The Insolvency and Bankruptcy Code (IBC) was legislated to expedite debt resolution and enhance the recovery rate. After some initial successes, especially in the resolution of some high profile steel companies, the momentum has waned and recovery rates have dropped as debtors have started to game the system. The Parliamentary Standing Committee that recently went into the issue observes that “low recovery rates with haircuts as much as 95 per cent and the delay in resolution process with more than 71 per cent cases pending for more than 180 days clearly point towards a deviation from the original objectives of the Code”. According to the Reserve Bank of India, the recovery rates in 2019-20 under SARFAESI and IBC were 26.7 per cent and 45.5 per cent, respectively. But according to a report by Macquarie Research, IBC recovery comes down to 24 per cent if the top nine accounts are excluded. In some cases such as Videocon and Ushdev International, recoveries were below 10 per cent. Even if we assume that the slowdown has reduced recovery rates, it is farcical for recovery value to fall below that of liquidation. The Ministry of Corporate Affairs has said that “resolution value is almost 188 per cent of the liquidation value” (House panel report), but this is the average for only about 4,500 cases cleared so far for insolvency resolution (of the 32,547 IBC cases submitted before NCLT since 2016), and masks wide variations.

Last week’s ruling of the National Company Law Tribunal (NCLT) in the case of Siva Industries draws attention to grey areas in the IBC. The NCLT bench in Chennai overruled a debt resolution plan submitted by a shareholder after it had been apparently approved by the Committee of Creditors. Under Section 12A of the IBC, an existing promoter can get back control over the company provided 90 per cent of the creditors agree to the debt resolution plan submitted by him. The NCLT in this case has expressed doubts over whether the CoC has indeed given its approval, arguing that there is no written evidence of it. The caseraises questions on whether Section 12A needs a relook. There are worries that elements in the CoC, resolution professional and the debtor can collude leading to a large haircut for lenders. The House Panel rightly points to the need for a code of conduct for the CoC and the RP.

Of the nearly 4,500 cases under insolvency resolution, about 8 per cent have been resolved, 30 per cent have gone into liquidation and 40 per cent are pending resolution. While sorting out speed and valuation concerns, a distinction should be made between wilful defaulters and bonafide promoters. Interests of MSME creditors and debtors should be looked into, particularly in pandemic times. ‘Pre-pack’ resolution could benefit the latter, while setting aside a small proportion of the resolution sum for the former could be considered. IBC’s promise as a law that transforms India’s debt behaviour should not be frittered away.