IBC in 2021
In 2014, the Ministry of Finance constituted the Bankruptcy Law Reform Committee (BLRC) with a view to resolve the twin balance sheet problem in India. The BLRC submitted its report in 2015, critiquing the prevailing framework as "highly fragmented and incoherent" and marred by "legislative and judicial uncertainty". The committee suggested the entire overhaul and streamlining of insolvency law, supplemented with a dedicated regulator and adjudicator, which led to the enactment of the Insolvency and Bankruptcy Code of 2016 (IBC) with the twofold objective of time-bound insolvency resolution and value maximisation. Since then, the positive impact of the IBC has been evident. India's ranking on the World Bank's Ease of Doing Business Index has risen to 63 from 130 in 2016 and its score on the "Resolving Insolvency" chart has almost doubled from 32.6 to 62.0.(1)
However, these five years have not been a smooth ride for stakeholders – huge haircuts for lenders and severely prolonged corporate insolvency resolution process (CIRP) periods in some cases have led to intense scrutiny of whether the IBC has been able to deliver on its lofty promises. But this view might be myopic insofar as it fails to consider factors such as the stage at which such entities entered CIRP (the value left in their assets). Firstly, the IBC was never intended as a recovery mechanism – in Swiss Ribbons,(2) the Supreme Court held that the IBC is a beneficial piece of legislation to put the corporate debtor back on their feet. Secondly, the value destruction of insolvent entities is partly attributable to the litigation delays – on average, a successful resolution has taken 459 days, compared with the 330 days prescribed under the IBC.
By March 2021, a total of 2,653 CIRPs have been closed, out of which only 13% underwent successful resolution while the others have gone into liquidation. While this appears discouraging in isolation, 74% of these liquidations correspond to Board for Industrial and Financial Reconstruction (BIFR)/defunct entities, and their asset values represented merely 5% of outstanding debt. In successful resolutions, the IBC has been able to recover 189% of realisable value, a figure that is considerably higher than any previous recovery mechanism.(3)
Furthermore, the IBC is still a nascent piece of economic legislation, which must be allowed a certain degree of flexibility. The Supreme Court has continuously highlighted the importance of this in matters of economic policy, which often reflects a trial and error mindset. The authorities have been vigilant in analysing and revising the IBC whenever required, as evident from the number of amendments, including the introduction of sections 29A and 32A, as well as the recent pre-pack framework for micro, small and medium enterprises (MSMEs).
The jurisprudential growth of the IBC in the last five years, marked by several landmark judgments of the Supreme Court, has been remarkable in settling a host of contentious issues such as the commercial wisdom of creditors (Essar Steel),(4) the right to proceed against personal guarantors (Lalit Kumar Jain),(6) and payment to dissenting financial creditors (Jaypee Infratech);(5) all of which have provided the insolvency process with much-needed predictability and stability. This has led to the alignment of thought and functioning of different stakeholders during insolvency, providing a robust foundation fit for intricate frameworks around complex issues such as personal insolvency, cross-border insolvency and group insolvency.
From the perspective of economic growth, a failing business's insolvency framework requires state intervention through insolvency law to allow a seamless re-allocation of resources to restore the business's efficiency, providing greater impetus to Schumpeter's creative destruction (the principle that a market economy moves forward when the long-standing processes are dismantled to make way for innovation and improvement). This not only frees up the underutilised capital but also leads to dynamic efficiency, wherein lies the essence of the IBC's importance.
The fifth anniversary of the IBC should not be blemished by criticism but rather characterised by constructive discussions on strengthening the insolvency regime. The reduction of litigation delays is the most pressing issue, considering cases like Bhushan Power and Steel, where the National Company Law Tribunal (NCLT) took around ten months to approve the resolution plan. While a specific timeline within the prescription of 330 days could be included, it would also be worthwhile to boost the litigation infrastructure. This could be achieved by strengthening existing NCLTs; in this respect, a part of the costs incurred by the government could be recovered as an insolvency process cost if such allocation can help strengthen the NCLTs. This should be understood in the context of massive value deterioration on account of litigation delays. At times, resolution plan value runs into thousands of millions of rupees and any delay in the approval of resolution plans leads to significant value loss to the creditors.(7) Furthermore, additional regulatory reforms can be introduced by promoting aggressive marketing of distressed assets, the establishment of a secondary market for distressed assets, and extending the pre-pack framework to corporate debtors other than MSMEs. While these suggestions may certainly be a step forward, the IBC has indisputably been successful so far and has an even more promising future.
For further information on this topic please contact Anoop Rawat at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
An earlier version of this article was first published in BW Legal World.
(1) Further details are available here.
(2) Swiss Ribbons Private Limited v Union of India, Writ Petition (Civil) No. 99 of 2018 (SC).
(3) Insolvency and Bankruptcy Board of India, Quarterly Newsletter January - March 2021 (Volume 18).
(4) Committee of Creditors of Essar Steel v Satish Kumar Gupta, Civil Appeal No. 8766-67 of 2019 (SC).
(5) Lalit Kumar Jain v Union of India, Transferred Case (Civil) No. 245/2020 (SC).
(6) Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Limited, Civil Appeal No. 3395 of 2020 (SC).
(7) There is much credence in the economic argument that delays in insolvency resolution lead to significant value losses. See Report of the Insolvency Law Committee (February 2020).