JOURNEY OF THE INSOLVENCY AND BANKRUPTCY CODE 2016

In 2016, the Insolvency and Bankruptcy Code (IBC) was passed to address increasing bad debts and non-performing loans. The IBC was passed to favour the creditor during the resolution process and with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner. IBC seeks to protect the interests of investors and to enable them in doing business in a smooth manner.

Till a few years ago, the process of winding up companies was regulated by the Companies Act, 1956 and 2013, under the superintendence of courts, a not-so-efficient process that resulted in undue delays. The older recovery mechanisms such as Lok Adalats, Debt Recovery Tribunals and Authorities under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) were plagued with huge delays and poor recovery of assets possibly due to the lacunas in these laws, which were used by debtors to their advantage.

With the enforcement of the IBC, the winding up procedure is now under the supervision of the National Company Law Tribunal (NCLT), which ensures quick and prompt action during the early stage of debt default by a company, thereby resulting in a better recovery rate as compared to the earlier laws.

In the wake of the passing off the IBC, two pieces of legislation were repealed i.e. the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The implementation of the IBC also amended 11 other Acts.

In a nutshell, the benefits of the IBC would be that the corporate insolvency resolution process (CIRP) is a process by which the debtor company can be rescued by a resolution professional and can be revived as a running and a profit-making company. In genuine cases, this is a benefit that has come as a life saviour to many. However, there are unscrupulous companies who have run up huge credit bills and are using the benefits of the IBC to dry clean the company that can then be purchased by a third party invariably known to them. By dry clean, I mean that they get rid of all the liabilities leaving employees, creditors, Tax and Government Authorities, banks and financial institutions in a financial lurch. Though the IBC is strict about related parties, yet this is a term that has been flouted and misused by the dishonest Board members who have ignored the law with impunity. Hence, what was passed as a benevolent legislation, failed to make its mark because of the corruption.

Further, the IBC is a legislation that has fixed timelines and lays down that a CIRP should be completed within a period of (a) 180 days from the date of admission of CIRP application, (b) extendable by 90 days. (c) However, the entire CIRP should be completed within 330 days including any extensions granted. This setting of timelines certainly makes the IBC a better option as compared to the Companies Act and other legislations that were involved in the winding up. However, the IBC is filled with lacunas and had to be amended several times over the last few years. It is still wanting as a perfect legislation.

As per Insolvency and Bankruptcy Board of India (IBBI), under the earlier regime, it used to take around 1500 days on an average to resolve insolvency matters, but under IBC regime, till June 2020, it has taken on an average of 380 days to resolve the insolvency matters and reinstate the company to a better position.

During the Pandemic, changes were made to IBC (Section 10A) to ensure that individuals, firms and companies are not harassed with insolvency cases filed against them for default arising on or after 25-03-2020 till 25-03-2021.

The outcome of this legislation can be assessed by looking at a NITI Aayog Report which shows that till June 2020, 250 companies have been rescued and 955 others have been referred for liquidation. Hence, the saving grace is that companies which are drowning in a financial crisis can revive if they are given an opportunity by a resolution applicant who agrees to give a resolution plan to revive the company.

Though the IBC’s performance has been relatively better than the other recovery mechanisms; it still suffers from certain issues. By way of example, as per the statistics available, out of the 2,600 cases that were closed by December 2021, 55% ended in liquidation, whereas, only 16% were completed with proper resolution plans approved by the committee of creditors (CoC). Even the timelines that have been mentioned above were not followed and, on an average, over 700 days were taken in the year 2022 to complete a resolution process, against the stipulated deadline of 330 days. But probably the most difficult of all issues is the steep haircuts given by the financial creditors, which at times goes to above 90%. This causes a spiralling effect of losses to financial creditors, operational creditors, employees, Tax and Government Authorities, shareholders and other stakeholders who are left in a lurch.

Though the prime objective of the IBC is to rescue corporate debtors in distress, which it does, but at the same time, it leaves several stakeholders bankrupt or nearing bankruptcy. I would say that at times it appears that in order to save one company, several companies pay the price. It would not be incorrect to state that when the unscrupulous top management uses the IBC for their own selfish needs, the damage is much larger than what appears on paper.

Nevertheless, one cannot overlook the positive aspects of this legislation, which was to help companies recover from a financial crunch. Undeniably, the IBC has been effective to a great extent so far, however, compliance in respect of timelines remains an issue. This may also be due to the huge pendency of cases in the National Company Law Tribunal (NCLT) and National Company Appellate Tribunal (NCLAT). Currently, NCLAT has 5 Benches- 4 in Delhi and 1 in Chennai and NCLT has 20 Benches across India.

Another issue in the success of the IBC is that the sole authority lies with COC to control the process without giving other stakeholders such as the operational creditors a chance to get involved in the decision-making. The Supreme Court has time and again acknowledged the supremacy of the COC in making a decision about whether a resolution plan should be accepted. The supremacy of the COC has left the resolution professionals (RPs) many a times as puppets to the whims of the COC. In deciding such an important aspect as a resolution plan surely, the commercial wisdom of all stakeholders should be taken as opposed to solely financial creditors. It goes without saying that financial creditors are already secured to a great extent because of the security against the loans. Hence, when the axe falls, it takes away the rights of the other stakeholders. Surely this lacuna should be filled.

No doubt, the IBC is a very important legislation and can bring great reform if implemented successfully. Further, the IBC ought to be amended giving other stakeholders some role to play in the decision-making power of what should be done to the ailing company. The financial creditors will only look at their interests and as such, other stakeholders should also be given opportunity in this important decision-making. It is, however, early years, as out of the 7 years of its existence (2 were during the Corona period), this Code has made some impact in its wake and if certain essential reforms are made in the IBC, it can be used very effectively as a tool to revive, restore and re-establish companies that are nose-diving into bankruptcy.

Sushila Ram Varma

Chief Consultant

The Indian Lawyer