Opinion: IBC is losing steam

By Seela Subba Rao The government of India enacted the Insolvency and Bankruptcy Code (IBC) Act in 2016 to address the resolution of stressed assets. The most important requirement was a speedy recovery process. The IBC Act, 2016, consolidated, revised and re-established the insolvency-related laws under one umbrella. It superseded all other laws and deals […]

By Seela Subba Rao

The government of India enacted the Insolvency and Bankruptcy Code (IBC) Act in 2016 to address the resolution of stressed assets. The most important requirement was a speedy recovery process. The IBC Act, 2016, consolidated, revised and re-established the insolvency-related laws under one umbrella. It superseded all other laws and deals with business structures, including individual, partnership and company.

The basic constituents of the IBC law are four viz, Insolvency and Bankruptcy Board of India (IBBI), Adjudicatory Authorities, Insolvency Professionals and Information Utilities. The IBBI is the regulator of the IBC which looks after the work and conduct of Insolvency Professionals (IP), Insolvency Professional Agencies (IPA) and Information Utilities (IU). There are different adjudicatory authorities for an individual, company and entity having unlimited liability and limited liability. The Debt Recovery Tribunal (DRT) is the adjudicatory authority for the individual and unlimited liability partnership firm. They can appeal to the Debt Recovery Appellate Tribunal (DRAT) if the party is not satisfied with the order of DRT.

Similarly, the National Company Law Tribunal will be the adjudicatory authority for companies and limited liability companies. The companies/parties can appeal to the National Company Law Appellate Tribunal if the party is not satisfied with the order of NCLT. If the parties are not satisfied with the order of NCLAT and DRAT, they may appeal to the Supreme Court. It has been specified under the IBC that the entire resolution process has to be completed within 180 days. If the process is not completed within the specified period, an additional 90 days can be given by Adjudicating Authorities in certain genuine cases.

Impact of IBC Act
As per the Economic Survey report 2020, the IBC has improved the resolution process in India as compared with other mechanisms. The recovery rate of NPAs under the IBC is 42.5% of the amount involved as compared with 14.5% under the Sarfaesi Act. Further, within 270 days, many cases have been resolved under the IBC. Earlier, it used to take 4-5 years for resolution/settlement.

The IBC Act, 2016, is aimed at time-bound resolution (or liquidation of stressed assets), which is critical for de-clogging bank balance sheets and for efficient reallocation of capital. The clock starts ticking once a case is admitted. After a case is admitted, an insolvency resolution professional is put on the job to find a resolution process. In case no resolution is possible within six months, another three months extension can be given. However, if no resolution is reached even in an extended period, the company goes for liquidation.

One of the key issues impacting time-bound resolution is the infrastructure of NCLT, which is not adequate to cope with the workload since many cases apart from bankruptcy are also filed for settlement/resolution. In addition to the new cases filed for resolution under the IBC, there was a significant backlog of cases that were transferred from the Company Law Board.

Further, many corporate recovery cases with DRTs and rehabilitation cases with the Board for Industrial and Financial Reconstruction are also transferred to NCLT. The provision related to the Corporate Insolvency Resolution Process (CIRP) came into force on December 1, 2016, and by September 2021, there were a total of 4,708 cases.

As per IBBI data, 3,068 cases have been closed and 421 ended in approval of the resolution plan. But it is observed that 73% of CIRP as of September 30, 2021, took more than 270 days, a steep rise in the maximum permissible period. The time frame for completion of the Pre-packed Insolvency Resolution Process (PIRP) for corporate persons/units under the MSME sector is 120 days from the commencement of PIRP. This came into force from April 1, 2021, after carrying out the necessary amendment to the IBC Act, 2016.

Road Ahead
Within six years, the IBC has come into prominence by helping banks in resolving bankruptcy cases. However, the insolvency resolution process, which seeks to address stressed assets in a quick and time-bound manner, appeared to lose steam in 2021.

In the first phase, 11 Benches and one Principal Bench were set up, and subsequently, five more Benches were set up for swift and time-bound resolution or liquidation of stressed assets. However, the Bench is under pressure because there are not enough Judges. Further, the same Bench will be hearing other company law matters. A separate Bench for insolvency and bankruptcy cases is the need of hour along with beefing up the infrastructure of NCLT.

Banks and financial institutions undergoing the corporate insolvency resolution process have taken a cumulative haircut of Rs 3.22 lakh crore or 61.2% of their admitted claims since the IBC regime was rolled out. These haircuts have hit their balance sheets to a considerable extent. This has put banks in a disadvantageous position in their effort to recover the full dues from defaulters.

When the IBC was envisaged, the initial plan was to have a strict timeline of 180 days with no exceptions. After objections from the stakeholders, only adjudicating authorities were given the power to extend it by another 90 days at their discretion in only very specific cases. Now the timeline is 330 days. The value of the assets erodes over time, leaving no bidder interested. Thus, the major task of the bid gets affected due to inordinate delay.

It is expected that the government appoints a greater number of members and ramps up infrastructure in NCLT and NCLAT. These institutions would continue to play an important role in the restructuring and financial revival of companies. At the same time, they would also protect the interests of the banks in true spirit as the banks are the repository of public resources.