IBC: Success or a Failure?

Introduction:

With the evolution of the commercial laws and the codification of the Insolvency and Bankruptcy Code, 2016, India has come far away from its earlier position in the economic market. Within a short span of 5 years, the Code has made its hegemony in the market and stands out as the rule of law in the resolution of the stressed assets of the debtor companies. Through IBC, a lot has been achieved in the last five years, including providing a free hand to the companies for exit to reduce their stressed assets, realising the creditors of their dues but the most important of them all is, changing the behaviour of the creditors and debtors. According to the latest “Doing Business 2019 Report”, India has made a quantum leap in its ranking in resolving insolvency parameters to 52nd position from 136th rank three years ago. This article will thus try to analyse whether the code has actually achieved its objective, as mentioned in its long title or if the policymakers have failed miserably since the recoveries made are very low in comparison to what was initially promised.

IBC as a solution to the Non-Performing Assets: A Successful Story Behind 

The burden of the gross non-performing assets (GNPA), fraud in loans or corruption cases had brought a slump in the economic recovery. The reason behind the rising NPAs was that the banks and the financial institutions were aggressive lending. To add to that was the wilful default of the borrowers that has been the driving factor that is making the banking sector go through the hard times. The government took various measures to solve the NPA problem like introducing ARCs (Asset Reconstruction Companies), schemes for the restructuring of the NPAs like corporate debt restructuring, strategic debt restructuring and many others. Various legal reforms like the introduction of SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 and the separate tribunal as DRT, i.e., Debt Recovery Tribunal, to deal effectively with the stressed assets were introduced but with no effect. Therefore, a robust and a modern way to deal with these stressed assets was the introduction of the new code, i.e. IBC - Insolvency and Bankruptcy Code, 2016

The Code is the second-generation reform which has paved the way for the companies that are not able to realize their market potential and hence allows them to easily exit from the market. According to Section 6 of the Code, when the Corporate Debtor defaults in the payment, the Corporate Creditor can initiate the process under CIRP (Corporate Insolvency Resolution Process) before National Company Law Tribunal (NCLT). Thereafter, according to the resolution plan, the tribunal has to act, and through the resolution, professionals endeavor to save the properties and assets of the corporate debtor. However, if there is no resolution plan for 330 days, then the liquidation proceedings against the defaulter are initiated.

The Code has successfully made quick recovery through the resolution process, and Bhushan Steel is one such example of the 2016 Code where Tata Steel bought Bhushan Steel and repaid INR 35200 crore out of INR 56,079 crore to financial creditors though with 35% haircut. The resolution is historic because of the amount recovered from the CIRP Process.

Dip in the recoveries under IBC: Case of Failure 

The success story of the recoveries under the five-year regime of IBC has come to a halt. The recoveries under the code have been sharply shrinking and getting delayed compared to the early days of the Code. During the resolution process, the bank has seen a dip of 67% on an average in the insolvency cases.

In the past, the average recoveries were to tune of 40-45% in the year 2020, but lately, the recoveries have been slow. Out of 458 cases resolved through IBC, the creditors have been able to recover significantly less than the admitted claim, i.e. only Rs. 2.5 lakh crore out of Rs. 7.5 lakh crore. The insolvency regulator released a figure in December 2021, which shows that only 37 cases were resolved in October- December 2021 through IBC, and only Rs. 33,000 crores were recovered by the creditor on the admitted amount which amounts to just 13% of the admitted claim. The reason behind the delay has various reasons, ranging from - lack of the court capacity to resolve the case at a faster speed to the absence of a well-developed market to realize the sale of the stressed assets and, most notably, the size of the more considerable amount of debt in India which makes it very difficult for the courts to realize the recovery. The lesser equipped benches in the country make it all the more difficult to complete a case within time, which increases the caseload. The average time taken by the court to resolve one case was 411 days against the 330 days timeline as provided by the act. The last and the most critical challenge is digitising the IBC ecosystem. The lack of digitisation has lead to the process being hampered with long delays. A parliamentary committee report suggests the digitisation of the courts, i.e. NCLT and NCLAT, to deal with the backlog of cases swiftly. 

The effect of change of limit from 1 lakh to 1 crore : Covid Regime

A notification  No.  SO 1205(E) dated – 24/03/2020 was passed by the Central government under IBC, looking at the hardship created from the economic crisis by covid-19 on traders, industries and MSME’S. This notification increased the minimum amount of default for CIRP under IBC, from a sum of Rs. 1,00,000 (Rupees One lakh only) to Rs. 1,00,00,000 (Rupees One Crore only). By this notification, the creditor cannot file an insolvency application against the debtor if the recovery amount is less than a crore rupees. The effects of such notification are prospective in nature and hence the fresh applications to start insolvency proceedings were affected and not those which were already in place before 24/03/2020. 

Difference of benefit between operational creditor and financial creditor:

The impact of such notification was seen on both the financial and operational creditor.

As an Operational creditor: 

The impact of the notification was felt most by the operational creditor due to the following reason that they have generally less than a crore debt and hence when the limit was lower at 1 Lakh, they could easily recover debt by filing application in NCLT. Also, the operational creditor cannot file a joint application to recover their amount by covering the threshold limit.

As a Financial Creditor:

The financial creditors are the big players and hence the amount lended by them easily soars above 1 crore and hence the new notification does not hamper much of their business. Also, even if the financial creditor’s due is less than a crore, they could still file a joint application under section 7 of the IBC along with the other creditors to reach the threshold limit.

Conclusion:

The code has sought to revive the economic condition of India through the insolvency regime. It has not only benefited the financial distress alone by working on the GNPA but also improved the credit discipline in India. However, there are areas where IBC needs remarkable improvement, like an adequate bench capacity to resolve the case in a time-bound manner. The other is that the government must submit the claims on time and try to avoid litigation if possible post-resolution. 

References:

1. https://www.mondaq.com/india/insolvencybankruptcy/1164034/five-years-of-ibc-a-promising-journey

2. https://ibbi.gov.in/uploads/resources/1f2dfa567dcf95833eddf7aec167fec7.pdf

3. https://economictimes.indiatimes.com/industry/banking/finance/ibc-led-recoveries-fall-sharply-as-delays-mount/articleshow/89974087.cms?from=mdr

4. https://www.financialexpress.com/industry/recovery-blues-for-lenders-under-ibc/2451478/

5. https://economictimes.indiatimes.com/news/economy/policy/5-years-of-ibc-insolvency-law-has-helped-improve-recoveries-but-delays-disappoint/articleshow/84740887.cms?from=mdr