ANALYZING THE EFFECTIVENESS OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016
Introduction
The Insolvency and Bankruptcy Code (IBC); 2016,is an umbrella legislation which has not only consolidated the insolvency laws, but has also reformed the insolvency mechanisms in India by introducing a whole set of insolvency ecosystem constituted by National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), the Insolvencyand Bankruptcy Board of India (IBBI), Insolvency Professionals, Insolvency Professional Agencies, and Information Utilitiesthrough the institutional framework introduced in the legislation.
Historical Background
The introduction of IBC, is a landmark event in the Indian economy thatrepealed and consolidated the archaic insolvency laws and provided a unified single legislation that extensively deals with the insolvencyregime in India. It is widely acknowledged that India owes its insolvency framework fromEnglish Lawand historical significance of the insolvency system starts in the British era fromthe enactment of Sections 23 and 24 of the Government of India Act; 1800,but ancient Indian manuscripts i.e., smritis alsoindicate towards the existence of a debt recovery mechanismfrom 200 BC involving religious aspects. Beforethe introduction of IBC, there existed a wide spectrum of insolvency regulations namely the Indian Insolvency Act of 1848, Code of Civil Procedure; 1882, Presidency Towns Insolvency Act; 1907,Provincial Insolvency Act of 1920, Sick IndustrialCompanies Act (SICA); 1985, Recovery of Debts Due to Banks and FinancialInstitutions (RDDBFI) Act; 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurities Interest (SARFAESI) Act; 2002.
Overview
The core objective of IBC; 2016,is to balance the interest of the stakeholders involved in the transaction. The IBC frameworkengages six categories of stakeholders, namely, creditors, debtors, banks, Asset Reconstruction Companies (ARCs), the bond market, and the economy. Withrespect to the corporate insolvency system, it induces the need for the choice of the procedure of insolvency, upholding the interest of the primarystakeholder.Corporate insolvency is initiated when the corporate defaults or when the equity ownersbecome inefficient. It may be done through either Corporate Insolvency Resolution Process (CIRP) or liquidation, and the Codeaims to maximise the value by striking a balance between the two.By implementing a time barred and creditorfriendly debt recovery mechanism, the IBC has accelerated the settlement of Non-Performing Assets(NPAs) up to some extent. It has enabled financial institutions and banks to take the essential steps for their recovery by giving them a legal framework for identifying and categorising NPAs.
Impact of IBC on Corporate Restructuring and Debt Recovery
Although recovery under the Code is much greater than recovery under the previous regime, but there are still some issues that need to be rectified. As per the data of IBBI, more than half of the cases closed under the corporate insolvency resolution plan ended in liquidation and just 14.93% finished with a resolution plan authorized raises serious concerns. The evidence indicates that this new system is neglecting its intended function. The biggest NPAs haven’t been resolved yet, which is another problem. In numerous resolution plan, the entire NPA is never recovered. Only a few industries, like steel, have seen success thus far.
The IBC has obstacles that limit its ability to effectively advance creditor rights and improve debt collection. The NCLTis overworked due to the number of cases that are still unresolved, which might cause delays in the settlement process.
Impact of IBC on India’s Economic Development
Despite still being in its infancy, the IBC has already been able to significantly alter the culture of borrower impunity and lack of remedies for creditors that plagues the Indian banking industry. However, it appears that such achievement comes at the expense of the interests of other parties, especially operational creditors.
The Code has introduced the concept of “Insolvency Professionals” who play a crucial role in managing and conducting the insolvency resolution process. These professionals are licensed and regulated by the Insolvency and Bankruptcy Board of India (IBBI).
The adoption of cross-border insolvency regime by India augmented its image as most advanced jurisdiction in terms of insolvency resolution. It is viewed as a progressive and forward looking market reform by global investors and advanced jurisdictions. This also resulted as a key step towards fostering ‘Ease of Doing Business’,which in turn is important for attracting higher investments, development of competitive environment and innovations, and economic growth.
The emphasis on resolution has encouraged entrepreneurs and start-upsfor taking calculated risks in the Indian business landscape. Entrepreneurs are more willing to take risks and innovate, knowing that they have a fair and efficient insolvency resolution process as a safety net.
The Code enables the efficient allocation of capital and resources in the economy. It helps in identifying viable businesses and allocates resources to support their revival, while non-viable entities are liquidated, releasing assets that can be deployed in more productive sectors.
The enactment of the Code has created an efficient market for resolution of distressed assets. The code has paved the way for investors looking for business expansion. With the implementation of code and the ensuring progress in the resolution process for NPAs, there is a genuine interest amongst investors.
The introduction of Information Utilities (IU) serves as a platform for creditors to provide commercial information on a debtor and serves as a database of data to support the contract, transaction, and debt. The main goal is to streamline and automate the process of establishing debt existence and the record of default. Initiating insolvency procedures in India by providing evidence of the record of default and recording and making accessible reliable financial information are the two main functions of IU.
Recommendations
Currently, the power of the Reserve Bank of India (RBI) to initiate insolvency proceedings is dependent on the authorisation of the government.Being the apex monetary regulator, the RBI should be granted full power to issue directions to the banks to initiate insolvencyproceedings as and when required.
Information utilities are crucial in providing evidence and information on defaults. Thereis a need for more than one information utility that would promote data integrity in the nation.
Inspired by the COVID lifestyle, online/virtual modes of resolution should be adopted right from the formation ofthe Committee of Creditors. The Code doesn’t necessarily require the physical mode of resolution, and this clause could be madeadvantageous. This mode will be less time-consuming and will add the benefit of easier access to resolution.
The IBBI ordinance of 2021, introduces the Pre-packaged Insolvency Resolution process for Micro, Small andMedium Enterprises (MSMEs). This informal method is expected to be a better performer than the existing norms. MSMEs,with respect to pre-packaged insolvency, are, supposedly, a game-changer, and the area could be used for further research.
The stakeholders of the IBC are the building blocks of the system, and their behavioural changes are to be observed andmeasured to understand the implications of the Code.The Code is relatively new, and the effects are only just ripplingthrough the economy.
The resolutionoutcome and the resolution timeline are discomforting. It is time to fill the vacancies in various benches, streamline processesfor timely disposal, put greater emphasis on the pre-packaged resolution, and thrust on enforcement of guarantee for optimalvalue maximisation of distressed assets.
Conclusion
In conclusion, the IBCstands as a testament to India’s commitment to fostering a business-friendly environment and enhancing the ease of doing business in the country. Through its robust framework and proactive regulatory efforts, the IBC has contributed significantly to improving Ease of Doing Business and enhancing investor confidence in the country’s business environment. With the continued support and efforts of regulatory authorities like the IBBI, India is well-positioned to further strengthen its insolvency framework and drive economic growth and development in the years to come.
Authored by: Adv Somesh Pandey, SUO Law Offices.
