Effective and Efficient: The Insolvency and Bankruptcy Code 

News: Recently, the Insolvency and Bankruptcy Code (IBC) has come under intense scrutiny. Its performance is being analysed across a number of parameters.   

What are the three criticisms against the IBC? 

First, there are inordinate delays in the resolution procedure.

Second, there have been more liquidations than resolutions.

Third, the recovery amounts under IBC have not been substantial,  

Argument against the criticism of the code

The performance of a bankruptcy resolution of IBC regime with the earlier Board of Industrial and Financial Reconstruction (BIFR) regime should ideally be evaluated along at least three dimensions given below:  

– (a) The average time taken to resolve successful cases should be one of the metric. On this performance metric, the IBC has effectively reduced the average time to settle a bankruptcy case from 5.8 years to 1.6 years.  

– (b) The fraction of cases resolved within a given timeframe. On this performance metric, the IBC has performed considerably well than BIFR. Firstly, most of those cases that were resolved under the BIFR it individually took more than 34 months, and Secondly, The BIFR has resolved less than 3,500 cases since its inception in 1987. However, the IBC has resolved about 1,178 cases since it was launched in 2016 until it was suspended at the onset of the COVID pandemic.   

– (c) The recovery rate conditional on resolution. Focusing on any single parameter may result in a gross under (over) estimation of the IBC’s (BIFR’s) performance. 

2] Other points  

If we start with a broad definition of resolutions that includes both liquidation and resolution, the IBC outperforms the earlier BIFR regime. However, If the definition of resolution is narrowed by excluding liquidation cases, the IBC still continues to outperform the BIFR. 

In addition, since many of the unresolved cases stuck in the BIFR were transferred to IBC. Therefore, the delays in resolution in the IBC should be viewed in comparison with the historical case pendency. In this case, the IBC is at least 23 times more efficient than the BIFR regime. 

The IBC represents a structural shift and a substantive improvement over the BIFR. The IBC have seen more cases being admitted than under the BIFR. 

The IBC has significantly outperformed the earlier BIFR regime in terms of the speed of resolution.  

Many of the BIFR’s legacy cases subsumed by IBC were often related to zombie firms. These firms were kept alive due to massive evergreening of loans between 2008-2015. 

The most powerful impact of the IBC is likely to be its ex-ante impact on firm and promoter behaviour.  

The IBC is potentially as effective as a disciplining device as much as it is a resolution mechanism. 

Source: The post is based on an article “Effective and Efficient: The Insolvency and Bankruptcy Code” published in the Indian Express on 22nd April 2022.