IBC came in as a breath of fresh air but it needs to keep evolving to be effective and useful
When the Insolvency and Bankruptcy Code (IBC) came into force five years ago, it was rightly hailed as a landmark reform move to speedily transfer capital locked in unproductive assets to productive uses. The extant systems — SARFAESI, Lok Adalats and Debt Recovery Tribunals — had proved ineffective. What marks out the IBC is its creditor-in-control model as opposed to the debtor-in-possession system. Under this, the promoter loses control over the management of the company as the debt is auctioned to interested parties other than the promoter. Ejecting the promoter was expected to rule out lengthy litigation. The IBC, which bears the stamp of the late Arun Jaitley, was also conceived in a context where large defaulters had their way with banks and got their loans restructured multiple times till they turned irrevocably bad. While the Asset Quality Review process brought these NPAs into the open, it required an IBC to weed these out of the banks’ books. The mandate before the IBC set-up was clear — to nip souring debt in the bud by divesting promoters of control and resolving it as soon as possible, while also realising the best possible value. This would pave the way for fresh credit and investments.
Meanwhile, the IBC will have to grapple with newer issues thrown up in recent cases. These relate to subjects such as cross-border insolvency, group insolvency and the tricky issue of resolution process for financial services companies as the DHFL experience shows. Also, as the RCom experience shows, what happens to assets (such as spectrum) leased out to companies when they hit the insolvency court? The IBC has certainly proved to be a superior process compared to the earlier systems but clearly, it will have to evolve with experience in order to be effective.