CONTEXT

• It has been five years since the IBC came into force.
• Since its implementation, the Insolvency and Bankruptcy Code (IBC), notified in 2016, has been the key mechanism for addressing corporate distress and the accumulation of bad loans in the financial sector since its implementation.

WHAT IS IBC?

• The IBC was enacted in 2016, with the aim to streamline and speed up the resolution process of failed businesses.
• It was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons.
• It is one of the biggest insolvency reforms in the economic history of India.

UNDERSTANDING THE TERMS

Insolvency:

• It is a situation where individuals or companies are unable to repay their outstanding debt.

Bankruptcy: 

• It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.
• It is a legal declaration of one’s inability to pay off debts.

EFFECTIVENESS OF THE PROCESS

• Overall, over the last five years, it has done quite well. The recoveries and resolutions have been quite good, quite fast, compared to other measures available to the lenders.
  • Today, on average, it takes about three years for recoveries and resolutions as compared to an earlier timeline of five years, six years or more.
• Also introduction of Section 29A [of the IBC] in the code, have also helped in resolving some of these problems.

Section 29A:

• This provision makes the defaulting person (promoter) ineligible for bidding of the asset (buying back) if the asset has been NPA for a year or more.
• The intent of section 29A is to prevent persons who, by their misconduct or fraudulent motives contributed to the default of the corporate debtor, from “buying back” the corporate debtor from the creditors, potentially at steep discounts.

ISSUES INVOLVED 

Promoter owned companies:

• Unlike in most of the developed countries, companies are run by professionals and the ownership is widely spread, in India companies are mainly promoter-owned and owners run the companies.
  • This duality of the role by the same entity creates a problem in taking over the asset.

Infrastructure issues:

• There are a lot of delays in the appointments, despite several vacancies.
• Also IBC is inflicted with the problem of insufficient number NCLAT [National Company Law Appellate Tribunal] benches.

Delays in NCLT’s functioning:

• There have been a lot of delays in implementation, whether it’s in terms of approvals, having an application admitted itself.
• These kinds of delays are a significant issue with the implementation of the code.

Repetition of litigations:

• Though the Supreme Court has clarified a number of legal positions around the IBC, the tribunal of the country still allows the same issues to be litigated again.

Extent of haircuts:

• There are concerns about the extent of haircuts that banks and financial creditors are having to take in order to achieve resolution.

WAYFORWARD

• There needs to be timely appointments in case of availability of vacancies in the system.
• The NCLT should be adequately funded and provided with an adequate number of members as well as infrastructure to deal effectively with the cases brought in front of it.
• Resolution within the mandated timelines should be prioritized as it will help increase the predictability of the process.
• The size of the haircut should not be the measure of the success of the IBC process, rather focus should be on attracting a more diverse range of strategic buyers to bid for assets, and submit resolution plans under the code.
• There is a need to broaden the scope of who can submit a resolution plan, by relaxing Section 29A. Under it promoters should also be allowed to submit the resolution plans with adequate safeguards in place to avoid its misuse.
• The proposed national ARC (Asset Reconstruction Company , also called as Bad Banks) should be set up at the earliest.
• Tribunals should avoid the duplication of the litigation process, as clarified by the Supreme court in its previous judgment.

The IBC should not be the only solution for resolving stress. Apart from strengthening the IBC framework, it’s equally important to look at the range of different options outside the IBC for resolving distress, like one-time settlements, restructuring packages, etc.

Reference:

1. https://www.thehindu.com/opinion/op-ed/what-lies-ahead-for-ibc-and-stressed-assets-resolution/article35085773.ece