Effective and Efficient: The Insolvency and Bankruptcy Code

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Last Updated23/04/2022

The performance of Insolvency and Bankruptcy Code (IBC) during the first term of the current government has been under intense scrutiny.
The Code has been mainly criticised on three counts: First, there are inordinate delays in the resolution procedure, second, there have been more liquidations than resolutions and, third, the recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.

A common metric used to assess the efficacy of IBC is the time taken to resolve cases.
It is calculated by taking a simple average of time taken on each completed case. This is one of the metrics used by the Insolvency and Bankruptcy Board of India (IBBI) to compare the IBC regime with the earlier BIFR regime.
The performance of a bankruptcy resolution should ideally be evaluated along at least three dimensions:
- The average time taken to resolve a case
- Fraction of cases resolved within a given timeframe.
- Recovery rate conditional on resolution.
Focusing on any single parameter may result in a gross under (over) estimation of the IBC’s (BIFR’s) performance.

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It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.
It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.
Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.
Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.

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Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.
Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

Faster Resolution: As of December 2020, over 86 per cent of current bankruptcy resolution processes had passed the 270-day mark.
- The PPIR procedure, on the other hand, is limited to a maximum of 120 days. Furthermore, the stakeholders have only 90 days to submit a settlement plan before the NCLT.
Greater Debtor Autonomy: In the event of pre-packs, the present management retains authority. A resolution professional, on the other hand, assumes control of the debtor as a representative of financial creditors. For the debtor, this leads in a cost-effective and value-maximizing solution.
Prevents errant promoters from abusing the system: The PPIR offers financial creditors strong consent rights. For example, before submitting a resolution plan, it must have approval from at least 66 per cent of financial creditors. This prohibits financial creditors from abusing the system.
A fair resolution: The amendment ensures that both debtors and creditors have a role in the resolution process. This is a departure from the previous strategy. Because the IBC 2016 places an overabundance of emphasis on creditors in the settlement.
Prevents job losses: PPIR reduces the likelihood of liquidation. As a result, company continuity is ensured, and worker layoffs are reduced.

Poor Approval Rate: According to data from the IBBI (Insolvency and Bankruptcy Board of India), NCLT approved just 15% of corporate insolvency cases from 2016 to 2019.
Greater emphasis on liquidation: The IBC's goal was to encourage entrepreneurship and resolution. IBC, on the other hand, placed a greater emphasis on liquidation. This limits the country's economic potential.
Almost a third of all business cases filed for resolution in 2019 ended up in liquidation.
Supreme Court Judgement: The government had set a mandatory deadline of 330 days if the 270-day mark was breached.
- However, in the Essar Steel insolvency case, the SC reduced the requirement that the CIRP be resolved "mandatorily" within 330 days. This decision can also be used to violate the PPIR process deadline.
Deficiency in Resources: In July 2019, the government intended to install 25 more single and division benches at the NCLT.
- They were founded in a variety of locations, including Delhi, Jaipur, Kochi, and others. However, due to a lack of suitable infrastructure and adequate support people, the majority of these remain non-operational or partially operational.

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IBC took considerably less time than BIFR.
In cases that were eventually resolved under the BIFR, over 80 per cent of them took more than 34 months.
While the BIFR was somewhat slow in resolution, it solved significantly more cases.
Since its inception in 1987, the BIFR has resolved less than 3,500 cases while the IBC, since it was launched in 2016, resolved about 1,178 cases until it was suspended at the onset of the COVID pandemic.
An analysis report suggested that IBC continues to outperform the earlier BIFR regime by 66 times which is substantially higher than a comparison based on simple time averages.
Since many of the unresolved cases stuck in the BIFR were transferred to IBC, delays in resolution should be viewed in comparison with the historical case pendency.

The IBC has outperformed the earlier BIFR regime in terms of the speed of resolution.
Most analyses of IBC’s performance overlook the that many of the legacy BIFR cases were subsumed by IBC, and these were often zombie firms that were kept alive due to the massive evergreening of loans between 2008-2015
IBC is potentially as effective as a disciplining device as much as it is a resolution mechanism.

Prelims take away

Mains Track

Q. Critically analyse the progress made in resolving stressed assets since the enactment of Insolvency and Bankruptcy Code (IBC).