Six-year scorecard: IBC has created a huge impact, but there are still too many red marks
The Insolvency and Bankruptcy Code (IBC) has reformed the Indian insolvency law landscape greatly, its most significant contribution being making errant promoters fearful of losing control of their companies in case of defaults. Given how the sanctity of the debt contract had been eroded, Section 29A, introduced through an amendment, compelled promoters to respect the loans they took from banks. Also, close to 20,000 applications seeking Rs 6.1 trillion have been resolved prior to being admitted in the IBC process. Had the IBC not existed, it is possible borrowers would have delayed repayments and, in the process, a lot of value would have been destroyed.
But six years and more than 3,400 cases later, it is obvious that the IBC has not quite lived up to the expectations. Nearly half the sick companies have been liquidated and a resolution could be found for just 14% of them. Timelines have rarely been met and financial creditors have taken home just about 30% of what they lent. For cases that were resolved in the fourth quarter of FY22, the haircut was 90%. There have been other shortcomings as well, evident from the Mumbai National Company Law Tribunal’s observation that a winning bid was intriguingly close to the liquidation value. The bench expressed doubts over breach of the confidentiality clause.
The Standing Committee on Finance’s concerns about the low recovery rates will see a Code of Conduct for the Committee of Creditors (CoC). The committee observed that the code was needed to define and circumscribe the CoC’s decisions. While lenders did appear to have given in too easily many times and a closer scrutiny of lenders’ decision is warranted, the government should move carefully on this as the status of bankers should not be undermined. The value of the assets of an insolvent company may have already eroded even before the case hits the courts. As such, comparing the amount recovered with the outstanding dues may not always be the right way to go. Instead, the efficiency of the process can be measured by comparing the recovered and liquidation value. Looking at it this way, financial creditors have been able to recover 166% of the liquidation value of the corporate insolvency resolution process (CIRP) cases resolved.
There is also the equally important concern about the performance of resolution professionals (RP) and ‘conduct issues’. The committee has done well to point out that the rationale for multiple Insolvency Practitioners’ Associations (IPAs) overseeing the functioning of their member insolvency professionals (IPs) rather than a single regulator, is unclear. However, whether an Institute of RPs, as recommended by the committee, can be effective is ensuring standards, is also unclear. Delays in the process have also cost the banks dearly. Although the IBC was amended in 2019 to say that the CIRP should be completed in 330 days, this is too long. In fact, the combination of delays and low recoveries has led lenders to explore alternative routes to resolve stress like sales to ARC (Asset Reconstruction Companies). A robust ARC mechanism would no doubt enhance the stressed asset ecosystem and take the load off the CIRP. Another important challenge is the digitisation of the IBC ecosystem; there should be a provision for virtual hearings to get through the backlog and deal with the pending cases swiftly. The IBC should evolve to become more effective.