Insolvency and Bankruptcy Code

October 6, 2022

2461

Context

At the sixth anniversary of the Insolvency and Bankruptcy Board of India (IBBI) on October 1, the Union Finance Minister voiced concerns over banks taking a hefty haircut on loans that go through the resolution process under Insolvency and Bankruptcy Code (IBC).

About IBC

Introduction: IBC was introduced in 2016 when India’s Non Performing Assets (NPA) and debt defaults were piling up and older loan recovery mechanisms were performing badly.
Aims:

To overhaul the corporate distress resolution regime in India.
To consolidate existing laws to create a time bound mechanism with a creditor-in-control model as against the debtor in possession system.

Outcomes: As per the IBC triggered insolvency, there are just two outcomes: resolution or liquidation.
Three classes of persons can trigger the corporate insolvency resolution process (CIRP) which are financial creditors, operational creditors and corporate debtors.

Objectives of the IBC Resolution

According to its regulator IBBI, the objectives of the IBC resolution are

To find a way to save a business through restructuring, change in ownership, mergers etc.
To maximize the value of assets of the corporate debtor
To promote entrepreneurship, availability of credit, and balancing of interests.

Challenges for the IBC

Lack of proper resolution: As per the IBBI data of 3400 cases in the last six years, more than 50% of the cases ended in liquidation while only 14% cases found a proper resolution.
Huge delays in resolution: Initially, IBC was touted as a time bound mechanism. The amended IBC act made the total timeline for completion of the resolution process to 330 days from the earlier 180 day deadline (with a permitted 90 day extension).

However, in FY22, it took 772 days to resolve cases involving companies owing more than ?1,000 crore. Also, the average number of days taken for resolution of such cases increased rapidly over the past 5 years.

Haircuts: It means the debt foregone by the lender as a share of the outstanding claim.

The Parliamentary Standing Committee on Finance in 2021 noted an average haircut of 80% by the creditors in more than 70% of the cases in the 5 years of the IBC.
As per The Hindu Data Team, almost 33 of 85 companies with more than ?1,000 crore debt had been given haircuts above 90% by the lenders.

Lack of digitisation has led to the delays beyond the prescribed statutory limits in the insolvency resolution process.

Achievements

Addressing NPA problem: The IBC was instrumental in reviving India’s insolvency regime and successfully addressing the looming threat of NPAs.
Credit discipline: Ease of credit flow is necessary for attainment of Ease of doing business and economic growth. Under the IBC regime, Rs. 2.5-lakh crore has been brought back into the banking system as a result of resolution of insolvencies.
The World Bank’s report: India’s rank in resolving insolvency went from 136 in 2017 to 52 in 2020, after the implementation of the IBC in 2016.

Insolvency and Bankruptcy Code (Amendment)bill, 2021

The Pre-packaged Insolvency Resolution Process (PIRP)/‘pre-packs’ was proposed as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs).
Aim: PIRP process in the Code will address the issues faced by MSMEs due to the impact of the pandemic and the unique nature of their business, duly recognizing their importance in the economy.

Way Forward

The Parliamentary Standing Committee suggested that the timeline of not more than 30 days to admit the insolvency application and transfer control of the company to a resolution process after filing.
New yardstick to measure haircuts: The IBBI suggested that haircuts not be looked at as the difference between the creditor’s claims and the actual amount realized. But the difference between what the company offers while entering IBC and the value realized.
Optimum budgetary allocations for upskilling insolvency professionals, improving tribunal infrastructure and for digitisation of the insolvency resolution process.

Source: TH