Context: Is IBC an effective resolution tool?

Source: The Hindu

The Insolvency and Bankruptcy Code of India was passed more than eight years ago. The Insolvency and Bankruptcy Board of India reports that, with a recovery rate of more than 32.8% against acknowledged claims, creditors have recovered Rs. 3.89 lakh crore under the framework.

In order to enhance the entire corporate insolvency resolution procedure, India passed the IBC, its first comprehensive bankruptcy law, in 2016. In order to expedite bankruptcy processes, minimize judicial delays, and enhance creditor recovery, the IBC established a time-bound resolution procedure that transferred control from debtors to creditors.

Current regulations allow a corporation accepted to the insolvency resolution process to find a settlement within a maximum of 330 days. If not, the business enters liquidation.

In the Financial Year 2023–2024, IBC accounted for 48% of all bank recoveries, making it the most common recovery mechanism. Additionally, 1,154 claims have been withdrawn under section 12A, and 1,276 cases have been resolved through appeal, review, or settlement. Five companies are heading into liquidation, while nearly ten are being addressed.

Debtors’ behavior has changed as a result of the IBC’s provisions, which encourage them to act quickly in times of hardship. The higher percentage of independent directors on the boards of businesses governed by the IBC is evidence of the Code’s beneficial effects on corporate governance.

The IBC serves as the foundation of India’s credit ecosystem and is more than just a piece of economic legislation. Finding a delicate balance between judicial supervision and economic realism will determine its future. Strong and reliable insolvency procedures are essential as India strives to become a $5 trillion economy.

Model Question:

“The Insolvency and Bankruptcy Code (IBC), 2016 has significantly improved the resolution framework in India, yet it faces multiple implementation challenges.” Examine.

Model Answer:

The Insolvency and Bankruptcy Code (IBC), 2016 was introduced to consolidate and streamline insolvency resolution processes for companies, individuals, and partnerships. It marked a paradigm shift from debtor-in-possession to creditor-in-control, aiming for a time-bound, transparent resolution mechanism.

Achievements of IBC:

1. Time-bound process: IBC mandates resolution within 330 days, ensuring faster outcomes than previous laws like SARFAESI or Companies Act.
2. Improved recovery rates: The average recovery rate improved to ~32%, compared to ~25% before IBC (as per RBI and IBBI data).
3. Behavioral change: Fear of losing control has encouraged many debtors to repay or settle disputes out of court.
4. Boost to Ease of Doing Business: India jumped in World Bank’s ranking due to IBC’s implementation in resolving insolvencies.

Challenges in Implementation:

1. Delays in resolution: Despite time limits, many cases spill beyond deadlines due to litigation and capacity constraints in NCLT.
2. Haircuts for lenders: Creditors often take large write-offs (e.g., 90%+ in cases like DHFL or Videocon), raising concerns.
3. Operational vs. Financial creditors: Priority given to financial creditors has sparked legal disputes and perceived inequity.
4. Limited capacity of Resolution Professionals (RPs) and IBBI to manage complex cases.
5. Cross-border insolvency and group insolvency are yet to be comprehensively addressed.

Way Forward:

1. Strengthen infrastructure and human resources in NCLTs.
2. Empower IBBI to monitor resolution professionals better.
3. Implement the UNCITRAL Model Law for cross-border insolvency.
4. Introduce reforms for pre-pack insolvency and MSME resolution.

While the IBC has transformed India’s insolvency ecosystem and boosted investor confidence, its long-term success depends on resolving bottlenecks in implementation and building institutional capacity.