The Insolvency and Bankruptcy Code now needs its next booster stage– economic times

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View: The Insolvency and Bankruptcy Code now needs its next booster stage

The case burden in NCLT on account of IBC has been overwhelming. Over 24,000 applications were filed since IBC’s commencement in December 2016, averaging about 8,000 a year, or 22 a day.

The game-changing Insolvency and Bankruptcy Code (IBC) introduced a market-driven mechanism to release capital locked up in non-performing assets (NPAs). Banks gained the most, thanks to speedier and higher recoveries. Gross NPAs fell for the first time in seven years from 11.2% in 2018 to 9.1% in 2019.

Even fresh additions to NPAs dropped significantly, leading to conversion of non-standard accounts into standard ones. Gradually, the benefits also flowed to other stakeholders, such as vendors, employees, and GoI by way of tax revenues. Three years after its implementation, IBC has profoundly impacted borrowers’ and creditors’ behaviour, thereby improving India’s credit culture and ranking in the World Bank’s ease of doing business index.

It has also provided an opportunity to strengthen institutions and professions dealing with insolvency, such as the Insolvency and Bankruptcy Board of India (IBBI) and National Company Law Tribunal (NCLT), and the committee of creditors, information utility or re-solution professionals.

The case burden in NCLT on account of IBC has been overwhelming. Over 24,000 applications were filed since IBC’s commencement in December 2016, averaging about 8,000 a year, or 22 a day. On an average, NCLT disposed of one out of every two cases even before admission, these matters presumably getting settled through mediation.

As in March 2020, NCLT admitted 3,774 applications — including old cases transferred from the Board for Industrial and Financial Reconstruction (BIFR) — and 157 were withdrawn under Section 12A of IBC and settled outside NCLT; 221 were resolved under IBC; 914 were placed under liquidation. The rest are pending at different stages of the Corporate Insolvency Resolution Process (CIRP).

In terms of outstanding dues, about Rs 2 lakh crore became realisable through the resolution process, Rs 7 lakh crore are under liquidation, and over Rs 3 lakh crore are undergoing CIRP. If we add to this the filings awaiting admission and those withdrawn, more than Rs 20 lakh crore of outstanding dues accessed IBC, about 10% of India’s GDP.

IBC’s critics mention inordinate delays in disposal, steep haircuts, inconsistency across NCLT benches and non-acceptance of the approved resolution plan by some stakeholders, especially government agencies and regulators. GoI moved swiftly with incremental amendments to address these concerns. At the same time, fast-growing jurisprudence on the issue helped stabilise IBC.

The Supreme Court upholding its constitutional validity was a shot in the arm.

Quick Learner
Deep haircuts were primarily due to old distressed assets with massive value erosion accessing IBC in the first phase. This problem may disappear with timely references to NCLT and development of a competitive marketplace for stressed assets. Efforts to further facilitate foreign portfolio investments (FPIs) and international debt
funds to participate in India’s stressed assets market will improve competition and aid value maximisation.

Significant amendments to IBC include debarring NPA holders from participating in the bidding process; recognition of homebuyers as financial creditors; special dispensation for MSMEs; post-admission withdrawal for out-of-court settlement; approved resolution plan binding on all stakeholders; ringfencing the corporate
debtor and successful resolution applicant from criminal prosecution and disgorgement of assets for violations by the previous management; and super seniority status for last-mile funding of stressed assets.

The time is ripe for initiating IBC 2.0. This should incorporate further enhancements such as a simplified non-adjudicatory fresh start process (FSP), pre-packs, cross-border insolvency and group insolvency. FSP aims to provide relief to individual debtors from the weakest category annual personal income not exceeding Rs 60,000, no pucca dwelling unit, eligible debt not exceeding Rs 30,000).

But the existing provisions are too cumbersome. Moreover, they will clog debt recovery tribunals (DRTs) if implemented as it is. Hence, the urgent need to simplify and make the process online and non-adjudicatory.

Pre-packs are extremely popular in advanced jurisdictions such as the US and Britain. They are a hybrid between an out-of-court resolution and a court-supervised one. Typically, the resolution plan is prepared by the corporate debtor in consultation with the creditors through a negotiated process.

They then approach the adjudicating authority for approval. It is cheaper and speedier, taking one-third the average time of a court-supervised process. The downside, however, is its confidentiality (read: non-transparency) and non-competitiveness.

Cross-border insolvency is a necessary prerequisite to deal with corporate debtors having a global footprint. It makes the entire process more capable of dealing with access, recognition of main proceedings, conduct of concurrent proceedings, and cooperation with other jurisdictions.

The UN Commission on International Trade Law(UNCITRAL) for cross-border inso-vency provides a common framework with enough flexibility to give precedence to domestic proceedings and accommodate public policy concerns, if any. Given that many Indian companies have a commercial presence outside India, and vice versa, we should have a cross-border insolvency framework at the earliest.

Absorb New Skills

Further, group insolvency will enhance IBC’s capability to deal with corporate debtors having multiple deeply interconnected subsidiaries. UNCITRAL provides a model framework for group insolvency as well, but it’s still in a draft stage. An enterprise group insolvency framework will help consolidate group companies substantively or administratively.

Further, where group interconnectedness exists, group interim finance, group avoidance transactions and other such options can be considered. GoI may introduce an enterprise group insolvency framework at the domestic level.

Later, it could enhance it to an enterprise group cross-border insolvency framework. IBC must acquire more exceptional capabilities to sustain gains made. Only then can it accomplish its core objectives of time-bound value maximisation, promoting entrepreneurship and availability of capital, and balancing the interests of all stakeholders.

The writer is former secretary, ministry of corporate affairs, GoI

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