Progress made in resolving stressed assets since the enactment of Insolvency and Bankruptcy Code (IBC)

Progress made in resolving stressed assets since the enactment of Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC), the uniform framework for insolvency resolution, was implemented by Parliament in 2016. The code seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

What is Insolvency?

Insolvency is a state of financial distress in which someone is unable to pay their bills. It is often confused with bankruptcy, which is a court-ordered legal procedure for dealing with debt that arises when an individual or business can no longer pay their debts.

What is Bankruptcy?

Bankruptcy is a legal proceeding, involving a person or business, who is unable to repay outstanding debts. Generally during bankruptcy proceedings, the debtor gives up certain property and financial assets to one or more entities referred to as creditors in exchange for an individual or lump sum payment of their remaining liabilities – hence the term “discharge” of debt.

Success of Insolvency and Bankruptcy Code (IBC):

The Insolvency and Bankruptcy Code (IBC) has initiated a cultural shift in the dynamics between lender and borrower, promoter and creditor. It played a critical role in reshaping the borrower’s behaviour. Prior to enactment of IBC, promoters, who saw no avenue to stay afloat, were inclined to drag lenders with them for lack of reprieve from borrowers and looming insolvency proceedings.

The success of the Insolvency and Bankruptcy Code, passed in 2016 by Parliament has propelled India to the forefront of bankruptcy reforms globally. The IBC has been able to achieve a record 43 per cent recovery of dues for its creditors. This phenomenal success has put India towards the top in terms of recovery under the new laws. It is also favourable for lenders as it is now easier to recover their debt on time without having to go through subordinate courts that also have long hearing durations.

Since the enactment of the Code in 2016, India has improved its Resolving Insolvency ranking 108 in 2019 from 134 in 2014 where it remained stagnant for several years. India won the Global Restructuring Review award for the most improved jurisdiction in 2018.

The International Monetary Fund (IMF) and World Bank have jointly studied the bankruptcy systems of economies. An IMF-World Bank study in January 2018 observed that India is moving towards a new state-of-the-art bankruptcy regime. India has implemented the Insolvency and Bankruptcy Code (IBC), 2016, which has already initiated resolution action in many cases involving big corporate defaulters.

The first calendar year under the Insolvency and Bankruptcy Code was a big success. The recovery of Rs 70,000 crore in fiscal 2019 was about double the amount recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets, and Enforcement of Securities Interests Act, and Lok Adalat in fiscal 2018.

The Insolvency and Bankruptcy Code (IBC) came into force in December 2016 with the objective of enabling a uniform regime for the resolution of corporate insolvencies. 94 cases have commenced under the IBC in the first eight months of 2017 which is double the volume compared to the same period last year.

Issues that need attention

The Insolvency and Bankruptcy Code (IBC) ushered in a new era of debt recovery for operational creditors. The mechanism was simple and robust – corporates who defaulted on their payments to operational creditors beyond the threshold limit of Rs 1 lakh had six months to get back into the good books of their lenders or face an auction with interested buyers by MAS on a date notified by the NCLT.

It is observed that more than 23% of the admitted companies ended with liquidation. As companies are admitted into liquidation, the employees on the rolls of the company are only cumulatively compensated till the resolution process is completed, while the contractual employees are downsized. It is also observed that sectors such as construction and electricity is in a different situation as they do not have any compensation plan based on their turnover amounts. These issues need attention so that more importance can be given to the policy drafting made regarding employee compensation at liquidation.

At the heart of the Insolvency and Bankruptcy Code 2016 (IBC) is its time-bound approach to resolving insolvency cases, which are essentially non-performing assets (NPAs) cases. The time-bound approach has led to increased cases of the liquidity crisis.

There are fears that the crisis could worsen as the market is flooded with stressed debt securities. Some promoters, particularly of NBFC firms, are trying various legal devices to retain their firms. There also is uncertainty on whether independent directors of defaulting companies can be held liable. Bankruptcy courts have been over-burdened with realty cases because even a lone homebuyer can file one.