G20 Sherpa Amitabh Kant’s call for changes to India’s insolvency resolution system to reduce delays and increase creditor recovery is the latest in a growing push to make the Insolvency and Bankruptcy Code (IBC) more effective. This code was introduced in 2016, promising to change the insolvency resolution with the aim of rescuing and restructuring distressed companies through a time-bound process, prioritizing their survival as a continuous factor.
Eight years on, while the IBC has had a few successes, it has been plagued by problems such as a backlog of cases, long delays in approvals and settlements, and steep haircuts for creditors. In the past, various stakeholders, including RBI Governor Shaktikanta Das and Parliament’s Standing Committee on Finance, have also flagged concerns and the need to rethink the IBC project.
Although the IBC has promoted a culture of accountability and credit behavior among borrowers, its effectiveness is hampered by procedural delays, staff shortages, deviations from key policies, and slow implementation of key provisions.
Delay in process
“We must welcome some concerns about the current performance of the IBC, which indicates the need for a second generation of reforms. An analysis of IBBI (Insolvency and Bankruptcy Board of India) data shows that insolvency decisions at the National Company Law Tribunal (NCLT) averaged 716 days in FY24, up from 654 days in FY23,” it said. Kant on Monday. The fixed time for settlement is 330 days.
In February 2024, the Standing Committee on Finance flagged the delay and its impact on the value of stressed assets, and called for a review of the IBC draft. “…the Committee believes that the design of the Code must be reviewed, considering the lacunaes and roadblocks that have appeared during the implementation of these Laws so far, so that the very purpose of its enactment is not defeated. The process of receiving claims also needs to be looked into as a huge delay occurs at this stage which causes a major effect on the entire settlement process, a serious decrease in the value of the property,” the panel said in the report.
Das, too, had raised the alarm about the delay in January. “Another thing is the fact that, the average time taken to acquit a case during FY21 and FY22 stands at 468 and 650 days respectively. Such a level of delay will seriously damage the value of goods. There are a number of factors at play here, namely, legal developments relating to the Code; litigation tactics adopted by some corporate creditors; lack of effective communication between creditors; problems in the justice infrastructure, etc.,” he said.
Cutting hair on the cliffs
There is an inverse relationship between settlement time and debt recovery. As of March 31, cases resolved within 330 days achieved a recovery rate of 49.2 percent of claims received. For those resolved between 330 and 600 days, the recovery rate was 36 percent. In those more than 600 days, the recovery rate was only 26.1 percent.
Despite the collapse of the number of creditors, experts say that the delay suppresses the results towards liquidation, defeating the raison d’etre of the program. Through March 31, foreclosure orders took an average of 673 days, compared to 847 days for approval of the resolution plan. Of all the 5,647 proceedings that were closed, 44 percent ended in termination, 17 percent of the settlement plans were approved, and the rest were a mixture of withdrawal and closure of appeals, revisions, or compensation.
IBBI chairman Ravi Mital recently said that IBC cases take time as it is a creditor-led model, not credit-led, and “the debtor is trying his best to ensure that the case is not sanctioned”, leading to late submissions and therefore higher costs. erosion and haircuts for lenders.
“We have done research…when the cases are brought to the IBC, they have lost more than 50 percent of their value. Now, the IBC is not responsible if the creditors bring cases late. The IBC is responsible when the case is brought before it, and if you consider the recovery as a percentage of the fair value, we get 84 percent,” said Mtal.
Industry experts agree that late entry is hurting the system. Abhishek Dafria, Senior Vice President and Group Head, Structured Financial Ratings, ICRA said: “We continue to get creditors coming to the NCLT to recognize a defaulting corporate debtor with huge delays, leading to massive asset erosion…IBC is still not recognized. as a first step to try and ensure that the company remains concerned. Lenders take other measures before they turn to IBC. “
Legal matters
While the NCLT should properly decide whether a case is admissible under the IBC within 14 days of an insolvency petition, it often takes months and sometimes even more than a year to initiate the proceedings. The reason is, at least in part, legal in nature.
“If we are talking about the delay in entry, the law says it is 14 days from the date of application (request)… Why is it not possible? The Supreme Court has held that (the timeline) is procedural in nature and therefore not directly binding. In all likelihood, 14 days seems like a very short period of time. Looking at the current situation, our current infrastructure… 14 days seems impossible,” a senior lawyer told The Indian Express.
In 2022, the apex court said that admission within 14 days was not a mandatory provision of the IBC and that the NCLT had discretionary power in deciding whether to admit the insolvency petition or not. This means that the NCLT, instead of considering default as the sole basis for acceptance, should also consider the circumstances of default and the arguments of the debtor.
Kant emphasized the need to “clarify the ambiguity of important legal principles,” especially regarding the superiority of the commercial judgment of the Committee of Creditors (CoC) and the established priority of claims.
“The Rainbow Papers case highlighted the important legal aspects of VAT (Value Added Tax) compared to IBC, saying that the CoC will not be able to recover its payments from the legal fees owed to any government. This seems to contradict the purpose of the law behind the IBC, which was intended to give priority to the repayment of the government compared to secured creditors and financial institutions. A formal amendment or reconsideration by a larger bench is needed,” said Kant.
Reduction of staff
It is no secret that the system is overcrowded and understaffed, with the NCLT benches dealing with a heavy caseload. Although there have been efforts by the government to improve the situation of workers, it is still not close to what is needed.
In its February report, the Standing Committee on Finance said that the pendency was over “20,000 cases in the NCLT by the end of the year”, and called for enhanced powers of the NCLT.
“Apart from the manpower gap, the Committee would like to highlight that the NCLT is working with poor infrastructure. The Committee recommends that the Department (Corporate Affairs) should prioritize addressing the needs of the Council urgently and fill the infrastructural and human capacity gaps without delay. The Committee believes that empowering the NCLT is an important step in improving the implementation of the IBC especially in the timely resolution of cases,” the report said.
The government is already considering amendments to the IBC after a comprehensive review was carried out last year. According to Kant, India should also consider measures such as removing court officials to prosecute private players.
“It is often said that justice is delayed and justice is denied… there is a need to reorganize the judicial process. It is important to reduce the legal bandwidth in administrative matters while opening up non-judicial functions to independent or independent key players so that technology can be used to improve the administration of the courts,” he said.