IBC framework needs a booster dose; debt resolutions slacken in two years

According to the statistics by the Insolvency and Bankruptcy Board of India, since the provisions of IBC came into force in December 2016, as many as 5,258 insolvency cases have been filed by lenders

The debt resolution of sick companies or ones that have failed to repay their dues has slowed down considerably under the Insolvency and Bankruptcy Code (IBC), 2016, in the past two years after initial euphoria saw several successful acquisitions by top companies, including the Tatas, Reliance, and the world’s largest steelmaker, ArcelorMittal.

The problems, as identified by the parliamentary committee on finance in August last year, include a very high haircut – as much as 95 per cent in some cases for banks - and delay in the resolution process beyond 180 days in 71 per cent of the cases admitted, signalling a deviation from the original objectives of the Code.

According to the latest statistics by the Insolvency and Bankruptcy Board of India (IBBI), since the provisions of IBC came into force in December 2016, as many as 5,258 insolvency cases have been filed by lenders. Of these, 3,403 cases have been closed until March this year. Of the resolved cases, nearly 47 per cent of companies have been liquidated; 17 per cent of the cases withdrawn after 90 per cent of lenders agreed, following an offer made by the promoter under Section 12A of the Code. Around 22 per cent of the cases are still ongoing, while in 14 per cent of the cases, the resolution plan has been approved.

“The IBC has been a mixed bag thus far. Currently, there is no law as effective as the IBC to resolve bad-loan issues. The IBBI did a good job in setting up the system, but the absence of institutional strength and training still needs to be addressed,” says Anoop Rawat, senior partner, Shardul Amarchand Mangaldas.

Apart from a creaking infrastructure in courts, a serious problem faced by lenders was when asset reconstruction companies (ARCs) were not allowed by the Reserve Bank of India (RBI) to bid for bankrupt companies. The RBI argued that ARCs came under the framework of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act and not the IBC Act, leading to ‘regulatory lacunae’.

An RBI committee allowed ARCs to bid for bankrupt companies, in a recommendation in November last year.

The RBI had identified 12 large companies under the Insolvency and Bankruptcy Code (IBC) in June 2017. As June 13 marks the completion of five years since the announcement of the first such list of loan defaulters, we bring you a series capturing the IBC journey

“I would suggest ARCs be immediately allowed to bid for IBC companies, apart from increasing the number of members and overhauling the digital infrastructure at courts,” adds Rawat.

Experts observe that statistics reveal a delay in the insolvency process beyond prescribed time lines as one of the major issues plaguing IBC.

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) will need to approve resolutions in a time-bound manner. Frivolous challenges and interference by erstwhile promoters - directly or indirectly - to delay the process must not be entertained, weigh in lawyers.

“The need for judicial intervention on settled principles like the commercial wisdom of the committee of creditors by NCLT or NCLAT should be avoided, as is enshrined in the principles of IBC and has been advocated by the Supreme Court (SC) from time to time,” says Ajay Shaw, partner, DSK Legal — a Mumbai-based law firm.
 

The lofty haircut taken by banks in several cases like Siva Industries and Videocon Industries also came up for criticism by the lower courts, but the SC made it clear that if lenders, in their commercial wisdom, think the offer is good for all stakeholders, then the NCLT and the NCLAT must not interfere.

Haircut is the amount banks forego to make an account standard.

“The haircut by banks in the IBC process should be looked at from the perspective of the value of the asset/business today and not what banks had lent it a few years ago. For example, in relation to an insolvency process for a technology (tech) company, the tech may have advanced over the years and one cannot value the company based on tech used 10 years ago and banks lending at that time,” clarifies Rawat. 

The IBC’s track record has been better than the earlier laws. This is described aptly by RBI Governor Shaktikanta Das in an interview to Business Standard in July last year.

In response to a question on how happy he was with the way IBC was progressing, Das had said, “The main concern around IBC resolution is that it is taking too much time — more than a year. It happens because of litigation and counter-litigation. The average time for resolution under IBC needs to be compressed. That is something we expect should happen because this is a new law, which was enacted and implemented in 2016. The jurisprudence around the new law is also getting established. The average resolution time taken under IBC needs to be quicker.”

He further added, “If we look at the numbers for the comparable period (2014-15 through 2019-20), the average recovery in the case of Lok Adalat was 5 per cent. In the case of the debt recovery tribunal, it was 6 per cent. In the case of SARFAESI, it was 20 per cent. In the case of IBC, the average is still 40 per cent. If you exclude 2020-21 — the pandemic year — the average recovery under IBC was 45 per cent.”

We should judge the success of IBC not just from the point of view of recovery percentage. There are other parameters to judge its success. 

IBC has spurred banks to recognise their bad debts in time. It has also instilled a strong credit and repayment culture by both banks and borrowers, Das had said.