In separate notices over the weekend, IBBI authorized creditors to sell partial assets in the event that they obtain more value. More importantly, the regulator also announced a performance-based compensation structure for resolution (RP) professionals. Both moves will lead to profound changes in recoveries, consultants have said.
“Allowing PRs an incentive based on salvage value aligns with the goals of all stakeholders. Creditors have until now been reluctant to work with a performance-based compensation plan, which has led to a decline in quality resolution and therefore salvage value. The incentives will encourage resolution professionals to strive to maximize the value of the debtor business,” said Nikhil Shah, Managing Director of Alvarez & Marsal (A&M) India.
In a notification, IBBI has for the first time set a minimum fixed fee for PRs. Depending on the size of admitted claims, PRs can now earn between ₹1 lakh and ₹5 lakh per month. Most importantly, incentives have been built in for quick resolution and maximizing value.
A PR is now entitled to 1% of the realizable value if the resolution plan is submitted to the National Company Law Tribunal (NCLT) in less than 165 days. Conversely, he gets nothing if the plan is submitted after more than 330 days.
The PR is also entitled to 1% of the difference between realized value and liquidation value as an incentive to maximize value. This change is effective from October 1st.
Consultants said the changes will push creditors to opt for higher quality professionals and will also require PRs to speed up the process.
“Fees should not be a constraint to getting the best value for money. It was found that lenders were reluctant to opt for performance-based incentives and in many cases had to settle for lower achievement due to the poor quality of the work While this is a welcome decision I would say that getting professional help should not be a problem and these costs should be covered separately in the resolution plan as it makes a difference in both value and time,” said Abizer Diwanji, Head of Financial Services at EY.
The IBBI also allowed creditors to sell assets separately in cases where no resolution plan was received for the debtor business as a whole, thereby maximizing value.
Bankers and consultants say there have been instances where the piecemeal sale of assets was a better option. As in the case of DHL which was finalized last year, where the retail portfolio was highly sought after for its high yield, strong asset quality and extensive network. But lenders opted to sell it along with the bad debt-infested wholesale trade, which drove the value down.
“There were instances where the aggregate value could have been higher, but it could not be achieved because all of the debtor company’s assets were being offered to the resolution seekers as a whole. These two changes are significant and will help achieve better outcomes for all stakeholders in the insolvency process,” said Shah of A&M India.