Collateral Damage

Collateral Damage

Irrespective of resolutions, companies going through the insolvency process are seeing large number of direct and indirect job losses

Mahesh Sharma (42) had worked for Moser Baer India for 17 years and drew a monthly salary of around Rs 27,000 when the company was dragged into insolvency proceedings in November 2017. Even before that, all was not hunky-dory as the management declared a lockout at the Greater Noida plant. The workers opposed it vehemently and got the lockout revoked, hoping that operations would start soon. Sharma, who was the President of Moser Baer Karamchari Union, says that workers were ready to give up a part of their salaries for a few months to help revive the company. Of course, people were not working during the insolvency resolution period, but they were hoping that a buyer would ultimately turn up and get the business going. But operations never started, and on September 20, 2018, the company was liquidated under the Insolvency and Bankruptcy Code (IBC), 2016, leaving 2,500 employees jobless. As part of the liquidation process, the factory land, one of the major assets, has been acquired by True Value Nirman, an Ahmedabad-based real estate company.

Sharma now runs a small electrical appliance shop in a dusty bylane of Dadri. He had tried to secure another job and was about to be hired by a firm on a monthly salary of Rs 34,000. However, he failed to clear the HR round due to his trade union activities in Moser Baer. He says he will never get another position in Noida or nearby areas because of his past affiliation to labour unions.

This is not a unique incident. The same story is being played out at many levels, in different parts of the country, as creditors push debt-ridden companies to the National Company Law Tribunal (NCLT) and resolutions are sought under the IBC. Some businesses managed to find new promoters and they continue to operate, but others failed and were liquidated.

Earlier, liquidation meant instant job loss as there were no provisions to liquidate a company as a going concern. But that law has been amended since and employees in a company under liquidation still have (slim) chances to save their jobs.

Take, for example, the case of IVRCL. The company was ordered to liquidate in July this year after the insolvency procedure failed to yield any resolution. As of now, it has 1,100 employees on board (800 permanent and 300 temporary), and their fate hangs in the balance. Sutanu Sinha, the official liquidator and also the resolution professional in this case, says that he is trying to sell the company as a going concern so that these jobs could be saved. According to Sinha, when he came in, the company had over 2,400 employees (1,500 permanent and 900 temporaries), but more than half have already left. Incidentally, the liquidation process is supposed to be over within a year from the time of the order. Nevertheless, the NCLAT has given a three-month extension to the liquidator to try and find a buyer.

The saga of Adhunik Metaliks and Zion Steel is not heartening either. The UK-based Liberty House Group acquired both during the resolution process but failed to pay within the stipulated time frame. As a result, both were ordered to be liquidated by the Cuttack Bench of the NCLT on July 7. Before liquidation, the companies had a combined workforce of 2,000 (on their payrolls and under contracts), says Sumeet Binani, who is now the liquidator. "Both companies are not operating for 12-16 months since Liberty House's failed attempt to buy them. Very few people are left today," he adds. Binani, too, is trying to find a buyer for the companies.

Does the System Protect Workers?

Even though the NCLT and other courts had, on occasions, gone out of their way to protect workers' interest, Sharma of Moser Baer workers' union does not agree. According to him, the IBC has been structured to help industrialists and workers' interest is rarely a priority for a resolution professional who is appointed by creditors. "They (resolution professionals) only have bankers' interest in mind," he says.

Sharma may not be entirely wrong. In a departure from the past, the IBC has tilted in favour of financial creditors who are mostly bankers. Understandably, these creditors often have the final say in all things vital, be it choosing the insolvency professional, accepting or rejecting the resolution plan or deciding the fate of operational creditors who are typically vendors and employees. While this creditor-driven approach has resulted in faster resolution of bad debt/debt default cases, jobs of current employees have turned out to be the collateral damage in this process.

It is not difficult to understand why. While liquidation of defunct companies does not result in significant job losses, liquidation of operational companies often results in substantial job losses as in the case of Moser Baer. Even successful resolution under the IBC - where companies are purchased as going concerns - does not guarantee job security. Ideally, it should not be the case. But new promoters often lay off employees to ensure better efficiency and commercial viability. The incentive lies in the difference between enterprise value and liquidation value. If the liquidation value is quite high, human resource reallocation becomes essential, and hence, the involuntary attrition.

Sethurathnam Ravi, former BSE Chairman and Founder and Managing Partner at Saket-based Ravi Rajan & Co, says, "While it is unfortunate, job losses are a normal occurrence at companies under the NCLT (it adjudicates insolvency matters). Moreover, one can put a number to direct job losses, but we should also take into account the supporting tertiary sectors and other operational creditors who are impacted negatively." Ravi and his partners at the firm are currently handling 11 insolvency cases.

What the Numbers Reveal

A close look at the numbers will further explain the scenario. Data from the Insolvency and Bankruptcy Board of India (IBBI) - the insolvency regulator - shows that the closure of cases under the IBC has been faster and the recovery rate has been much better than what it had been under the previous (resolution) laws. So far, over 2,500 cases have been admitted under the IBC of which 156 have seen resolution and 587 cases have gone into liquidation. Out of these 587, only 160 were operational and others were defunct. More than 300 cases have been withdrawn and close to 1,500 are still in different phases of the insolvency process. According to the IBBI, the average recovery rate for financial creditors has been 43 per cent and the average time for resolution has been 360 days, compared to 26 per cent recovery and an average 4.2 years for resolution under previous laws.

Of the 12 large cases of non-performing assets (NPAs) referred to by the Reserve Bank of India for resolution under the IBC, two of them - Lanco Infratech and ABG Shipyard - have been liquidated. We do not have ready access to ABG Shipyard's job data, but Lanco had close to 1,200 employees in March 2017. Insolvency proceedings were initiated against the company in August 2017, and it was liquidated a year later. Understandably, both cases witnessed huge job losses.

According to a resolution professional who does not want to be named, even in high-profile insolvency cases such as Essar Steel and Bhushan Steel, several top-level employees, as well as contract workers, have lost their jobs although both cases have been resolved. Business Today could not independently verify this claim. An e-mail query sent to Tata Steel, the new promoters of Bhushan Steel, did not elicit any response at the time of going to press.

A look at other companies does not augur well for employees. Alok Industries, which was acquired by a combine of Mukesh Ambani-led Reliance Industries (RIL) and JM Financial Asset Reconstruction Company (ARC) in March 2019, has over 10,000 employees who face an uncertain future. Ajay Joshi, the insolvency professional in this case, told Business Today the question (of job loss) is not applicable at present as the takeover is not yet complete. Or take the case of Videocon. Gajanan Bandu Khandare, President of Videocon Group Employees Union, says that 6,000 workers at the company still have their jobs, but they have not been paid for the past seven months. Delays in resolution also lead to workers' distress. Videocon Industries went under the IBC in June 2018 but has not seen a resolution.

It is clear from our research that no consolidated data on job losses due to the IBC mechanism is available yet, but the government is aware of the distress an insolvency process can cause. That is why it has requested restraint in taking debt defaulters to the NCLT. In a recent media briefing, Injeti Srinivas, Secretary, Ministry of Corporate Affairs, said that there is a need for an alternative mechanism and not all default cases should not be referred to NCLT. As insolvency is a rigorous process, only cases which involve large outstanding should be resolved through the IBC. He also expressed his concern over dragging solvent companies to insolvency proceedings for small dues.