THE IBC REVOLUTION - REDEFINING THE INDIAN ECONOMY BY - ARJUN BAHL
THE IBC
REVOLUTION - REDEFINING THE INDIAN ECONOMY
AUTHORED
BY - ARJUN BAHL
This paper explores how the
Insolvency and Bankruptcy Code (IBC), 2016 has changed the financial
environment in India, with a special emphasis on the Corporate Insolvency Resolution
Process (CIRP). With the goals of protecting investors, promoting
entrepreneurship, and streamlining insolvency and liquidation procedures in
India, the IBC evolved as a complete regulatory framework. Analysis of the
IBC's effects on the banking industry highlights increased non-performing loan
recovery, moral lending practices, and heightened creditor trust. Though there
are still issues with its application and interpretation, it has completely
changed the financial sector. The study also looks at cross-border
insolvency issues in the Indian setting and criticizes the present strategy,
which veers between universalism and territorialism. It highlights the
necessity of harmonization and international cooperation. Despite the IBC's
accomplishments, it emphasizes flaws including the backlog at NCLT and worries
about corporate "haircuts." The outcome of the research emphasizes
the necessity of ongoing revisions to preserve the IBC's efficacy and
efficiency in handling insolvencies and bankruptcy in India.
Herb Kohl once said, “Bankruptcy is a
serious decision that people have to make.” The problem of insolvency has
plagued India for many years. When performing the insolvency resolution
proceedings in India, many overlapping laws were in use. The process for
realizing assets, taking possession of property, and satisfying debt
obligations was different under each statute. The overlapping statutes led to
uncertainty throughout the insolvency and liquidation proceedings. The creation
of a comprehensive insolvency regulatory framework was necessary to address
this issue.[1]
The early 2000s to 2008 saw a golden
period for the Indian economy. Banks, particularly those in the public sector,
made significant loans to businesses during this time. However, as the global
economy slowed, profits from different groups were stolen. This had an adverse
effect on the ability of these businesses to repay their loans. Prior to the
passing of the IBC, 2016 the mechanism that governed the recovery of bad loans
were legislations such as the SARFAESI Act, 2002 and the Companies Act, 2013.[2]
The Insolvency and Bankruptcy Code,
2016 was introduced in the Lok Sabha in December 2015, and thereafter became
effective in December 2016. The concept of doing business, protecting
investors, and liquidating a company was often considered to be a long-drawn
and complicated process. It was with the intention of streamlining the process
related to liquidation that the IBC, 2016 was passed. Further, it was intended
to protect the interest of investors and make the process of conducting
business easier. In order to provide fair talks between debtors and creditors
by addressing the asymmetry of debt and default information, it was designed to
streamline and simplify the insolvency and bankruptcy proceedings in India.[3] While
the enactment of the Code was seen as a step in the right direction, there have
been several deliberations regarding the adequacy of the Code. The adequacy of
the Code to deal with the current problems faced by businesses and thereby
safeguard the interests of debtors and creditors is to be adjudged. The
enactment of the said Code has been met with resistance by some who question
the competency of the Code and therefore believe that certain modifications
should be made.
