Exit from business is as integral to ease of doing business as is an entry. Earlier frameworks for resolution, such as the Debt Recovery Tribunals, the Lok Adalats and even the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) of 2002, which sought to ease the process of resolution or liquidation failed to do the task effectively. It was in this context that the government decided to frame and enact the Insolvency and Bankruptcy Code (IBC) of 2016.
Objective: The IBC, which came into existence in 2016, aimed to create a single, comprehensive framework that would provide a time-bound and cost-effective process for resolving insolvency and bankruptcy.
Institutional framework:
Process:
The IBC seeks to achieve the stated objectives through a well-defined process that includes various stages, including initiation of insolvency, appointment of an insolvency professional, resolution plan, and liquidation.
| Initiation | Insolvency Resolution Process | Liquidation |
|---|---|---|
| Minimum amount of default: - ₹ 1000 (for Individual) - ₹ 1cr (for Companies) | In case the application is admitted by the adjudicating authority, a moratorium is declared on all the legal proceedings against the debtor until the completion of the CIRP. | If either the Resolution plan is rejected by the CoC or failed to be approved by it with in 330 days, the process of liquidation kicks in automatically. |
| Initiators: - Debtor - Secured & Unsecured creditors - Employees | A resolution professional is appointed by the NCLT who supersede the board of directors of the debtor company and supervises its assets. | The proceeds of liquidation are distributed among secured creditors, unsecured creditors, Govt dues, Preferential share holders etc. in the respective order of priority. |
| Adjudication Authority: - DRT (for individuals) - NCLT (for companies) | The Resolution Professional would help in chalking out a resolution plan and get it approved by the committee of creditors (CoC) with a majority of 66%. |
Performance:
The apprehension of losing the business to the resolution applicant in the event of a successful CIRP or the eventual liquidation has instilled a sense of fear in the minds of the Corporate Debtors. This has resulted in improvement in the corporate repayment culture of the bank loans and resultant reduction in the nonperforming assets (NPAs) of the banks in the recent years despite the adverse impact of COVID-19 pandemic on the trade and economy of the country.
Successful examples:
- In Essar Steel resolution, the creditors managed to recover 925 of ₹49,000 crore of debt outstanding.
- In Bhushan Steel case, 64% of ₹56,022 crore outstanding was retrieved, whereas Binani Cements in whose case all of the ₹6,469 crore outstanding was recovered.
However,
- Out of the 4,376 cases for which the Corporate Insolvency Resolution Process (CIRP) had commenced till now, only 2,653 have been closed, with just 348 (or 13.1 per cent) of those closed being disposed after approval of a debt resolution plan.
- If we consider the proportion of outstanding credit recovered from defaulters through the resolution process, the figure stands at 39.26% even for the minority of cases resolved through the CIRP, which is not very much higher than the 26 per cent registered for cases dealt with under the SARFAESI Act. The argument that the IBC would be a game changer is yet to be validated.
Challenges:
- Backlog of cases in the NCLT, which has led to delays in the resolution process. The proportion of NCLT benches to the high number of cases are imbalanced.
- Another challenge is the lack of infrastructure and trained professionals to manage the insolvency process. At present, there are less than 100 registered insolvency professionals.
- Due to the lack of need for minimum experience in handling and managing a company, one might question the ability of the resolution professional.
- The time limit of 330 days to complete CRIP is proving to be very difficult. For companies having a large number of creditors, will have hindrances in the smooth functioning of the creditor’s committee.
- No strict liability of directors for wilfully delaying /concealing insolvency of company
To address these challenges, the government has taken several measures, including increasing the number of NCLT benches, increasing the number of insolvency professionals, and amending the IBC to address practical challenges.
Way forward:
- The process of mediation be institutionalised and appropriately integrated in the CIRP Regulations with adequate provision to exclude the time taken in the mediation process while reckoning the completion of CIRP within the stipulated timeframe of 180, 270, or 330 days.
- Setting up of additional benches of NCLT and National Company Law Appellate Tribunal may be taken on priority to bring down the pendency and adhering to the stipulated timelines.
Despite certain challenges faced so far, it deserves to be recognised that the IBC has significantly contributed to consistent improvement in India’s ranking in the World Bank’s erstwhile ‘Ease of Doing Business’ over the years. Timely changes/modifications of the existing legislation and expanding to new areas (group insolvency, pre-pack process for all assets, cross-border insolvency regime) would facilitate overall improvement in the insolvency resolution regime of the country.