Insolvency and Bankruptcy Code

The Government of India implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA).

IBC is the lynchpin:

• Unified law: The interest of all parties i.e. lenders, borrowers and even operational creditors is now addressed under a unified law under the IBC.
• Changed behaviour of defaulters: The IBC has given more teeth to lenders and has changed the credit behaviour of borrowers.
• Shift of control from debtor to creditor: IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor In Control’ regime, as now the Board of Directors is suspended in case of default and and the IP manages the enterprise in the best interest of all its stakeholders.
• Resolving the ‘chakravyuh challenge’: IBC has made possible for struggling companies to ‘exit’ easily allowing creditors to take the company to the NCLT for winding up.
• Spurs professionalism in financing sector: 
  1. IBC has reduced crony capitalism
  2. reduced under and over invoicing
  3. reduced serial defaulters
  4. lead to better allocation of capital by limiting the escape routes for defaulters
  5. water tight frame for disposal of cases

Success of IBC so far:

• Due to the institution of IBC, we have seen that many business entities are paying up front before being declared insolvent. The success of the act lies in the fact that many cases have been resolved even before it was referred to NCLT.
• 4452 cases were dismissed at the pre-admission stage.
• Realization by creditors around Rs 80,000cr in resolution cases.
• Banks recovered Rs 5.28 lakh crore in 2017-18, compared to just Rs 38500 cr in 2016-17.
• The maximum amount recovered was Rs 4, 92,500 cr from 21 companies.
• 12 big cases are likely to be resolved this year, and the realization in these cases is expected to be around Rs 70000 Cr.

Challenges posing the IBC:

1. Tribunal issues:
   • Clogging up of cases due to slow process and limited personnel. For example, more than 9,000 cases are before the 11 NCLT tribunals that have been set up around the country.
   • Absence of jurisprudence and precedents – different NCLTs are giving different rulings.
2. Concerns with time stipulation:
   • Regarding the time stipulation, in few cases the tribunal laid down that the 14-day period is only directive and not mandatory.
   • Also, the NCLAT has held that the provisions of the Limitation Act, which sets out the time-limits under which a complainant can approach the courts for redress, do not apply to proceedings under the Insolvency Code.
3. Administrative issues:
   • IBC has failed to secure the due share of banks as the amount realized by banks in cases is falling too low, in some cases amount realized is less than even one-third of bank’s claim value.
   • Loopholes in the functioning of Committee of Creditors. Nominated members of Financial creditors does not have any authority to take decisions upfront. It leads to a conflict of interest in reaching a revival plan.
   • There is no proper infrastructure of the Information Utilities (IU) that provide access to credible and transparent evidence of default.
   • There is a multiplicity of regulators to Insolvency Professionals i.e. presence of numbers of insolvency professional agencies (IPAs) to regulate professionals.
4. Authoritative Insolvency Resolution Professionals:
   • The IBC’s provision to throw the management out and replacing them with IRPs is consider to be draconian.
   • IRPs are a mix of chartered accountants, cost accountants, MBAs and retired public sector executives but there are many concerns has raised over the quality of the IRPs.
5. Cross Border Insolvency
6. Drafting loopholes:
   • For instance, the act has no provision for an amicable settlement once a case has been admitted.

Way forward:

• There is need for setting up more tribunals in different parts of the country to handle the greater-than-expected volume of cases.
• IBC must consider that there are distinct advantages if the existing management is allowed to keep running the company such as knowledge, information and expertise.
• India is more concerned with the recovery of NPA, not with the running of units, thus the first priority is to save the banking system. Thus the banks also must push policy makers towards this move because they’re unlikely to get more if the case comes before the NCLT.
• Proactive training/on boarding of judges, lawyers, and other intermediaries will be necessary for effective implementation of the code.
• Technological infrastructure needs to be strengthened to avoid any kind of data loss and to maintain confidentiality. There is a requirement of enhanced IU infrastructure.

Conclusion:

IBC as a structural reform has demonstrable impact, which is reflected in behavioural change among debtors, creditors and other stakeholders, it is the IBC or the insolvency law which has trumped even the GST.