Performance Analysis of Insolvency and Bankruptcy Code, 2016 (IBC)

In Context 

In Q4 of FY22, for the first time the amount to be realised from the resolution process was lower than the liquidation value of assets.

Why did the Insolvency and Bankruptcy Code, 2016 (IBC) come into force ?

• Poor recovery of claims and inordinate delays in resolving bad assets were the problems that plagued the older recovery mechanisms such as SARFAESI, Lok Adalats, and Debt Recovery Tribunals.

• In 2016, the Insolvency and Bankruptcy Code was passed to tackle the mounting bad debts and to favour the creditor during the resolution process. 

About Insolvency and Bankruptcy Code, 2016 (IBC)

• It was enacted on May 28, 2016, against the backdrop of mounting non-performing loans, with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner.
• It was implemented through an act of Parliament and got Presidential assent in May 2016.
• It aims to resolve claims involving insolvent companies.
• It also aims to protect the interests of small investors and make the process of doing business less cumbersome.  

Other Provisions

• Companies have to complete the entire insolvency exercise within 180 days under IBC. 
  • The deadline may be extended if the creditors do not raise objections on the extension.
•  For smaller companies, including startups with an annual turnover of Rs 1 crore, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. 
  • If debt resolution doesn’t happen the company goes for liquidation.
• It seeks to tackle the non-performing asset (NPA) problem in two ways.
  • Behavioural change on part of the debtors to ensure sound business decision-making and prevent business failures is encouraged. 
  • it envisages a process through which financially ailing corporate entities are put through a rehabilitation process and brought back up on their feet

• The IBC sets out three classes of persons who can trigger the corporate insolvency resolution process (CIRP) – financial creditors, operational creditors and corporate debtors.
• The most important aspect under the IBC is the timeliness of insolvency resolution. 
  • The Supreme Court in Kridhan Infrastructure Vs Venketesan Sankaranarayan, observed that the insolvency resolution should not suffer from an indefinite delay in complete abeyance of the timelines fixed under the IBC.

Performance Analysis 

• The IBC’s performance has been relatively better than the other recovery mechanisms; it suffers from similar systemic issues. 
• 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. 
• The average number of days it takes to resolve such cases has increased dramatically over the past five years.
  • On average, over 700 days were taken in FY22 to complete a resolution process, against the stipulated deadline of 330 days. 
• Worryingly, the lenders continued to take steep haircuts.
  •  The haircut is the debt foregone by the lender as a share of the outstanding claim.
  •  In 100 out of 500 companies that saw proper resolutions, the haircuts were above 90%.

• The biggest issue is the delays and a lot of it is due to the capacity of tribunals.
  • The functioning of the NCLT [National Company Law Tribunal] during the COVID-19 pandemic has been a setback for the IBC. 

Other Challenges 

• There have been more liquidations than resolutions.
• The recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.

• Another important challenge is the digitisation of the IBC ecosystem. 
  • The lack of digitisation has led to the insolvency process being stymied with long delays much beyond the statutory limits. 

Way Forward 

• The government needs to cater appropriate budgetary allocations to upskilling insolvency professionals, improvement of tribunal infrastructure and digitisation of the insolvency resolution process.
• The IBC has reformed the Indian insolvency law landscape to a great extent.
• It is important for the key stakeholders to make their best endeavours to ensure that the power of the IBC does not diminish. 
• The goal must be to fill the voids that are discovered and move towards a more complex legal system over time. 
• There is a long way ahead for the Indian insolvency regime to meet the standards of other mature global jurisdictions.