Poor recovery, increasing delays mar IBC resolution process

The recovery ratio for creditors through the Insolvency and Bankruptcy Code (IBC) has fallen to its lowest level ever. In Q4 of FY22, the amount to be realised from the resolution process was lower than the liquidation value of assets.

• The era before IBC had various scattered laws relating to insolvency and bankruptcy which caused inadequate and ineffective results with undue delays.
• The recovery action by creditors,either through the Contract Act or through special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes.
• Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor aid restructuring of firms.
• Laws dealing with individual insolvency, the Presidential Towns insolvency Act, 1909 and the Provincial Insolvency Act. 1920 are almost a century old.
• Ineffective implementation, conflict in one of these laws and the time-consuming procedure in the aforementioned laws, made the Bankruptcy Law Reform Committee draft and introduce Insolvency and Bankruptcy Law bill.

What is IBC?

• The Insolvency and Bankruptcy Code, 2016(IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• The bankruptcy code is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
• The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
• The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it.

Four pillars of IBC

• Insolvency Professionals: They would play a key role in the efficient working of the bankruptcy process. They would be regulated by ‘Insolvency Professional Agencies.
• Information Utilities: These would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.
• Adjudication: The NCLT will be the forum where firm insolvency will be heard and DRTs will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate bodies, viz., NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.
• Insolvency and Bankruptcy Board of India: This body will have regulatory over-sight over the Insolvency Professional, Insolvency Professional agencies and information utilities.

Objectives of IBC

• Consolidate and amend all existing insolvency laws in India.
• To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
• To protect the interest of creditors including stakeholders in a company.
• To revive the company in a time-bound manner.
• To promote entrepreneurship.
• To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
• To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
• To set up an Insolvency and Bankruptcy Board of India.
• Maximization of the value of assets of corporate persons.

Achievements of IBC

• Faster Resolution: By mid- 2021, more than 250 companies had been revived and over 86 percent of bankruptcy resolution processes had passed the 270-day mark in 2020.
• Improved Ranking: IBC has also helped India rise from the 130th to the 63rd rank in the global ease of doing business ranking in 2020.
• Greater Debtor Autonomy: In the event of pre-packs, the present management retains authority which provides opportunity to MSMEs to restructure their liabilities and start with a clean slate.
• Prevents fraudulent activities by debtors: Since the ownership and control of the business entity, its assets and business activities stand transferred from the debtor to an insolvency professional as soon as an application is admitted by the adjudicating authority, the debtor is pre-empted from indulging in any activity to defraud the creditors.
• Prevents errant promoters from abusing the system:The PPIR offers financial creditors strong consent rights. For example, before submitting a resolution plan, it must have approval from at least 66 per cent of financial creditors. This prohibits financial creditors from abusing the system.
• A fair resolution: The amendment ensures that both debtors and creditors have a role in the resolution process.
• Certainty and clean title: When insolvency is resolved through the Code, there is a certainty in the settlement of liabilities and ownership of assets. Since all liabilities including government dues are settled, the resolution applicant is vested with a clean and litigation-free business and assets, etc.
• Prevents job losses: PPIR reduces the likelihood of liquidation. As a result, company continuity is ensured, and worker layoffs are reduced.

Issues with IBC

While the IBC’s performance has been relatively better than the other recovery mechanisms, it suffers from similar systemic issues.

• High liquidation: For instance, of the 2,600 cases that were closed by December 2021, 55% ended in liquidation while only 16% were completed with proper resolution plans approved by the lender.
• Long delays: On average, over 700 days were taken in FY22 to complete a resolution process, against the stipulated deadline of 330 days.
• Haircuts: Moreover, during the fourth quarter of FY22, the amount to be realised from the resolution process was lower than the liquidation value of assets. Worryingly, the lenders continued to take steep haircuts. In 100 out of 500 companies that saw proper resolutions, the haircuts were above 90%.
• Inadequate capacity of tribunals: The biggest issue is the delays and a lot of it is due to the capacity of tribunals. The functioning of the NCLT during the COVID-19 pandemic has been a setback for the IBC.
• Delay in approval: One part of the timeline that isn’t looked at so much is the delay in filing of admissions, where the clock starts. Several cases have been pending admission for over a year. And similarly, at the back end, the delay occurs between the approval of the resolution and the approval by the tribunal.
• Lack of coordination between parties involved: There is lack of coordination between the parties in the process (creditors, stakeholders) which delays the insolvency proceedings.
• Inexperienced insolvency professionals: Since the Code and its prescribed procedures are new, understandably, the insolvency professionals, advocates and adjudicators lack experience, which causes significant delay in resolution proceedings. At times, due to this lack of experience, a company which could have been revived ends up liquidated.
• Overburdening of courts: As the number of NCLTs and NCLATs are limited, they are weighed down by a deluge of applications, naturally impeding the timely conclusion of proceedings.

Suggestions to reform IBC process

• There is a need to increase the number of NCLT benches and appoint more competent professionals. This will ensure that the IBC platform is not used as a recovery but more as a resolution tool.
• Further masses should be aware of alternate dispute resolution mechanisms like Lok Adalat, Arbitration etc. This can reduce the workload on insolvency tribunals.
• The government can place companies such as construction, electricity (that do not have hard assets) outside the NCLT. This would save resources and time in pursuing IBC for these companies. 

The IBC, despite its shortcomings, is an impressive substitute to the earlier insolvency resolution process in India. The new Code has not only streamlined the process, but also provided a time-bound one-stop solution to the parties involved. Systematic issues need to be addressed to reap its full potential.