Insolvency And Bankruptcy Code: Revamp Soon to Improve Functioning And Image

The High Court acknowledged that the return of the aircraft, which was the costliest asset on the books for Go First, would possibly thwart the Corporate Insolvency Resolution Process (CIRP), but in its view it could not be used as a defense to not deregister the aircrafts, allowing the lessor to fly them back.  

The decision came even as the process of insolvency of Go First had reached the final stage under the IBC (Insolvency and Bankruptcy Code, 2016), leaving many bidders wondering why they had bid at all even as they scrambled to revise their offers all over again.  

“The delay in resolution could have caused loss of reputation for business in India, … though successful resolution in a complex sector such as Aviation, could have showcased the efficacy of India’s governance and judicial framework,” said Aswani Taneja, Partner, Prudent Law Chambers.  

Chances of Succesful Resolution of Insolvency

Chances of successful CIRP of a corporate debtor require not only a time-bound process but more importantly, clarity on the true asset value of the corporate debtor. If the resolution professional is unable to present a clear picture, a proper bid can hardly come in and a final resolution limiting the hair-cut for lenders can be made.

More than half the default cases at the IBC have been languishing for more than nine months without any resolution. 

According to the IBC, financial creditors—mostly banks—have a higher priority in the recovery waterfall mechanism over operational creditors, but even they are generally able to recover only a small percentage of the admitted claims. The average recovery value stands at 34 per cent of the claims made by the creditors since the law came into force in 2016. However, the efficacy of the successful CIRP is to be gauged in terms of the revival of business and employment and development of ancillary business.

Experts believe that there are reasons for slow recovery or low recovery in the majority of cases.

“There is no doubt the recovery has improved, but the time taken is much more than the stipulated time frame of 330 days, this is one problem area which has to be addressed urgently,” said Aseem Chawla, Founder ASC Legal Solicitors & Advocates

A recent CRISIL report cited two reasons for the lower realisation: “First, limited judicial bench strength and delays in identification and acknowledgement of default. Second, a significant delay in the pre-IBC admission stage (650 days in fiscal 2022 increased from about 450 days in fiscal 2019) has suppressed recovery rates. This has led to a diminution in asset values and sub-optimal recoveries”. 

Some Shining IBC Examples 

However, not all stories of firms going through insolvency resolution have been ones that left bidders or lenders unhappy. 

There are quite a few landmark cases in which the companies got a new lifeline after a resolution under IBC. A few of them which have bounced back after being acquired under IBC, include Uttam Galva, Videocon, Bhushan Steel, Essar Steel and Ruchi Soya, Dewan Housing Finance, SREI and a few others. 

It is also true that since the code came into being in 2016, it has resolved a significant number of cases where huge amounts are involved in stressed assets. To a great extent, it has improved the credit culture in the country.

“The IBC has worked better than all the previous mechanisms, such as the Debt Recovery Tribunal, SARFAESI Act and Lok Adalats. However, there are certain areas of concern which have to be addressed,” said Taneja. 

Focussed implementation of some of the latest and proposed changes related to capacity building, digitalisation of IBC platforms are critical to further ramp-up efficiency.

The Code has resulted in resolution of 891 insolvency cases till December 2023 and creditors have realised 3.2 lakh crore under these resolution plans. Moreover, 25,107 applications for initiation of insolvency resolution process were withdrawn before their admission, resulting in resolution of underlying debt of Rs 10 lakh crore, thus indicating an improved debtor-creditor relationship.

Areas Of Concern 

But for IBC to continue being a success, some hurdles need to be addressed. For example, recovery rates have fallen from 43 per cent to 32 per cent between March 2019 and September 2023. Besides that, the average resolution time has also increased from 324 to 653 days versus the stipulated 330 days.

The government is mulling multiple changes in the law. In most of the big cases, the resolution period crosses the stipulated 330 days. In order to streamline it, the government may propose to introduce restrictions on judicial review unless the final resolution has been made.

There is also a need to bring in group insolvency resolution plans wherein the provisions will allow all firms in a group to be clubbed together to get better realisation and faster resolution.

To make the process of resolution faster, implementation of the NCLT order may have to be made mandatory.

Provisions for making overseas insolvency easier needs also be brought in.

As per the law, there is no provision for attaching the properties overseas. To ensure and expand the provision to include companies overseas, new legal provisions are obviously necessary.  

Post-Elections: Expect A New IBC 

Top officials said the Government is considering tweaking the current laws related to IBC to address its shortcomings and that this may come about after the new government is sworn in, in June this year. 

“The proposed reforms, if implemented, in the Insolvency and Bankruptcy Code (IBC) will likely make it more efficient,” said Chawla.

The changes will improve resolution value, as well as reduce resolution timelines. This may, obviously lead to higher stressed asset recoveries in the medium to long term making the whole process easier and more attractive.