Nearly a decade into its existence, IBC framework needs to be reimagined

“A comprehensive law like the IBC is often viewed as a last resort by lenders — an avenue that needs to be explored after exhausting all alternatives. However, this view stems from the lack of a comprehensive vision for the future of a beleaguered borrower,” noted Rajeshwar Rao, deputy governor, Reserve Bank of India (RBI), at a conference on bankruptcy in Ahmedabad (May 6, 2022). His observation — five years after the Insolvency and Bankruptcy Code came into being — was a pointer to the convergence of opinion that outcomes under this architecture have not turned out the way it was envisaged.

 

Close to the end of IBC’s first decade, the timeline for Corporate Insolvency Resolution Process (CIRP) resolution continues to increase for financial creditors (FCs), operational creditors (OCs), and corporate debtors (CDs), standing at its longest since FY21. The timeline recorded for FY25: 723 days for FCs, 724 days for OCs, and 577 days for CDs.

 

Says Ashwini Kumar Tewari, managing director, State Bank of India: “The increase in resolution timeline remains a matter of worry; there are still challenges in admitting cases at National Company Law Tribunals (NCLT).” That these issues “have to be taken up by Parliament on a priority basis to make amendments to make the IBC contemporary to aid early resolution of cases.” Last week, the parliamentary panel on finance discussed the issue to make the IBC process more robust by setting up “dedicated” NCLT and National Company Law Appellate Tribunal (NCLAT) benches to expedite cases. 

 

The famous “tareekh pe tareekh" dialogue from the Hindi movie Damini captures where we are now. Aniruddha Sen, partner (banking and finance) at Trilegal, is for “serious disincentives (such as through a stringent cost regime) as parties frequently resort to frivolous litigation without any downside for them at all.” Shivraj Patil, senior analyst at India Ratings & Research, concurs that adjournments should be curbed by enforcing stricter procedural norms and ensuring accountability across all stakeholders, including committee of creditors members and applicants. He is also for ensuring timely appointment of members and enhancing digital case-tracking systems. Particularly in uncontested matters where all stakeholders are aligned, “faster judicial confirmation is critical to preserve recovery value and uphold the code’s objective of resolution over liquidation.” 

 

The RBI’s Financial Stability Report of December 2021, in an analysis of 60 corporate debtors resolved under the IBC between September 2019 and September 2021, showed that the sample median recovery rate was 24.7 per cent. The longer bad loans remain on banks’ books, the lower is the amount recovered. It was explained that a reduction in the median gap between bad-loan identification and CIRP commencement may have a pronounced effect on recovery. And that an examination of the one-year transition of substandard and various doubtful categories of large loans shows no meaningful recovery once banking assets are impaired.

 

Rao pointed out that an efficient insolvency legislation should be premised on the following five pillars: prioritise going concern status over liquidation; force creditors to come together and work out a resolution plan; time-bound resolution to arrest value deterioration; claw-back of questionable transactions that may have contributed to the financial stress of the defaulting borrower; and finally, an effective resolution regime that “protects the majority from the minority by forcing a cramdown if the majority decision covers a predefined threshold of approval”. He also made a point which has gone largely unnoticed — on pre-packaged insolvency resolution process (PPIRP) which combines the best of the out-of-court resolution efforts and the judicial finality of a resolution plan approved by an adjudicating authority is a welcome initiative. Even though PPIRP is allowed only for borrowers that are classified as micro, small and medium enterprises, “we could envision pre-packs as a natural complement to the prudential framework of RBI in respect of all borrowers in that difficult resolution involving non-cooperative lenders can be resolved using such pre-packaged plans”.’ 

 

Divyanshu Pandey, partner (finance practice) at J Sagar Associates, believes that legislative change and amendment to regulations are not the only tools to make IBC effective. “The government has to realise that implementation of these changes will be more effective when NCLTs and NCLAT stop giving differing views on IBC.” For this, the ramping up of infrastructure for these tribunals, appointment of commercially savvy judges, and granting them exclusive jurisdiction to deal with IBC cases, is the need of the hour. “Without this in no time, IBC tribunals will become like DRTs/DRATs (debts recovery tribunals/debts recovery appellate tribunals)”.

 

The IBC has to be reimagined.