After making insolvency process creditor-driven, can IBC address the delays

Sample this: Till October 2023, as many as 27,514 applications for initiation of corporate insolvency resolution were withdrawn before the admission itself. These companies had an underlying default of Rs 9.74 trillion, according to the Insolvency and Bankruptcy Board (IBBI) of India. Besides, more than a third of the corporate insolvency resolution processes that were withdrawn after admission resulted in full settlement with the creditor who had filed the insolvency application.

Indeed, though the Insolvency and Bankruptcy Code (IBC) had a sedate start in December 2016, it gathered steam the following year, with the Reserve Bank of India (RBI) coming out with a list of the 12 biggest non-performing assets (NPAs) in the country, which went on to be called the Dirty Dozen.

In the years that followed, the Code, according to experts, has created a paradigm shift, making the bankruptcy regime more creditor-driven than debtor-driven. It has also acted as a “stick” for defaulting promoters, who often settle their debts for the fear of losing their companies — as evident in the large number of applications being withdrawn before admission.

“The IBC, being a creditor-in-control model, has largely impacted the credit culture in the country. With creditors having the stick of IBC and the existing shareholders and management having the fear of losing control, there has been a much-desired balancing of positions in the creditor-debtor relationship in India, which is a big positive for the credit markets,” says Kumar Saurabh Singh, Partner at law firm Khaitan & Co.

Consolidation of processes

Prior to the IBC, the corporate distress resolution regime in India was an interplay between various legislations, tribunals, and schemes such as the Sick Industrial Companies Act, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Debt Recovery Tribunal (DRT), Lok Adalats, and RBI Schemes for Corporate Debt Restructuring.

Initial data shows how recoveries under the IBC surpassed all other regimes within a year of its launch. The amount recovered under the IBC in 2018-19 was more than Rs 66,440 crore, compared to Rs 38,905 under SARFAESI Act and Rs 10,552 by the DRTs. 

“Before the IBC, India's bankruptcy process was fragmented across multiple laws and forums, leading to lengthy and often inefficient resolution processes. The IBC consolidated these processes, providing a unified legal framework,” says Sonam Chandwani, managing partner, KS Legal & Associates. 

According to the latest provisional data regarding the NPAs of scheduled commercial banks, recovery under IBC till 2022-23 was to the tune of 40 per cent, while it was 27.6 per cent under SARFAESI and 9.2 per cent under DRT.  

“The reduction in the gross value of NPAs in the Indian banking system from Rs 8.96 trillion in March 2018 to Rs 5.77 trillion in December 2020 is a testament to the success and adoption of the IBC. The IBC has not only empowered the creditors but has also helped in the prevention of value destruction,” says Deepika Kumar, Partner, King Stubb & Kasiva, Advocates and Attorneys.

Some of the features that have worked for the IBC include the provision of a moratorium to ensure that creditors are safeguarded against actions of a sick corporate debtor. The concept of “clean slate” increases the chances of a successful resolution process as the winning bidder is safeguarded from all past liabilities of the corporate debtor.

Not just this, clear timelines and the waterfall mechanism for equitable distribution of dues also aid the process. The waterfall structure allows higher-tiered creditors to be paid the principal and interest ahead of lower-tiered creditors. The lower-tiered creditors are given interest-only payments until the higher-tiered creditors are paid in full.  

Still a work in progress

Experts point out that though the IBBI data reflects a steady rise in the total number of insolvencies admitted, the year-on-year increase does not show a consistent trend. “Though the IBC provides for the most effective insolvency resolution process we have had, certain underlying issues still dissuade certain creditors or debtors,” says Yogendra Aldak, Partner at Lakshmikumaran & Sridharan Attorneys. 

One criticism of the IBC has been over the delays, which have often led to erosion in the value of assets. The amount recovered by creditors as a percentage of their claims has remained the same, at around 32 per cent. A senior official says banks often take a long time to bring a company to the IBC and in the process the value is lost. 

“The law is quite perfect. It is the implementation that needs to be improved. This issue covers all stakeholders involved in the IBC, from NCLT (National Company Law Tribunal) and RPs (resolution professionals) to the lenders,” the senior official says.

The timeline for completion of resolution under the IBC is 270 days, and can be extended, subject to conditions. Although the IBC leaves little room for interference with the corporate insolvency resolution process, objections by erstwhile promoters or the suspended board of the corporate debtor, competing resolution applicants, and dissatisfied creditors are many, and cause delays.

“Despite the streamlined processes, there are concerns such as diminishing recovery rates, pointing to the need for enhanced skills and expertise among the professionals handling these cases,” Chandwani adds. 

The corporate affairs ministry is preparing draft rules for the NCLT to deal with IBC cases. The rules would work as guidelines for the tribunal. For instance, NCLTs would be directed to penalise frivolous applications that end up causing delays. There would also be a priority list to ensure that certain matters are expedited. 

Besides, the IBBI has been asked by the Delhi High Court to frame a Code of Conduct for the Committee of Creditors in order to hold them accountable.

“Evolution of the IBC is a continuous process, and to a great extent the legacy issues under the bankruptcy, such as delay in conclusion, timely recovery, etc, are taken care of under the IBC. However, the regime still has a long way to go,” says Abdullah Qureshi, Associate Partner, IndiaLaw LLP.

The next stage for IBC’s evolution, experts say, would be the introduction of the much-awaited cross-border and group insolvency provisions, which are expected to be taken up — like many other things — after the Lok Sabha elections.