Insolvency and Bankruptcy Code (IBC) was established in 2016 to consolidate insolvency resolution process for Limited Companies, individuals, Limited Liability Partnerships (LLPs) and partnerships. With this government showed its intention to create a mechanism to put the insolvency resolution process on fast track. The basic aim of the code was that let the resolution emerge with the status of the firm as a going concern, any action towards the closure of the firm would jeopardise the organisational resources and would kill the firm.
The Insolvency and Bankruptcy Board of India (IBBI) was established as a regulatory body under the Insolvency and Bankruptcy Code, 2016. At the same time two adjudicating authorities Debt Recovery Tribunal for Partnerships and individuals and to National Company Law tribunal (NCLT) was established for Limited Liabilities Partnerships and companies. With one blow government not only ensured that certain laws are overridden but also repealed many obsolete laws. This step was really in the direction of ease of doing business. With a stringent norm of 270 days (180+90 days) resolution the Code was hailed by Indian as well as global community including the World Bank and IMF. IBC was in fact instrumental in giving fillip to propel India’s rank by 30 places in ease of doing business.
This framework was expected to overcome the deficiencies of liquidation and allow companies to revive without stringent formalities. The general perception about IBC was it would help creditors to resolve the problems of bad loans in effective manner t the same time facilitate practical solution to the debtors.
To set the ball in motion ,Reserve Bank of India identified 12 major cases such as Essar Steel, Bhushan Power and Steel etc. into the IBC process in June 2017. They had an outstanding claim of Rs.3.45 lakh crores in total and liquidation value was paltry at around 21% i.e. Rs. 73,220 crores. RBI also released another list of 26 defaulters in October 2017. Picture looked satisfactory with average recovery rates crossing 40% around September 2018 which was highest in the decade. It was a big boost when the apex Court upheld the constitutional validity of the Insolvency and Bankruptcy Code 2016 in its “entirety”. But the overall recovery till date including that of the major 12 cases is dismal due to various reasons.
Let us review the status of cases of IBC.As the data published by IBBI overall 2542 cases were filed till end of September 2019. Out of the total 2542 cases 86 cases have been closed/settled or on appeal while 587 cases went for liquidation and 156 cases are gone for approval for resolution and 116 cases stand withdrawn. Around 400 cases pertain to Real Estate and Construction activities which are reeling under pressure. If one apples time parameter ,around 850 cases are pending for more than 180 days out of which 535 cases are pending for more than 270 days.
The resolution path had been far from satisfactory after the initial momentum. Lots of frivolous objections were raised by the promoters as well as operational creditors in various matters, leading to long legal battle. Add to the agony is the shortage of the judges in the tribunals. Such state of affairs prompted government to have a relook at the provisions of IBC. When it comes to government departments and the proceedings under IBC, it’s full of surprises. In one case a government company looking for Bank Guarantee to bid, had to lose out the deal for the delay in approval by the bankers.
At this backdrop, the Government introduced new amendments to IBC, which was passed in both houses of the parliament this year. It provides room for resolution to be completed within 330 days instead of 270 days, and if any case is pending over 330 days, then it has to be resolved within next 90 days. The new amendment puts a mandate that the decision under IBC is binding on all the government agencies which are notoriously inactive during the proceedings and harassing the victims. It also made a pragmatic step by allowing merger/acquisition plan as a part of resolution process. Another positive feature of the new amendment is that it restores the home buyers’ status as financial creditor. In case where a debt is owned by a class of creditors (home buyers) beyond a specified number, financial creditors will have a say in the resolution process through an authorised representative in the committee of creditors (CoC). Another feature of this amendment is that it allows financial creditors to have priority in the distribution process and it restored their power of decision making in liquidation of the debtor. Thus the new amendment addressed the issue of time limits, it provided relief to operational creditors by recommending higher amount of pay-outs and set the rule for group of financial creditors.
In a way IBC is beneficial as a social measure which empowers the employees and avoid insolvency or liquidation by adopting timely rescue. But when the whole issue is continuity and time being essence of business so success depends on how fast the engine is allowed it to run with the necessary ammunition by the government.
- UDAY TARDALKAR
CORPORATE CONSULTANT AND TRAINER