Source – Indian Express

Introduction

In 2016, a significant legal landmark was reached with the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) which introduced an innovative resolution framework. This framework not only transformed the dynamics of insolvency proceedings but also played an important role in readjusting credit relationships. By strengthening the positions of both financial and operational creditors, the Code motivated business promoters to fulfill their financial responsibilities, though they are still under the fear of relinquishing control over their enterprises.

2023 has witnessed highs & lows in the number of cases initiated under IBC, number of cases resolved and number of cases under consideration which reflects the importance of IBC in this era.

What Changes were Introduced by the Insolvency and Bankruptcy Code, 2016?

• Time-bound Resolution Process:
  • One of the major achievements of the IBC is the introduction of a time-bound resolution process.
  • The code aims to complete the insolvency resolution process within a maximum of 330 days, including time spent in legal battles.
  • This time-bound approach is crucial for reducing delays and ensuring a more efficient resolution of insolvency cases.
• Confidence of Lenders:
  • The code has also led to increased confidence among lenders, as they have a clearer and more effective mechanism for recovering dues.
• Promoting Entrepreneurship:
  • The IBC provides an opportunity for the revival of distressed companies through resolution plans.
  • This is in contrast to the earlier regime where liquidation was often the only available option.
  • The focus on resolution over liquidation promotes a culture of entrepreneurship by giving companies a chance to recover and continue operations.
• Attracting Foreign Investment:
  • The IBC has contributed to improving the ease of doing business in India. The transparent and time-bound insolvency resolution process has increased confidence among foreign investors, making India a more attractive destination for investment.
  • Foreign investors are more likely to engage in business transactions if they have confidence in the legal and regulatory framework.
• Reduction in Non-Performing Assets (NPAs):
  • The IBC addresses the issue of rising NPAs in the banking sector.
  • By providing a mechanism for the speedy resolution of stressed assets, the code has helped financial institutions clean up their balance sheets and manage their non-performing loans more effectively.

What are the Current Number of Cases and Challenges Before IBC Cases?

• Admission and Withdrawal Statistics:
  • As of the end of September 2023, 7,058 cases had been admitted under the IBC framework.
  • Additionally, 26,000 applications, representing defaults totaling Rs 9.33 lakh crore, were withdrawn before their admission under IBC.
• Initiation by Operational Creditors:
  • Approximately half of the admitted cases are initiated by operational creditors, highlighting the effectiveness of the IBC in providing a mechanism for small and medium enterprises to recover dues.
    • As per Section 5(20) of IBC, “operational creditor” refers to a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
    • As per Section 5(21) of IBC, “operational debt” refers to a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.
• Case Closure and Withdrawals:
  • Out of the admitted cases, 1,053 have been closed on appeal, review, or settled.
  • Another 947 cases have been withdrawn under Section 12A of IBC, potentially due to settlements with applicants or creditors.
• Resolution and Liquidation Statistics:
  • Resolution plans have been approved in 808 cases.
  • Liquidation has commenced in 2,249 cases.
  • In cases with resolution plans, creditors have realized only 31.85% of their admitted claims, totaling Rs 3.15 lakh crore.
  • Liquidation values have been even lower at 6.5% of the claims.

What are Issues Before Lesser Number Resolutions in 2023?

• Prolonged Resolution Timelines:
  • Despite the initial promise of a time-bound resolution process, the average time taken for closure remains high at approximately 653 days.
  • In ongoing cases, a significant majority (over 67%) have surpassed the expected resolution timeline of 270 days, causing delays and uncertainties for stakeholders.
• Extended Duration in Liquidation Cases:
  • In cases of liquidation, a concerning 55% have extended beyond two years, reflecting a failure to expedite the winding-up process.
  • The protracted liquidation timelines can have adverse effects on creditors, reducing the overall effectiveness of IBC in addressing insolvency issues promptly.
• Gap Between Actual and Expected Resolution Timelines:
  • There exists a substantial gap between the expected and actual resolution timelines, indicating a need for further streamlining and efficiency enhancements within the IBC framework.
  • Stakeholders, including creditors and investors, are impacted by prolonged proceedings, affecting their confidence in the resolution process.

What are the Potential Solutions?

• Continuous Evolution of the Code:
  • While efforts have been made to enhance the IBC's functionality over the years, the persisting issues highlight the evolving nature of insolvency cases and the need for continuous adaptation.
  • There is a necessity for ongoing amendments and refinements to address emerging challenges and ensure the code remains responsive to dynamic economic conditions.
• Implementation Challenges:
  • The effectiveness of the IBC is hampered by implementation challenges at various stages of the resolution process.
  • Identifying and addressing these challenges is crucial for improving the overall efficiency and effectiveness of insolvency resolution in India.
• Stakeholder Confidence and Predictability:
  • Prolonged resolution timelines impact stakeholder confidence, affecting the overall attractiveness of the IBC framework for investors and creditors.
  • Enhancing predictability in the resolution process is vital to rebuilding trust among stakeholders and promoting a healthier insolvency ecosystem.
• Need for Further Reforms:
  • While several steps have been taken to tighten the code, the persisting issues necessitate a comprehensive reassessment and further reforms.
  • A holistic approach, considering feedback from stakeholders and addressing systemic bottlenecks, is essential for achieving the intended goals of IBC.
• Global Comparisons:
  • Benchmarking the IBC against global standards and best practices can provide valuable insights into areas requiring improvement.
  • Analyzing successful international models can contribute to the development of effective strategies for enhancing the efficiency of insolvency resolution in India.

Way Forward

• Realizations from resolution plans have been lower than expected in 2023, raising questions about the effectiveness of the resolution process. Looking into debates about recession in the upcoming times and increase in NPA resolution process, a better guidance for resolution proposal is required.
• To address other issues, continuous evolution of the Code is paramount. Ongoing amendments and refinements are necessary to adapt to emerging challenges and dynamic economic conditions.
• Tackling implementation challenges, improving stakeholder confidence, and enhancing predictability in the resolution process are crucial steps for a healthier insolvency ecosystem.