Opinion: IBC is running out of steam

By Seela Subba Rao

The Indian government enacted the Insolvency and Bankruptcy Code (IBC) Act in 2016 to address the resolution of distressed assets. The most important requirement was a quick recovery process. The BAC Act 2016 consolidated, revised and reinstated insolvency laws under one umbrella. It replaced all other laws and deals with business structures including individuals, partnerships and corporations.

The basic constituents of the IBC Act are four, namely, Insolvency and Bankruptcy Board of India (IBBI), Judicial Authorities, Insolvency Professionals and Information Services. The IBBI is the IBC regulatory body that deals with the work and conduct of insolvency professionals (IPs), professional insolvency agencies (IPAs) and information services ( UI). There are different jurisdictional authorities for an individual, a corporation, and an entity with unlimited liability and limited liability. The Debt Recovery Tribunal (DRT) is the jurisdictional authority of the individual firm with unlimited liability. They can appeal to the Debt Recovery Appellate Tribunal (DRAT) if the party is not satisfied with the DRT’s order.

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Likewise, the National Court of Company Law will be the jurisdictional authority for companies and limited liability companies. Companies/parties may appeal to the National Company Law Appeals Tribunal if the party is not satisfied with the NCLT’s order. If the parties are not satisfied with the NCLAT and DRAT order, they can appeal to the Supreme Court. It has been clarified under the IBC that the entire resolution process must be completed within 180 days. If the process is not completed within the specified period, an additional 90 days may be granted by the contracting authorities in certain real cases.

Impact of the IBC law
According to the Economic Survey 2020 report, the IBC has improved the resolution process in India compared to other mechanisms. The NPA recovery rate under the IBC is 42.5% of the amount in question, compared to 14.5% under the Sarfaesi law. In addition, in 270 days, many cases were resolved under the IBC. Previously, it took 4-5 years for resolution/settlement.

The IBC Act of 2016 aims for timely resolution (or liquidation of distressed assets), which is essential for unclogging bank balance sheets and for efficient capital reallocation. The countdown begins once a case is admitted. Once a case is admitted, an insolvency resolution professional is engaged to find a resolution process. If no resolution is possible within six months, another three-month extension may be granted. However, if no resolution is reached even in an extended period, the company goes into liquidation.

One of the major issues impacting on-time resolution is NCLT’s infrastructure, which is not adequate to handle the workload since many cases, apart from bankruptcy, are also filed. for settlement/resolution. In addition to new cases filed for resolution under the IBC, there was a significant backlog of cases that were transferred from the Company Law Council.

In addition, many business recovery cases with DRTs and rehabilitation cases with the Council for Industrial and Financial Reconstruction are also transferred to NCLT. The Business Insolvency Resolution Process (CIRP) provision came into force on December 1, 2016, and as of September 2021, there were a total of 4,708 cases.

According to IBBI data, 3,068 cases were closed and 421 resulted in resolution plan approval. But we observe that 73% of CIRPs as of September 30, 2021 took more than 270 days, a sharp increase in the maximum time allowed. The time limit for the completion of the Pre-Packaged Insolvency Resolution Process (PIRP) for legal persons/units in the MSME sector is 120 days from the start of the PIRP. This came into force on 1 April 2021, after making the necessary amendment to the BAC Act 2016.

Way to go
In six years, the IBC has made a name for itself by helping banks resolve bankruptcy cases. However, the insolvency resolution process, which aims to deal with troubled assets in a quick and time-limited way, seemed to run out of steam in 2021.

In the first phase, 11 benches and one main bench were set up, and subsequently five more benches were set up for quick and timely resolution or liquidation of distressed assets. However, the bench is under pressure because there are not enough judges. In addition, the same bench will hear other corporate law cases. A separate bench for insolvency and bankruptcy cases is the one hour need with NCLT infrastructure building.

Banks and financial institutions subject to the corporate insolvency resolution process have taken a cumulative haircut of Rs 3.22 lakh crore or 61.2% of their admitted claims since the rollout of the IBC scheme. These haircuts have significantly affected their balance sheets. This has placed banks at a disadvantage in their efforts to collect full dues from defaulters.

When the IBC was considered, the original plan was to have a strict deadline of 180 days with no exceptions. After objections from stakeholders, only the contracting authorities had the power to extend it for an additional 90 days at their discretion in very specific cases only. Now the deadline is 330 days. Asset values ​​erode over time, leaving no interested bidders. Thus, the main task of the offer is affected due to excessive delay.

It is expected that the government will appoint more members and strengthen the infrastructure of NCLT and NCLAT. These institutions would continue to play an important role in the restructuring and financial recovery of enterprises. At the same time, they would also protect the interests of banks in a true spirit as banks are the custodian of public resources.

(The author is former Deputy Managing Director, NABARD)

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