Eight years of IBC: Triumphs, trials and the road ahead

The year 2016 marked the inception of the Insolvency and Bankruptcy Code (IBC), which was crowned as a truly transformative measure. Enacted for clear, hastened and effective bankruptcy resolution, creditors tend to benefit more from the legislation.

The National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI) serve as the institutional backbone of the IBC, which has ushered in narrow predictability, transparency and economic resurrection.

Yet, with eight full years behind, the IBC is now being examined for its "efficiency" in the wake of various court interventions, procedural bottlenecks and stakeholder imbalance. This article critically analyses the achievements and glitches of the IBC, and explores quagmires that it has been unable to resolve.

The IBC aimed to tackled the following areas:

(a) Remediation for the NPA crisis: Prior to the enactment of the IBC, bankruptcy resolution was governed by several statutes, namely, the Sick Industrial Companies Act, the Recovery of Debts Due to Banks and Financial Institution Act, and the Companies Act. This led to delays extending beyond four years and added to the general inefficient management of the economy. IBC thus aimed at bringing these disparate laws together and giving priority to creditor rights versus debtor management, thus achieving time-bound resolution. 

(b) Creditor-centric approach: Shifting from earlier debtor-in-possession models to the creditor-in-control model was one of the defining features of the IBC. The Committee of Creditors (CoC) could suggest the recovery of a distressed business and instill confidence in lenders. In spite of these views, concerns exist regarding the influence to be given to the big financial creditors, and not equitable representation for the operational creditors.

(c) Institutional strengthening: Both NCLT and IBBI were expected to enhance the functioning of procedures and expedite judicial process. It was hoped that they would act expeditiously in resolving the cases and ensure a transparent process. However, with systemic backlogs and inadequate resources, cases are piling up, generating considerable doubt about the realisation of these promises.

Now, a look at the achievements of the IBC regime is necessary, which can be described in the following:

(a) Speedier resolution of cases: The IBC initially demonstrated impressive turnaround times, with resolution timelines often falling within the 330-day limit. Cases like Essar Steel India Ltd v. Satish Kumar Gupta reaffirmed the CoC’s authority, preventing unnecessary judicial interference. In this case, the Supreme Court ruled that the CoC has the final say in approving resolution plans, reinforcing the role of financial creditors in determining the viability of distressed companies. However, data suggests that over 70% of cases now exceed the prescribed timelines due to procedural delays and extended litigation.

(b) Improved recovery rates: Compared to pre-IBC mechanisms, creditors witnessed better recovery rates. According to Reserve Bank of India (RBI) data, IBC-led resolutions yielded 42% recoveries on admitted claims, surpassing earlier averages of 26% under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Debt Recovery Tribunals (DRTs). However, this recovery rate has declined in recent years, with some high-profile cases fetching as little as 10-15% of total claims. The case of Jaypee Infratech Ltd exemplifies the challenge, where delays and disputes among stakeholders led to prolonged resolution, causing significant value erosion.

(c) Recognition of homebuyers as financial creditors: In Pioneer Urban Land & Infrastructure Ltd v. Union of India, the Supreme Court upheld the constitutional validity of the IBC amendment granting homebuyers financial creditor status. This landmark decision empowered real estate consumers, offering them a mechanism to recover investments from defaulting builders. However, implementation challenges persist, as homebuyers often struggle to navigate the resolution process effectively. The Amrapali Group insolvency case illustrates how homebuyers face extended litigation and delays despite being recognised as financial creditors.

The IBC regime has faced certain problems, which are:

(a) Delays and interventions of the judiciary: The significance of the IBC is diminished by substantial delays within its framework. Although there are fixed time limits under the legislation, over 70% of guide-case closures exceed the prescribed resolution timeline of 330 days. Celebrity cases like Jaypee Infratech and DHFL went on for long because of multiple rounds of appeals and contests among the stakeholders. Besides, the case of Essar Steel India, gaining finality nearly after two years, reflects how interference from the courts and multiple filings by creditors continued to create problems and delays in the resolution process. These delays cause erosion of asset value and contravene the very spirit of formation of the Code for an early economic revival. These proceedings found themselves slapped by excess interference from lower tribunals, bringing resolutions to the janitor's closet. The Supreme Court maintained the distinction between financial and operational creditors in Swiss Ribbons, reiterating that the process should have qualified coherence in its insolvency resolution. Unfortunately, new matters come before the court highlighting inconsistencies of interpretation, which create unpredictability in the outcome of cases.

