The Insolvency and Bankruptcy Code (IBC) has been a significant reform in India’s financial landscape, aiming to address the challenges surrounding insolvency and bankruptcy proceedings. Since its inception, the IBC has witnessed both failures and successes, offering valuable insights into its strengths and weaknesses. While some cases have showcased the code’s efficacy in resolving insolvency issues swiftly, others have exposed its limitations, leading to concerns among stakeholders. In this article, we delve into the factors contributing to both failures and successes under the IBC, analyse their implications for the Indian economy and propose strategic measures to enhance its effectiveness. By understanding the past and present, we can chart a path forward towards a more robust and resilient insolvency framework.

Improvement in EoDB and Timeline

According to the World Bank’s latest examination results announced on October 24, 2019, India demonstrated notable progress in its ease of doing business rankings. The country climbed 14 spots to reach the 63rd position overall, securing a place among the top 10 global “improvers” for the third consecutive year. Particularly in terms of resolving insolvency, which assesses the ease of exiting a business, India experienced a significant improvement by rising 56 places to the 52nd rank compared to the previous year’s 108th position. The World Bank acknowledged the effectiveness of the Insolvency and Bankruptcy Code, 2016 (IBC), in providing companies with viable tools to restore their financial viability and creditors with better negotiation capabilities, resulting in higher chances of recovering their funds. Consequently, the overall recovery rate for creditors increased from 26.5 cents on the dollar to 71.6 cents , and the time required for resolving insolvency decreased significantly from 4.3 years to 1.6 years.

IBC Failures and Success

Though since the implementation of IBC in 2016 the average time taken to resolve bankruptcy cases in India has significantly increased over the years, causing delays and inefficiencies in the process. According to the IBBI data, the average timeline has nearly doubled from around 330 days in 2018 to the current 588 days. The reasons behind this prolonged duration include delays in the admission of cases, longer resolution processes, frequent litigation, and challenges faced by resolution professionals.

Loss in Realisation Rate

According to 2021 IBBI newsletter, a total of 4,541 cases of Corporate Insolvency Resolution Process (CIRP) were initiated, involving corporate debts worth ₹13.94 lakh crore. However, until June 2021, only ₹1.82 lakh crore, or approximately 20% of the total debt claims, has been realized, resulting in a significant net loss or haircut of 80% of the debt. In comparison, the earlier debt resolution process under the Sick Industrial Companies (Special Provisions) Act of 1985, which involved the functioning of the Industrial and Financial Reconstruction (BIFR), achieved a recovery rate of 25%, indicating comparatively better performance. Although it is interesting to point out that IBBI is more inclined toward computing realisation against liquidation value rather than total admitted claims, for instance in its Jan-Mar 2023 quarterly newsletter the board reported that the creditors have realised 168.47% of the liquidation value and more than 83% of the fair value (based on 586 cases where fair value has been estimated). The haircut for creditors relative to the fair value of assets was less than 17%, while relative to their admitted claims is of around 68%.

Moreover, the condition has improved in terms of claim realisation in a recent data by IBBI. In the fiscal year 2022-23 (FY23), the National Company Law Tribunal (NCLT) granted approval to a record-breaking number of 180 resolution plans, resulting in the recovery of a total amount of Rs 51,424 crore from distressed assets. While this achievement is the second-highest in terms of creditor realization compared to FY19, where Rs 1.11 lakh crore was recovered through 77 completed insolvency proceedings, including significant cases like Essar Steel and Monnet Ispat. These developments in FY23 have enabled creditors of financially troubled companies to recover 36% of their total admitted claims, amounting to Rs 1,42,543 crore for the fiscal year ending on March 31, 2023. Though the amount of realisation is impressive but the rate of realisation against the liquidation value is falling continuously, according to study by India Rating the realisation rate for FCs decreased to 34.2% in FY22-23, compared to 42.7% in FY21-22 and 45.3% in FY20-21.

