In 2014, the Ministry of Finance had 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’. In this backdrop, the BLRC 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, 2016 (IBC) with the twin-fold objectives of time-bound insolvency resolution and value maximisation. Since then, the successful impact of IBC has been evident with the jump in India’s rankings in World Bank’s Index on Ease of doing business, where India now stands at 63, a massive improvement from 130 in 2016; with India’s score in the ‘Resolving Insolvency’ parameter almost doubling from 32.6 to 62.0.
However, these five years have not been a smooth ride for the stakeholders – huge haircuts for lenders and severely prolonged CIRP periods in some cases have led to intense scrutiny of whether IBC has been able to deliver on its lofty promises. Despite the aforesaid, such a view might be myopic insofar as it fails to consider factors like the stage at which such entities entered CIRP (the value left in their assets). Firstly, IBC was never intended as a recovery mechanism – in Swiss Ribbons, the Supreme Court held that IBC is a beneficial legislation to put the corporate debtor back on its feet. Secondly, the value destruction of insolvent entities is partly attributable to the litigation delays – on average, a successful resolution has taken 459 days, as against the timeline of 330 days prescribed under IBC.
By March 2021, a total of 2653 CIRPs have been closed, out of which only 13% underwent successful resolution while the others have seen liquidations. While this paints a gloomy picture in isolation, 74% of these liquidations correspond to BIFR/defunct entities, and their asset values represented merely 5% of outstanding debt. In successful resolutions, IBC has been able to recover 189% of realisable value, way higher than any previous recovery mechanism (IBBI Quarterly Newsletter).
Furthermore, IBC is still a nascent economic legislation and an economic legislation must be allowed a certain degree of free play in the joints. The Supreme Court has continuously highlighted the need for flexibility in matters of economic policy, which often reflect a ‘trial and error’ mindset, observing most recently in Swiss Ribbons that ‘to stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation’. The authorities have been vigilant in analysing IBC and plugging holes whenever required, as evident from the number of amendments, including introduction of section 29A, section 32A as well as the pre-pack framework for MSMEs, most recently.
The jurisprudential growth of IBC in these 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), right to proceed against personal guarantors (Lalit Kumar Jain), and payment to dissenting financial creditors (Jaypee Infratech), which have provided the much-needed predictability and stability in the insolvency process. This has led to the alignment of thought/functioning of different stakeholders during insolvency, providing a robust skeletal foundation to now introduce intricate frameworks around complex issues such as personal insolvency, cross-border insolvency, and group insolvency.
From the perspective of economic growth, the freedom of exit to a failing business (insolvency framework) is an exigency, where the state intervention through insolvency law allows a seamless re-allocation of resources from a failing enterprise to an efficient one, providing greater impetus to Schumpeter’s creative destruction (the principle that a market economy moves forward when the long standing processes get 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 why IBC is important.
The quinquennial anniversary of IBC should not be blemished by criticism and instead be characterised by constructive discussions on strengthening of the insolvency regime. The reduction of litigation delays is the need of hour, considering cases like Bhushan Power and Steel, where the 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 through strengthening of existing NCLTs; in this respect, a part of the costs incurred by the government could be recovered as insolvency process cost if such allocation can help in strengthening the NCLTs. The need for NCLT strengthening, should be understood in the context of massive value deterioration on account of litigation delays. At times, resolution plan value runs into thousands of crores and any delay in approval of resolution plan leads to significant value loss to the creditors. We have various precedents to support this submission. Further, additional regulatory reforms can be introduced promoting the aggressive marketing of distressed assets, 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, IBC has indisputably been a fairly successful story so far and one that promises a still better future.
This article was originally published in BW Legal World on 12 August 2021 Co-written by: Anoop Rawat, Partner; Ahkam Khan, Associate. Click here for original article
Contributed by: Anoop Rawat, Partner; Ahkam Khan, Associate
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