MACROSCAN Penned by Ragavan Jan 3, 2023
The Insolvency and
Bankruptcy Code
Currenc-I
The Economics and International Business Club
Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika
Anjaney | Harshit | Krithik | Pranita | Ragavan | Srishti | Vishal
The IBC and its Objectives
The Parliament of India enacted the Insolvency and Bankruptcy Code in 2016 to
provide a time-bound process for resolving distressed firms and individuals. Insolvency
refers to a condition wherein any firm or an individual losing their ability to pay back
the debt. Bankruptcy is the legal declaration of insolvency. Insolvency Resolution refers
to the sale of the business as a going concern, whereas liquidation refers to the sale of
the assets of the company.
The IBC regime seeks to enhance the recovery of bad loans and provide business
continuity. The most important of all the objectives is to maintain the business as a
going concern. The next is to maximise the value of the assets of the distressed firm
through a time-bound resolution. The third objective is to unlock the capital to ensure
the availability of credit for the businesses.
The IBC Process
The first step in the process involves applying to the National Company Law Tribunal
(NCLT) for the resolution of distressed firm by any of the stakeholders. The NCLT is the
adjudicating authority for the Corporate Insolvency Resolution Process (CIRP). Once
the NCLT admits the petition, it announces the CIRP to the public and calls for the
submission of claims. It also appoints an interim insolvency professional (IP), who will
constitute the committee of creditors (CoC). The Committee of Creditors consists of the
financial creditors to the firm. The CoC then decides whether to continue with the
interim IP or appoint a new Insolvency Professional. The NCLT forwards the names of
the IPs to be appointed for approval by the Insolvency and Bankruptcy Board of India
(IBBI). IBBI is the regulator overseeing the insolvency proceedings in India. After the
CoC is formed, they exercise the power of the management and the board on the
advice of the IP. Applicants can submit a resolution plan to the IP, who will present the
plan to the CoC for approval by at least 66% of voting share of financial creditors.
Finally, the NCLT issues a binding order on all parties accepting or rejecting the
resolution plan.
If the NCLT rejects the resolution plan, it will pass a liquidation order. Then, the CoC will
appoint a liquidator to sell the firm's assets and share the proceeds of the sale among
all the stakeholders as per the provisions of the IBC.
How has the IBC performed since its inception?
The Insolvency and Bankruptcy Code is one of the landmark reforms in resolving
insolvency in India. The Code uses a market-led mechanism in the resolution of the
distressed firm. It ushered in a paradigm shift in the existing regime of insolvency
resolution (Debtor-in-possession) to Creditor-in-control. The notable achievement
under the regime is the resolution of Essar Steel India, which Arcelor Mittal India
acquired. The amount realised by the creditors stood at a staggering 82.91%, i.e., Rs
41,018 of Rs 49,473 was recovered. IBC was celebrated as a big achievement. However,
the recovery rate started dwindling. The average recovery rate for the first 10 cases was
33.5%. In subsequent years, the recovery rate consistently started falling below 25%.
Even the time taken to resolve the cases was under 300 days in FY2018. Today, even in
a case where the amount due is less than Rs. 50 Crore, it takes more than 600 days for
resolution. Though the IBC looked promising in the initial years, a lot of challenges
emerged in the subsequent years.
Challenges in the Process
The time taken for the resolution process and the haircuts incurred by the creditors are
the pressing issues in the CIRP. The average time taken to resolve the cases has
increased significantly over the last six years. While the IBC at inception provided for
resolution within 180 days and a 90-day extension if approved by the NCLT, the
amended IBC has relaxed the time for resolution to 300 days. According to a "The
Hindu" report, in FY22, it took about 772 days to resolve companies that owed more
than Rs 1000 Crores. Such a long resolution time leads to deterioration in the asset
quality rendering the assets unviable.
The second challenge is that the proportion of liquidation remains very high. More than
half of the cases admitted under IBC have been liquidated. When a firm's assets are
liquidated, jobs are lost, and operations cease. The third challenge is the significant
amount of haircuts on successful resolutions. A haircut is the value of the asset forgone
by the lenders during the recovery. The haircut has been as high as 80% in most cases.
Way Forward
One of the main reasons for the delay in the resolution of the cases under IBC is the
paucity of the NCLT benches. Expediting the appointment in the NCLT and increasing
the number of benches might improve the timely recovery. The IBC is still in the nascent
stage. The interpretation of the IBC by the Supreme Court and the High Courts would
give more clarity to the new insolvency regime. The IBBI has also proposed a way to
measure haircuts because, by the time a firm is admitted under IBC, its assets might
have significantly deteriorated. The discretion of the CoC in the approval of the
resolution plan should be diminished because they might lack the experience required
to manage a company. Despite the implementation challenges, the IBC is a step in the
right direction as it enhances the ease of doing business by facilitating exit from the
business.
References
https://ibbi.gov.in/uploads/publication/290a3e0f6b5a0318e2a75282fe262d1c.pdf
https://www.fortuneindia.com/opinion/the-feats-failures-of-ibc-why-it-must-
change/106119
https://www.fortuneindia.com/long-reads/ibcs-existential-problems/108827
https://www.thehindu.com/news/national/explained-what-is-the-insolvency-and-
bankruptcy-code-ibc-and-where-does-it-stand-after-more-than-five-years-of-
being-in-place/article65969421.ece
https://www.thehindubusinessline.com/opinion/columns/understanding-ibc-facts-
and-implementation-challenges/article35071282.ece
