Hyderabad: The Insolvency and Bankruptcy Code (IBC) was signed into a law on 28th March 2016 and became fully functional from December 2016. The Insolvency and Bankruptcy Board of India (IBBI) was established on 1 st October 2016. IBC was introduced as there was an acutely felt need for a law that would enable one or more creditors to quickly recover a maximum part of their debts while being fair to all the other parties.
The Act attempts to finely balance various interests. Since for a business it is normal to borrow from more than one lender, the focus was on seeing to it that all the lenders agree to the recovery or settlement process rather than harass the borrower individually.
Since its inception, the IBBI has had not breathed space or time, largely because of the problem of the ever-increasing mountain of bad debts. From afar it looks like, despite the fact that the IBBI has been running ever faster, it has remained at the same place. A useful aspect of the IBC has been that it has achieved relatively good results despite the magnitude of the problems that it has faced in its short existence.
Aim and importance of IBC
The aim and importance of IBC is that it stipulates that the whole process has to be completed within a period of 270 days since the admission of the case. This means that under IBC the number of adjournments are limited which in turn means that it does not give an opportunity to unscrupulous litigants to delay the case through adjournments on flimsy grounds – which is a major factor for the pendency in cases.
Task and challenges
Any growing economy needs the growth of private enterprises. As businesses grow and flourish it tends to lead to increased employment, GDP and revenues for the government thereby leading to the onset of a larger positive cycle.
Any trade or business activity requires the successful and efficient completion of two important aspects (a) buying and selling and (b) entry and exiting a business. Unless both these are completed with complete confidence private economic activity will never be successful.
Ease of doing business, as we now call it, can happen only when an entrepreneur hopes to start and wind up a business in the shortest time possible. These are as important as profit and loss. Similarly, an overwhelming part of businesses tends to borrow money for their needs.
Reasons behind capital deficiency in Indian economy
Anybody will be forthcoming and willing to lend only if they are optimistic about repayment and in case of default by the borrower then, the process to recover the money. One of the major reasons for the capital deficiency in the Indian economy is that unlike most of the well-developed economies of the world, we do not have a dynamic bond market.
Most attempts to develop a bond market have resulted in limited success only because it simply takes too long for a lender to recover his money in a court of law. That in turn is a larger problem because our legal system is plagued by infrastructure shortages and because it is clogged by huge number of pending cases (which by recent count nearly 3.3 crore).
Contribution of IBC
The contribution of IBC has often been misunderstood. Any understanding of the contribution has to look at the nature of debt dynamics and it is often here that people jump too quickly in judgment against IBC.
Since its inception (December 2016 to September 2019), 2542 corporate insolvency cases have been admitted of which 186 have been closed on appeal or review or settled, another 116 have been withdrawn, 587 have been ordered to liquidate while 156 have had seen the approval of the resolution plan. In short, 1045 have been closed while 1497 are in different stages.
Among the liquidations, 498 have been voluntary liquidations – with 75% of them due to their being commercially unviable or not carrying out any business. The total money realisable (lent) by the financial creditors (and excluding operational creditors or those who lend money during the course of business including suppliers, etc) is Rs.3.32 lakh crores. This excludes the 12 large accounts (many of them politically well-connected groups) where the banks were forced to initiate proceedings on the direction of RBI.
Together, these 12 companies had outstanding claims of Rs.3.45 lakh crores. Of these accounts IBC proceedings led to the realisation of Rs.101,906 crores from 7 companies. The rest are under different stages of either resolution or liquidation. In four of these 7 companies, the realisation was more than 40% while in three of them it was more than 50%.
Criticism and complexities
The major criticisms of IBC have been that the recovery rate has been too low and that it has not been able to adhere to the timeline of 270 days that is there in the Act. The average time taken varies from 300 days to 374 days with the occasional case taking up more time.
The question of amount realisable is always a source of controversy. But, it is important to understand that the historical experience throughout the world is that once a company, especially one with large amounts of debt, defaults on its obligations, there is a less than 10% probability that it will be able to recovery and repay its total outstanding that existed before its default in full.
Thus, in case of a default, the question always is how much the lenders are willing to forego. It is for that reason that lenders are expected to be judicious and prudent when lending – better to be safe than sorry is the fundamental logic in banking. In the case of IBC, the recovery rate varies from about 10% to 150% of liquidation value.
The issue of inability to adhere to timelines is more complicated. IBC is still in a work in progress and as with any new law, there are bound to be areas that are either undefined or where there are issues. Any law takes about 3 to 5 years to stabilise in its functioning. This is more so, in a country that follows rule of law where it is normal that it will take a little more time to be resolved than by the courts or through legislative remedies than in countries that live under dictatorships.
Under rule of law it is not permissible for executive arm of the country to simply declare that something has to take place. Right to constitutional remedies is a fundamental right and it includes the right to challenge any executive action when someone thinks that their rights have been affected.
Implications under IBC
The implication under the IBC is that often a party may approach the higher court against the proceedings underway, especially if the challenge was on a point of law or procedure. That would immediately lead to adjournment of the case until it is decided by the higher court. In almost all the major cases under IBC, the delay was due to this factor (example: Bhushan Steel and Essar Steel case).
However, all credit needs to be given to the Supreme Court because in such cases, the SC has tried to settle the case at the earliest possible limit. Another problem that is plaguing the IBC is that there are times when two arms of the government are at opposite sides of the litigation and claim priority over payments. Presently, there is a case where the Enforcement Directorate has attached properties due to allegation of money laundering.
How to make working of IBC more effective?
In order to make the working of IBC more effective, it is necessary that the government accepts without any second thoughts and in good spirit the proportion suggested in Section 53 under “Distribution of Assets” and make necessary amendment to the act so that all other claimants be considered to be “operational creditors” rather than claim first right to the dues.
Further, there are pending issues of law and procedural issues. The committee headed by UK Sinha, on procedural aspects of multiple insolvencies in a group is expected to be finalised soon.
This is yet another important issue since about 47 such companies have outstanding debts worth nearly Rs.1 lakh crores.
IBC's handicap
A handicap under which IBC is forced to function is that it simply does not have sufficient infrastructure to deal with the problem of mounting cases. There are presently 13 division benches apart from the Principal Bench at Delhi.
The problem of lack of infrastructure is due to the lack of more commitment from the Centre and more importantly the states. In most cases, the NCLT does not have sufficient physical and human resource infrastructure.
Recent studies have pointed out that these are insufficient to deal with the existing number of cases and more importantly if one were to consider the pace at which new cases are coming to the courts. It is estimated that India will need 69 benches to deal with pendency and the pace at which cases are coming to the courts.
It is almost like as if the States have not realised that Ease of Business is possible only when there is sanctity of contract AND when dispute resolution happens quickly by following the rule of law.
Unfortunately, the problem of lack of commitment on the part of the states extends not just to IBC but to all commercial cases. Despite the passage of Commercial Courts Act in 2015 and various Central government notifications, most of the states have not even established commercial courts in all the districts. Even in cases where there are commercial courts, their functioning is hit by lack of infrastructure due to negligence by the Executive.
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