Author – By Upscale Legal
The Insolvency and Bankruptcy Code, 2016 (IBC) marks a significant milestone in the realm of insolvency and bankruptcy resolution in India. With its passage by Parliament and Presidential assent on May 28, 2016, the IBC revolutionized the legal framework surrounding insolvency and bankruptcy. The IBC sought to address the shortcomings of the earlier bankruptcy regimes and bring about a cultural transformation in the process. It achieved this by creating a comprehensive code for insolvency and bankruptcy, establishing new structures for insolvency resolution, and introducing judicial discipline. However, despite its ambitious objectives, the IBC has faced challenges. This article delves into the challenges and opportunities that arise from the IBC’s implementation, shedding light on its key provisions, historical context, and the potential impact it holds for businesses and creditors.
The Complex Pre-IBC Scenario
Before the introduction of the IBC, India lacked a comprehensive law addressing the intricacies of financially distressed companies. An assortment of laws, each pertaining to specific scenarios, entities, or groups of creditors, muddled the landscape. The Sick Industrial Companies Act, 1985 (SICA) focused solely on rescuing industrial firms, while the Companies Act, 1956, navigated liquidation and winding-up procedures. Concurrently, debt recovery laws like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) provided avenues for security enforcement and debt recovery by financial institutions. The disjointed legal framework led to delays, confusion, and clashes among the various laws and forums. Moreover, many of these laws, SICA included, failed to achieve swift restructuring with consideration for both creditors and debtors. India usually obtained a low ranking in the World Bank’s Ease of Doing Business Index for resolving insolvencies reflected these challenges.
The Birth of the IBC and its effects
To address these issues, the Ministry of Finance established the Bankruptcy Law Reform Committee in 2014, under the leadership of Mr T.K. Viswanathan. The Committee’s report and the draft of the Insolvency and Bankruptcy Bill, 2015 laid the foundation for insolvency reform. With subsequent revisions and amendments, the IBC was eventually passed as a consolidated law to streamline insolvency resolution and liquidation. The IBC was designed to overcome these deficiencies by establishing a committee of creditors (COC), dedicated adjudicating authorities (AA), and a new regulatory body, the Insolvency and Bankruptcy Board of India (IBBI). The National Companies Law Tribunal (NCLT) was designated for corporate insolvency resolution and liquidation. However, due to the overwhelming caseload, particularly in major cities like Delhi and Mumbai, delays in the adjudication of disputes have occurred. Despite efforts to expand bench strength and set up regional benches, vacancies and pending retirements among judicial and technical members continue to raise concerns about the tribunal’s ability to handle the increasing workload.
The IBC introduces an early trigger mechanism for insolvency resolution, activated by a payment default exceeding INR 1,00,000 for corporate debtors and INR 1,000 for individuals or partnership firms. Financial creditors can file an application based on the occurrence of default, which prompts a 180-day moratorium period and the appointment of an insolvency professional to oversee the debtor’s business. The IRP strives to balance resolution and liquidation objectives. The resolution plan, if approved by 75% in value of financial creditors, offers a chance for the company’s revival. If this plan is not accepted or is not feasible, the debtor’s liquidation follows.
Upon liquidation, secured creditors have the option to enforce their security interests, but this relinquishes their priority in the distribution of assets. The IBC establishes a clear order of priority for distributing assets among various classes of creditors, highlighting changes from earlier regulations.
The IBC aimed to enforce judicial discipline by introducing strict timelines for insolvency resolution processes. However, the average time taken for corporate insolvency resolution processes (CIRPs) has exceeded the stipulated timeline of 330 days, resulting in delays and erosion of value for creditors. The disruptions caused by the COVID-19 pandemic further exacerbated these delays. Additionally, a significant number of CIRPs have resulted in liquidation rather than resolution plans, indicating challenges in achieving successful outcomes.
Despite challenges, the government and the Insolvency and Bankruptcy Board of India (IBBI) have proactively responded to issues by amending the legislation and regulations. The IBC has undergone frequent amendments to address various challenges, although some amendments have led to confusion.
Recent legislative amendments have focused on improving the timeliness of resolution processes. The Insolvency and Bankruptcy Code (Amendment) Act 2021 introduced a pre-packaged insolvency resolution process for micro, small, and medium-sized enterprises (MSMEs). The process allows for a shorter timeline of 120 days and enables MSMEs to work on resolution plans while remaining in possession of the company.
The application of the IBC to individuals, including personal guarantors of corporate debtors, has also been clarified through notifications and judicial decisions. The IBC has been applied to personal guarantors, leading to an increase in insolvency proceedings against them.
To address stressed assets, the government established the National Asset Reconstruction Company (NARCL) and the India Debt Resolution Company Ltd (IDRCL) to help banks manage non-performing assets and clean up their balance sheets.
The Supreme Court has played a crucial role in shaping IBC jurisprudence through landmark judgments. These include decisions on withdrawal or modification of resolution plans, NCLT’s discretionary power to admit applications, treatment of advance money as operational debt, and the commercial wisdom of the COC.
The IBC falls short in addressing cross-border insolvency cases effectively. While it allows foreign creditors to participate, it lacks mechanisms for accessing assets abroad. To address this, bilateral agreements with other countries may be sought, necessitating further regulatory development. However, recent coordination protocols between different jurisdictions, such as the case of Jet Airways, demonstrate efforts to handle cross-border insolvency cases.
The IBC signifies a significant leap forward in streamlining insolvency and bankruptcy procedures in India. Its provisions offer an early trigger for resolution and provide a clear framework for insolvency professionals. However, its effectiveness hinges on regulatory development, particularly the establishment of a proficient cadre of insolvency professionals. It has established a more structured and effective framework for resolving insolvency cases. However, challenges related to delays, judicial interpretation, and structural issues in the adjudicating authorities remain to be addressed for the IBC to fully realize its transformative potential.
As the IBC embarks on its journey of implementation, its role in transforming India’s insolvency landscape will become more evident, offering businesses and creditors an avenue for more efficient resolution and liquidation processes. Frequent amendments and proactive responses by the government, the Hon’ble Supreme Court of India and IBBI indicate a commitment to refining the legislation and making it more effective in the years to come.