[Answered]Critically analyse the progress made in resolving stressed assets since the enactment of Insolvency and Bankruptcy Code (IBC). Suggest some measures to improve it further.

Demand of the question

Introduction. Contextual introduction.

Body. Success of Insolvency and Bankruptcy Code. Issues related to it. Measures to improve the Insolvency and Bankruptcy Code.

Conclusion. Way forward.

Insolvency is a state of financial distress in which someone is unable to pay their bills. Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The Insolvency and Bankruptcy Code is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

Success of Insolvency and Bankruptcy Code (IBC):

  1. The IBC has initiated a cultural shift in the dynamics between lender and borrower, promoter and creditor. It played a critical role in reshaping behaviour of borrowers.
  2. Before enactment of the IBC, the recovery mechanisms available to lenders were through Lok Adalat, Debt Recovery Tribunal and SARFAESI Act. While the earlier mechanisms resulted in a low average recovery of 23%, the recoveries have risen to 43% under the IBC regime.
  3. Since enactment of the IBC, India significantly improved its ‘Resolving Insolvency’ ranking 108 in 2019 from 134 in 2014 where it remained stagnant for several years.
  4. India won the Global Restructuring Review award for the most improved jurisdiction in 2018.
  5. An IMF-World Bank study in January 2018 observed that India is moving towards a new state-of-the-art bankruptcy regime.
  6. Insolvency law has led to stability in financial systems.
  7. Recovery through the IBC was about Rs 70,000 crore in fiscal 2019 twice the amount recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat in fiscal 2018.
  8. The recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.

Issues that need attention:

  1. The number of cases admitted through Lok Adalats and DRTs have declined significantly post introduction of the IBC. Given the very small threshold limit of Rs 1 lakh, operational creditors seem to be more aggressive in dragging the corporate debtor into the NCLT, eating up the bandwidth of the court and thereby delaying resolution of the bigger cases and defying the main objective of the IBC.
  2. It is observed that more than 23% of the admitted companies ended with liquidation. As companies are admitted into liquidation, the employees on the rolls of the company are only cumulatively compensated till the resolution process is completed, while the contractual employees are downsized. It is also observed that sectors such as construction and electricity, where there are no hard assets, are also being dragged to the NCLT and such companies are mostly liquidated.
  3. At the heart of the IBC legislation was its time-bound approach to resolving insolvency cases. But the time bound process has led to increased cases of liquidity.
  4. Several lenders are unsure of their stance. Some promoters are trying every legal device to retain their firms, and the very process frequently getting caught in a judicial quagmire.
  5. Bankruptcy courts have been over-burdened with realty cases because even a lone homebuyer can file one.
  6. So far, creditors of a company undergoing insolvency proceedings have been at liberty to negotiate with bidders on a case-to-case basis. This leads to bids and counter-bids and bank officials are chased leading to litigation.

Measures needed:

  1. There is need for setting up more tribunals in different parts of the country to handle the greater-than-expected volume of cases.
  2. IBC must consider that there are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise.
  3. The banks also must push policy makers towards this move because they’re unlikely to get more if the case comes before the NCLT.
  4. Proactive training of judges, lawyers, and other intermediaries is necessary for effective implementation of the code.
  5. Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality.
  6. Apart from this courts must avoid intervening routinely, unless key points of law need clarification.
  7. Lack of sufficient number of resources in terms of IPs, benches, judicial members, technical members at NCLT needs to be addressed.

Insolvency and bankruptcy code has been a success. But some issues still remain. It has been amended accordingly. Recently, the Supreme Court has increased the time limit for the corporate resolution to extend beyond the mandated 330 days. However, proactive seeking and acting on feedback from other stakeholders is needed, as testified by the fact that the IBC has undergone two major amendments already due to various issues and loopholes.

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