Approach:
- Introduction on IBC.
- Give an account of how it has fared till now.
- Mention the challenges associated with IBC.
- Conclusion – what more measures need to be taken.
The IBC, enacted in 2016, replaced all the existing laws with a uniform procedure to resolve insolvency and bankruptcy disputes. It allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code created a new institutional framework to facilitate a formal and time bound insolvency resolution process and liquidation.
How has it performed till now ?: According to the Insolvency and Bankruptcy Board of India (IBBI) for January-March 2022, 64.7% of all the cases admitted for the corporate insolvency resolution process (CIRP) since 2016 have been closed. Amongst this, 11% have been withdrawn, about 14 % settled, 30% liquidated and 9% resolved. Data reveals that resolution rate of cases under CIRP is rather low and the number of cases seeing liquidation are three times more than those being resolved. E.g., of the 2,600 cases that were closed by December 2021, 55% ended in liquidation while only 16% were completed with proper resolution plans. The amounts recovered from the debtors have also been low. Since the IBC came into force, only 32.9% of the claim amounts were recovered. In January-March 2022, this figure stood at only 10.2% of the claim amounts.
Challenges associated with IBC:
Delays in the process: Resolution & liquidation have taken much longer than the mandated time. E.g., of cases involving more than INR 1,000 Crore, the average resolution time was 274 days in FY2018. This has risen to 772 days in FY2022. The main reason for delay is litigation on the decisions. Such an adjudication process, coupled with litigation, counter-litigation and multiple appeals, renders IBC timelines meaningless.
Big Haircuts: Longer delays result in larger haircuts, as the value of sick companies tends to diminish at an increasing pace over time. For instance, the lenders have had to take a haircut of 83% in the case of Alok Industries, a little less than 90% in the case of Reliance Infratel and 96% in the recent Videocon Group case.
Less Focus on alternatives : Globally, a mechanism like the IBC’s corporate insolvency resolution process (CIRP) has been a last-resort measure. However in India, there are no specific provisions for mediation under the IBC.
Regulatory Fear : Banks, especially those in the public sector, are unable to take pragmatic decisions due to regulatory fear. They feel any risk-taking could potentially yield a low rate of dues recovery in the short term & may subject them to vigilance inquiries and audits.
Resource Deficit : The Government had proposed to set up 25 additional single and division benches of NCLT in July 2019. However most of these remain non-operational or partly operational on account of lack of proper infrastructure or adequate staff.
Exclusion of promoters : Promoters are excluded from bidding despite them not being wilful defaulters. There have been many cases where default occurs for reasons beyond the control of the promoter.
What needs to be done?:
- There is a need to increase the number of NCLT benches and appoint more competent professionals of financial system. This will ensure that the IBC platform is not used as a recovery but more as a resolution tool.
- There is a need to promotemediation for out-of-court proceedings, with legislative recognition for speedier dispute resolution.
- The Mediation Bill of 2021 is a step in the right direction. It requires disputants to try and settle civil or commercial disputes through mediation before approaching any court, within a mandated period.
- Bankers should be protected for bona fide decision-making during the resolution process. It protects companies from frivolous lawsuits by assuming that, unless proved otherwise, management is acting in the interests of the corporation and its stakeholders.
- Promoters, who are not wilful defaulters, should be allowed to bid at NCLT, after checking their track record by the banks.