(b) Creditor disproportionate control and fairness issues: While financial creditors occupied a pre-dominant position in the CoC, operational creditors lacked any voting right despite being prime stakeholders. While the Court accepted it in Swiss Ribbons, the issue of fair distribution of assets continues to give rise to apprehensions. A balanced framework is very much in call in some quarters, as operational creditors and other important stakeholders have not too favoured the discriminatory treatment.

(c) Liquidation vis-a-vis the resolution balance: While the IBC lays focus on resolution compared to liquidation, a considerable number of cases are invariably reaching liquidation. The delays in the cases of Jet Airways and DHFL have increased the litigation complexities and hampered expeditious restructuring. More than half of the cases admitted have ended up in liquidation, raising an alarm whether the IBC is doing justice to revive such companies.

Before this article comes to a conclusion, a brief look at the allied matters concerning IBC is required.

(a) Cross-border insolvency gaps: Cross-border insolvency mechanisms are unfortunately not addressed in its cavalcade. No structural mechanism has yet been figured out, although talks are still underway. The Insolvency Law Committee (ILC) on Cross-Border Insolvency in 2018 proposed a Cross-Border Insolvency Framework. Nonetheless, slow adoption and topical references indicate that the government proposes to enact laws to plug in a structure. However, legal insecurity still reigns for foreign creditors, coupled with Indians' handling of insolvency cases. In the absence of a legal structure, ambiguities prevail in the cases of cross-border insolvencies, wreaking havoc upon international creditor interests.

(b) Group insolvency and inter-corporate liabilities: The effectiveness of group insolvencies cannot be achieved, and thus, the resolution of such financial conglomerates is complicated. One has witnessed how multi-stage parent-subsidiary cases might raise legal proportions through the IL&FS case, rather arbitrary inter-corporate liabilities. Without a structure-oriented systematic approach, ineffective resolution processes are on the order against group insolvencies in practice.

(c) Pre-packaged insolvency and MSME concerns: While considering the introduction of pre-packaged insolvency resolution for MSMEs as a monumental step in the right direction, its efficacy thus far has somewhat failed to achieve the benchmarks set by international standards. India's pre-packaged insolvency process (PIRP) suffers from slow uptake, inadequate creditor support, and considerable procedural lags.

A comparative study could help refine India's approach and ensure that PIRP serves its intended purpose effectively. Further refinements in PIRP guidelines and better incentives for MSMEs could improve its utilisation.

As recorded by the IBBI, more than 7,000 resolutions under the Code have been initiated, with more than 2,500 of those having been successfully resolved, resulting in recovery of over ₹3 lakh crore. However, there is significant variance between recovery levels, with some cases yielding below 20% of the admitted claims. The IBC has improved the country's rating in the World Bank's Ease of Doing Business index and improved its ranking from 136th in 2017 to 63rd in 2020, largely due to the impact of the resolution of insolvency cases. Nevertheless, delays and contrasting implementation continue to be concerns. The effectiveness of the mechanism will come into question as developments continue to unfold, as will judicial interference and gaps in the legal framework. The need of the hour is improvements to tribunal infrastructure, an improvement in the structure of the decision-making process undertaken by the CoC and aligned concerns in insolvency.

Some specific recommendations are:

(a) Let there be an increase in the numbers of NCLT benches and enhanced judicial capacity, so as to bring down case numbers and reduce backlog.

(b) Establishing a structured framework for cross-border and group insolvency.

(c) Continuing with enhancing the rights and participation of operational creditors in the resolution process.

(d) Foster alternative dispute resolution processes into the IBC structure.

In a sense, the IBC still has much to do to achieve its original intended purpose of economic revival and boosting confidence in the credit economy.

Tushar Mishra holds a B.A. (Hons.) in History from Ramjas College, University of Delhi, and is currently pursuing his LL.B. (Hons.) at the National Law University Odisha (NLUO).