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Understanding IBC: Facts and implementation challenges

Hemant Batra July 1 | Updated on July 01, 2021

The principal objective of the law is to restructure and resolve insolvency of corporate persons, writes Hemant Batra

Insolvency and Bankruptcy Code, 2016 is a comprehensive law that consolidates into its manifold both the consequential aspects of an economic collapse of a debtor – rehabilitation and liquidation. The principal objective of the law is to restructure and resolve insolvency of corporate persons, partnership firms and individuals promptly for leveraging the maximum value of assets of such persons. While proceeding therewith to also promote the entrepreneurship as well as accessibility to credit.

The Code also aims at not losing sight of the interests of all the stakeholders including alteration in the order of priority of payment of Government dues. This is a phenomenal economic law and public policy reform of the last decade. Undoubtedly, the Code has altered the course and manner of resolution of non-performing assets (NPA).

Largely, the change was instituted by a time-bound framework for resolving insolvency within a period of 180 days extendable up to another 90 days. The Code gives an impetus to entrepreneurs while balancing the interests of the stakeholders. The experts in the realm of economic restructuring and commercial rehabilitation regard the Code as a revolutionary shift of earlier law from a defaulting debtor controlling assets until resolution or liquidation, to the creditors in command of the NPAs during resolution or liquidation.

Also read: A non-performing code for bad debt

The Code allows the creditors of a corporate debtor to commence the corporate insolvency resolution process (CIRP) against the corporate debtor, in cases of failure of the debtor in repaying its debts. The creditors are classified as the operational and financial creditors with the former being the one who has provided goods or services to the debtor, including employees, Central or State governments.

While the latter is a creation of a pure financial contract where an amount has been provided to the debtor against the consideration of time value of money. In case of admission of an application preferred by a creditor, a moratorium is declared on the continuation and initiation of all legal proceedings against the debtor until the completion of the CIRP.

The corporate debtor is restricted from selling, encumbering, and alienating its assets, without the approval of the committee of creditors (CoC), when a moratorium is in operation. In the meanwhile, with the appointment of an interim resolution professional who is subsequently substituted by a regular resolution professional, the powers of the board of directors are suspended.

The corporate debtor’s assets and management are supervised by the resolution professional who is also responsible for aiding CoC in gathering information and managing the entire CIRP. After CIRP either the matter is successfully resolved, or the corporate debtor is liquidated.

Based on the available official data as of December 31, 2020, 4,117 applications have been admitted for CIRP. This is since December 2016, when the Code came into effect. Just About 23 per cent of the cases admitted were settled or withdrawn after the commencement of CIRP. Ironically, out of the 1420 cases wherein CIRP got concluded, liquidation occurred 3.6 times of those which got successfully resolved.

However, it is claimed in the official Economic Survey Report of 2020-21 that this does not represent an accurate picture of the performance of the Code because 73 per cent (799 cases) of cases undergoing liquidation and 33 per cent of cases (101 cases) undergoing resolution had been brought in from earlier Board for Industrial and Financial Reconstruction (BIFR) regime.

Also read: Process to select next Insolvency & Bankruptcy Board of India Chief begins

These cases were believed to be dead corpus with most of the net worth having got already eroded by the time they went for CIRP. Until December 2020 the Code has rescued 308 corporate debtors under the resolution process, which took an average of 441 days. As per data available, they owed ₹4.99-lakh crore to creditors with a realisable value of the assets being only ₹1.03-lakh crore. However, under the Code, the creditors were able to recover ₹1.99-lakh crore. At the same time, 1112 corporate debtors also went into liquidation taking on average 328 days for the conclusion.

Exit from business is as integral to ease of doing business as is an entry. India’s global ranking in this regard has consistently improved with the Code yielding desired results in resolving insolvency. The World Bank has acknowledged that the reorganisation process accessible under the Code provides efficient means to reinstate financial viability and better prospects to realise the optimum asset value.

However, some issues still need to be addressed to efficaciously expedite the resolution process under the Code, keeping in view that the time taken for the conclusion of the same is far exceeding the prescribed statutory timelines and the facilitative process for resolution is not as productive as it ought to be.

(Hemant Batra is a Delhi-based corporate and public policy lawyer and counsel)

Published on July 01, 2021

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