Insolvency and Bankruptcy Code (IBC)

In Context

• The performance of the Insolvency and Bankruptcy Code (IBC) has been under intense scrutiny. 

Performance Analysis 

•  A common metric used to assess the efficacy of IBC is the time taken to resolve cases.
  • It is calculated by taking a simple average of time taken on each completed case. 
    • This is one of the metrics used by the Insolvency and Bankruptcy Board of India (IBBI) to compare the IBC regime with the earlier Board of Industrial and Financial Reconstruction (BIFR) regime .
    • For instance, it is often reported that the IBC has reduced the average time to settle a bankruptcy case from 5.8 years to 1.6 years.

• The curve for the IBC (in blue) is significantly above the one for BIFR (orange) across the time series indicating that, for any fraction of the total cases resolved under each scheme, the IBC took considerably less time than BIFR. 
• The IBC has significantly outperformed the earlier BIFR regime in terms of the speed of resolution.
  • But the above analysis ignores the number of pending cases and therefore ,it is proposed to use an alternate metric that combines the time horizon of resolution and the number of pending cases.
  • the performance of a bankruptcy resolution should ideally be evaluated along at least three dimensions: 
    • The average time taken to resolve a case, the fraction of cases resolved within a given timeframe, and 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.

About Insolvency and Bankruptcy Code, 2016 (IBC)

• It was enacted in  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
•  Companies have to complete the entire insolvency exercise within 180 days under IBC and the deadline may be extended if the creditors do not raise objections to the extension.
• 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.

Aims and Objectives 

• To protect the interests of small investors and make the process of doing the business less cumbersome
• To promote entrepreneurship, availability of credit and balance the interests of all  the stakeholders.

Achievements 

• The IBC has undoubtedly revived India’s insolvency regime and it has been successful in combating the growing threat of NPAs.
• It has also benefited the economy in a variety of nuanced ways, including improving credit discipline. 
  • As per reports, a total of ?2.5-lakh crore has been introduced back into the banking system from 2016 upon resolution of insolvencies under IBC.
• Post the implementation of IBC, as per the World Bank’s report, India’s rank in resolving insolvency went from 136 in 2017 to 52 in 2020. 

Criticism & 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.
• The recovery rates under the IBC are low. There are matters where haircuts of as much as 95 per cent are being granted during the insolvency resolution.
  • Since 2016, the lenders took an average of 61 per cent haircut on claims.

•  There are inordinate delays in the resolution procedure
  • Around 71 per cent of the cases are pending for more than 180 days which is a marked deviation from the intent of swiftly resolving insolvency.
• 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 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. 
• The government needs to cater appropriate budgetary allocations to upskilling insolvency professionals, improvement of tribunal infrastructure and digitisation of the insolvency resolution process.
• There is a long way ahead for the Indian insolvency regime to meet the standards of other mature global jurisdictions.

Source: IE