The Insolvency and Bankruptcy Code, 2016 (IBC) enacted on May 28, 2016, against the backdrop of mounting non-performing loans, with a view to establishing a consolidated framework for insolvency resolution of corporations, partnership firms and individuals in a time-bound manner, seeks to tackle the non-performing asset (NPA) problem in two ways.

Firstly, behavioural change on part of the debtors to ensure sound business decision-making and prevent business failures is encouraged. Secondly, it envisages a process through which financially ailing corporate entities are put through a rehabilitation process and brought back up on their feet.

Under the IBC, the Indian insolvency regime shifted from ‘debtor-in-possession’ to ‘creditor-in-control’. The creditor-in-control model hands control of the debtor to its creditors and relies upon the managerial skills of a newly appointed management to take over an ailing company and ensure business continuance. The Apex Court in Swiss Ribbons Vs Union of India, has held that the core objective of the IBC is to ensure revival and continuation of the corporate debtor. Thus, the IBC has a larger public-welfare consideration in play.

The three class targets

The IBC sets out three classes of persons who can trigger the corporate insolvency resolution process (CIRP) – financial creditors, operational creditors and corporate debtors.

For an operational debtor, the Apex Court in Mobilox Innovations Vs Kirusa Software observed that the operational debt should be free from any pre-existing dispute which cannot be dealt with summarily in insolvency proceedings. In terms of liability, in Lalit Kumar Jain Vs Union of India, the Supreme Court clarified that the liability of a guarantor was coextensive with that of the principal debtor. Accordingly, parallel proceedings could be initiated against the guarantors.

Perhaps the most important aspect under the IBC is the timeliness of insolvency resolution. The Supreme Court in Kridhan Infrastructure Vs Venketesan Sankaranarayan, observed that the insolvency resolution should not suffer from an indefinite delay in complete abeyance of the timelines fixed under the IBC.

Once an insolvency petition is admitted, a moratorium is introduced. In P Mohanraj Vs Shah Brothers Ispat, the Supreme Court held that a moratorium prohibits the institution and continuation of any proceedings against the corporate debtor during the CIRP. A moratorium is meant to prevent further depletion of the corporate debtor’s assets and hence acts as a ‘shield’, but it does not protect the key managerial personnel of the corporate debtor who was responsible for the insolvency.

The IBC also bars certain individuals from submitting a resolution plan or participating in the insolvency resolution process. The Supreme Court in Chitra Sharma Vs Union of India held that the purpose behind the bar against certain individuals is to ensure that persons responsible for the insolvency of the corporate debtor do not participate in the CIRP by means of a backdoor entry.

Similarly, in Phoenix ARC Vs Spade Financial Services, it was observed that the IBC provides that any related party of the corporate debtor does not have the right to be part of a committee of creditors (CoC). The object of such a provision is to prevent the decisions of the CoC from being sabotaged by related parties of the corporate debtor.

Apart from the powers to undertake insolvency resolution proceedings, the National Company Law Tribunal (NCLT) is endowed with broad residuary jurisdiction under the IBC to decide upon all questions which arise out of or in relation to the insolvency and liquidation of the corporate debtors. However, in the adjudicatory process concerning a resolution plan, the Apex Court in the Jaypee Kensington case held that there was no scope for interference with the commercial wisdom of the CoC. If an adjudicating authority found any shortcomings in the resolution plan, then the same would be sent back to the CoC for re-submission.

The IBC has reformed the Indian insolvency law landscape to a great extent. It has contributed to the development of disciplined borrowing amongst companies. Promoters are fearful of losing control of their enterprises in the event of a default. A whopping 18,629 applications seeking more than ₹5,29,000 crore are noted to have been resolved even prior to being admitted. Post the implementation of IBC, as per the World Bank’s report, India’s rank in resolving insolvency went from 136 in 2017 to 52 in 2020. The recovery rates under the IBC are low. There are matters where haircuts of as much as 95 per cent are being granted during the insolvency resolution. Since 2016, the lenders took an average of 61 per cent haircut on claims.

Adding to the problem is the pendency of insolvency matters. Around 71 per cent of the cases are pending for more than 180 days which is a marked deviation from the intent of swiftly resolving insolvency. As far as staffing is concerned, in September 2021, the NCLTs were functioning without a President and were short of 34 members out of a total sanctioned strength of 62 members.

Another important challenge is the digitisation of the IBC ecosystem. The lack of digitisation has led to the insolvency process being stymied with long delays much beyond the statutory limits. Often, the admission of cases in NCLT has proven to be a task. A Special Parliamentary Committee in its report opined that the NCLTs and the National Company Law Appellate Tribunal (NCLATs) should be digitised. There should be provision for virtual hearings to deal with the pending cases swiftly.

The way forward

It is important for the key stakeholders to make their best endeavours to ensure that the power of the IBC does not diminish. The goal must be to fill the voids that are discovered and move towards a more complex legal system over time. Statistics indicate that a majority of liquidation happens in matters where the debtor’s assets erode over time during a prolonged insolvency process.

Hence, the timeliness of insolvency resolution is key. The government needs to cater appropriate budgetary allocations to upskilling insolvency professionals, improvement of tribunal infrastructure and digitisation of the insolvency resolution process.

The IBC has undoubtedly revived India’s insolvency regime. Not only has it been successful in combating the growing threat of NPAs, but it has also benefited the economy in a variety of nuanced ways, including improving credit discipline. As per reports, a total of ₹2.5-lakh crore has been introduced back into the banking system from 2016 upon resolution of insolvencies under IBC.

However, like any other law, IBC also has areas that can witness remarkable improvement. There is a long way ahead for the Indian insolvency regime to meet the standards of other mature global jurisdictions.

The authors are advocates at Phoenix Legal, a law firm