The recovery mechanism that has been
curated for creditors is known as “Corporate Insolvency Resolution Process
(CIRP). Insolvency proceedings may be initiated by either the financial
creditor, operational creditor, or the company itself to determine whether the
corporation against whom such proceedings have been initiated is capable of repaying
the debt or not. An officer known as the insolvency resolution professional
(IRP) is appointed to evaluate the assets and liabilities of the company and
thereby determine the capacity of the company to repay its debts and comply
with other financial obligations.[4] The
process related to corporate insolvency is encompassed within sections 7 to 32 of
the IBC. Some of the key terms related to CIRP are as follows:
·
Financial Creditor
·
Operational Creditor
·
Corporate Debtor
·
The Committee of Creditors (CoC)
·
Insolvency Resolution Professional (RP)
Impact
of the IBC on CIRP:
Pursuant to the IBC's sections 7 and
9, it is not required to give the corporate debtor a chance to be heard before
the acceptance of the IBC application. The management team is moved to the RP
that the applicant has suggested when the IBC application is approved. This
indicates that even a minor default may result in a scenario where the
business is transferred. Debts are retrieved by creditors from the
insolvent corporation; some creditors also apply leverage on corporate debtors
to retrieve their claims by using the IBC. Businesses have been affected by
this since it raises pressure on profitability and adds to the strong demand
for capital investment. A major modification to the IBC permits an operational
creditor to pursue legal action under the code to efficiently recover their
debts.[5]
A fast-track procedure for insolvency
resolution is outlined in Chapter IV, Part II of the Code, and it applies to
the class of corporate debtors specified in section 55(2) of the Code. The goal
is to cut the time needed for insolvency resolution in half when compared to
the typical Code procedure and to speed up the CIRP for new and small
enterprises. After the IBC was put into effect, the average time to resolve
insolvency decreased from 4.3 years to 1.6 years between 2017 and 2020.[6] In
November 2016, the Board published regulations pertaining to the CIRP. The 2016
Code permits the earliest possible start of a CIRP and requires its timely
conclusion. Unlike other processes where a 180-day period is allowed, this one
must be finished in 90 days. The Committee of Creditors (COC) must consent
before the adjudicating body can prolong the period by more than 45 days.[7] The
winding-up process is initiated under section 33 of the Insolvency and
Bankruptcy Code 2016 if no resolution plan is presented, if the resolution
plan is inconsistent with the provisions of the IBC 2016, or if the corporate
debtor refuses to abide by the resolution plan approved by the adjudicating
authority. The same conditions apply if a request for the corporate debtor's
liquidation is made by the committee of creditors.[8]
The bankruptcy and insolvency
procedure in India has undergone an evolutionary change as a result of the
Insolvency and Bankruptcy Code (IBC) of 2016. Its purpose is to harmonize and
modify the legislation concerning the time-bound reorganization and insolvency
resolution of individuals, partnership firms, and corporate entities. The key
objectives of the IBC include encouraging entrepreneurship, maximizing asset
value, providing financing, and balancing the interests of all parties
concerned. To oversee the insolvency process, the Insolvency and Bankruptcy
Board of India (IBBI) was established along with the National Company Law
Tribunal (NCLT), which serves as the adjudicating authority and is essential to
the insolvency resolution and liquidation process. India's perspective on
bankruptcy and insolvency has undergone a significant change since the IBC was
implemented.[9]
Amendments
to the IBC that have influenced the CIRP:
The IBBI (Insolvency Resolution
Process for Corporate Persons) (Second Amendment) Regulations, 2023 ("CIRP
Amendment Regulations"), which amend the IBBI (Insolvency Resolution
Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations")
under the Insolvency & Bankruptcy Code, 2016 ("IBC"), were
notified by the Insolvency and Bankruptcy Board of India ("IBBI") on
September 18, 2023.[10] Some
of the key amendments are as follows:
Ø Section 29A delineates the
qualifications that prospective bidders in a corporate insolvency resolution
procedure (CIRP) must meet. In certain cases, the scope of Section 29A might
have been excessively broad, potentially resulting in the inadvertent exclusion
of certain technically proficient bids.[11]
Ø According to the Ordinance, a CIRP
proceeding may be withdrawn if 90% of the CoC agrees to do so. However, this
withdrawal will only be allowed until the resolution specialist explicitly
invites interested bidders to submit resolution ideas.[12]
Ø According to the IBC, 75% of the CoC
by value must vote on any decision made by the CoC. For significant choices
like: (i) requesting an extension of the CIRP period from 180 to 270 days; (ii)
replacing an interim resolution professional or resolution professional, and
(iii) accepting a resolution plan, the voting threshold has been lowered from
75% to 66% by the Ordinance. The voting threshold for other regular matters has
been lowered to 51%.[13]
Ø According to the IBC, a company has
the authority to start a voluntary (CIRP). The individuals who can do
this are as follows: (i) the corporate debtor; (ii) a shareholder who has been
given specific authorization to do so in the company's articles; (iii)
directors and key employees; and (iv) the chief financial officer. A special
resolution of shareholders is now required under the Ordinance in order to file
for a CIRP.[14]
The amendments increased the
obligations of the RP to verify the asset list of the corporate debtor with the
financials of the company and to bear the responsibility of forgiving the delay
in filing stakeholder claims (rather than the creditor itself); permitted
members of the committee of creditors ("CoC") to request an audit of
the corporate debtor at a cost included in the CIRP costs (if approved by the
CoC); relaxed the timeline for submitting claims for stakeholders. Assistance
was provided to the NCLTs by requiring additional details in a CIRP
application.[15] By
recognizing a balance between the IBC's mandate and the reality on the ground,
the CIRP Amendment Regulations aim to fill in the gaps and streamline the
insolvency process, as indicated by stakeholders. These modifications bring
about a welcome shift to the current system, with improved checks and balances
that are a step in the right direction.
