’s debt resolution process cost the company around Rs 320 crore for the PR process and salaries. Similarly, Videocon, which has been in a debt resolution process since late 2017, pays nearly Rs 10 crore per year for the resolution process alone. “As many debt resolution companies are in litigation and there is no clarity on closing, PR bills keep rising and are being paid on a priority basis,” the source said.

Meanwhile, the banks are forgoing their notional interest income.

According to the IBBI, since the provisions of the corporate insolvency resolution process came into effect on December 1, 2016, about 3,774 CIRPs have been started through the end of March this year. Of these, 312 have been closed on appeal or settled, and another 157 have been withdrawn. Approximately 914 resulted in winding-up orders and 221 resulted in the approval of resolution plans. Banks recover on average 45 percent of their claims from bankrupt companies.

Although the bankruptcy law aims to terminate the various processes as soon as possible and has prescribed deadlines, litigation has delayed resolution. For example, the 221 CIRPs, which produced resolution plans through March 2020, took an average of 375 days (excluding time taken by appeal authority) to conclude the process. Similarly, the 914 CIRPs that resulted in liquidation orders took an average of 309 days to complete, according to the IBBI. But by including litigation time, the average time taken increases considerably.

ring the cash register

  • PR/consultant/legal bills hit new high
  • Bankrupt businesses paying PR/consultants/legal bills out of their income
  • Dues from banks and bankrupt co-employees go unpaid for years
  • Bank collections fall due to rising bills from consultants
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