At the same time, a substantial number of CIRP cases are concluding into liquidation, leading to the complete closure of businesses, resulting in job losses, and creditors receiving minimal compensation. According to IBBI March 2023 quarterly newsletter, a total of 6571 CIRPs have commenced by the end of March, 2023, and during the same period a total of 2030 CIRPs have ended in liquidation, excluding 20 cases where liquidation order has been set aside either by the tribunal or court. The realisation under liquidation is even meagre against the total outstanding claims and creditors may have to bear haircut as high as 95% of the total value. However, one of the reason as to why liquidation yields so less is that more than 76% of the CIRPS ending in liquidation (1548 out of 2022 for which data are available) were earlier with BIFR and/or defunct. The economic value in most of these CDs had almost completely eroded even before they were admitted into CIRP. These CDs had assets, on average, valued at 7% of the outstanding debt amount.

Challenges and Recommendation

The Parliamentary Standing Committee on Finance for the 2020-2021 submitted a report highlighting key observations regarding the resolution of insolvency cases in India. The report acknowledged a reduction in the average time required to resolve insolvency cases from 4.3 years to 1.6 years between 2017 and 2020, following the implementation of the Insolvency and Bankruptcy Code (IBC). However, the Committee expressed concern over low recovery rates and delays in the resolution process, indicating a deviation from the original objectives of the Code.

During the resolution process, significant haircuts, where creditors forgive a portion of the dues, were observed, with some cases witnessing haircuts of up to 95%. The Committee recommended providing greater clarity in order to strengthen creditor rights and suggested establishing a benchmark for haircuts that aligns with international standards.

The report also highlighted the significant backlog of insolvency cases pending before the National Company Law Tribunal (NCLT), with 13,170 cases involving a total value of nine lakh crore rupees. Approximately 71% of these cases have been pending for more than 180 days. To address this delay, the Committee recommended the creation of dedicated benches within the NCLT to handle matters related to the insolvency process. Additionally, it proposed that defaulters’ applications be accepted within 30 days of filing, thereby transferring control of the company to the resolution process to minimize delays and changes in ownership of assets.

Regarding the NCLT’s capacity, the Committee noted that over 50% of the sanctioned strength of the tribunal remained vacant. It advised conducting an analysis to determine the required capacity based on projected case volumes, planning recruitment in advance, facilitating virtual hearings to address backlogs, and implementing training programs for NCLT members. The report further emphasized the appointment of High Court judges as judicial members of the NCLT to ensure expertise and effectiveness

Additional Suggestions from ILC

Furthermore, the Insolvency Law Committee Report for the year 2022 puts forward a range of recommendations aimed at enhancing the insolvency resolution process in India, encompassing not only the effective realization of claims and the duration of proceedings but also considering the broader aspects of the system. Firstly, it suggests mandating the use of information utilities (IUs) to establish defaults, aiming to expedite the process and avoid delays in admitting CIRP applications. Secondly, the report calls for clarity on continuing proceedings for avoidable transactions and improper trading after the completion of a CIRP, proposing a clarificatory amendment to Section 26 of the IBC. The threshold date for the look-back period of avoidable transactions should be changed to the filing date of the CIRP application, including transactions from filing until commencement.

Further, the report emphasizes curbing unsolicited resolution plans and revisions, suggesting a mechanism to review late submissions and unsolicited revisions. Delays in approving or rejecting resolution plans should be minimized, with a recommended timeline of 30 days for disposal by the Adjudicating Authority (AA). The report emphasizes the role of the Stakeholders Consultation Committee (SCC) in the liquidation process, requiring mandatory consultation with the SCC by the liquidator. Secured creditors stepping out of the liquidation process should contribute to workmen’s dues and pay for security interest preservation. Amendments are proposed to explicitly state these contributions in the IBC. Lastly, the report also suggests allowing the termination of voluntary liquidation processes before the passing of a dissolution order, providing a simple termination mechanism and ensuring consistency in practice.

The Way Ahead

The data regarding realisation of claims and duration cannot be said to be very consistent as the performance during a particular year may depend on such circumstances which are not in one’s control such as the kind of companies opting or being subjected to CIRP/Liquidation, moreover a fair amount of credit has to be given to the earlier Covid situation. However, the decreasing rate of realisation both against liquidation value and the total admitted claim is a point of concern along with the situation such as balancing the rights of creditor and debtor. The code may be considered superior to its predecessors in terms of streamlining the process and time taken to resolve the insolvency but it is far from achieving its objectives and matching the efficiency of its foreign counterparts. The lawmakers need to bring out proposed amendments into implementation in consultation with various stakeholders, including bankers and lawyers in order to resolve the various shortcomings of the code.

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December 2023