In the Indian banking industry, the IBC
has had a profound impact, drastically altering the environment surrounding
debt relief and financial stability. This all-encompassing law sought to
improve creditor rights, expedite the settlement of distressed assets, and
streamline bankruptcy procedures. The implementation of the IBC has enabled
banks to effectively recover non-performing loans and lessen their toxic asset
burden by offering a more efficient framework for debt collection.
Additionally, it has promoted ethical lending practices and given borrowers a
sense of discipline. However, difficulties putting it into practice and
changing legal interpretations have brought up important questions that still
influence the dynamics of the industry.
Lending in India has been inhibited
by the rise of non-performing assets (NPAs) in the banking sector and other
financial institutions, especially among public sector banks. Consequently, to
assist the Indian economy, the IBC was passed. The recently passed Code calls for
a formal insolvency resolution procedure (IRP) for businesses, which might
involve finding an expedited liquidation or developing a viable survival
strategy. Due to this, the updated Code might substantially cut down the
total number of long-pending cases while also guaranteeing that different banks
handle NPA situations more swiftly. Indian lenders, both secured and unsecured
creditors, would receive more support from the IBC. Section 14 of the statute
mandates that the Adjudicating Authority issue an order imposing a 180-day
freeze on all pending processes in order to start the insolvency resolution
process. Except the liquidation process, the stay on pending cases forbids the
execution of decrees and judgments as well as the transfer, encumbering, alienation,
or disposal of the assets of corporate debtors. Nonetheless, the Act does
not cover transactions that the Central Government notifies in association with
any regulator of the financial industry. This section of the law also prohibits
providing the corporate debtor who is not to be terminated with necessary
goods or services.[16]
Prior to the IBC, lenders were
reluctant to provide money due to the lack of an effective resolution
framework, raising doubts about their ability to recover the debt. This led to
a decrease in the amount of credit available and, consequently, fewer financially
feasible projects. The culture of not paying back loans and getting away with
it had to change. Without IBC, the borrower would not have much of an incentive
to repay. Banks received 42.5 percent of the total amount filed under the IBC
in the 2018–19 fiscal year; by contrast, 14.5 percent went through the
SARFAESI resolution process, 3.5 percent went through Debt Recovery
Tribunals, and 5.3 percent went through Lok Adalats. In contrast to claims of
Rs 1.66 lakh crore, the recovery under the IBC was Rs 70,819 crore.[17] The
banking industry in India has seen significant changes since the IBC was
implemented. It has decreased non-performing assets, expedited the resolution
process, and enhanced creditor confidence. It is necessary to compare it with
bankruptcy laws in other nations in order to comprehend its efficacy on a
deeper level.
The insolvency laws in some countries
prioritize promoting international collaboration, while others work to obstruct
it in favor of their domestic laws that are seen to be infallible. These methods are comparable to the broad
notions of territorialism and universalism that have historically been applied
to explain how courts operate in global insolvency processes. The Model Laws
have not been included in India's insolvency code. Rather, it still relies on
its domestic insolvency laws and common law to deal with cross-border
insolvency matters. Indian courts are only permitted to acknowledge and uphold
foreign decisions in accordance with the Indian Code of Civil Procedure (CPC).
The judgment of a foreign court does not automatically become recognized
because it originates from a superior court in a "reciprocating
territory." Furthermore, although UNCITRAL permits foreign delegates to
make decisions, the CPC's restrictions prevent the recognition of such
decisions.[18]
Cross-border insolvency issues can be
addressed using two provisions of the IBC: Section 234(1) and Section 235(2).
In order to resolve and implement the IBC's provisions, the Indian government
is required by these sections to engage in a bilateral agreement with the
foreign government. The Indian and foreign governments must engage in
protracted negotiations to reach this bilateral accord. In addition, the
foreign party must make an application with the Indian court; the recognized
foreign proceeding will be governed by the common law and the CPC. A lack
of collaboration in simultaneous insolvency processes in the Netherlands and
India gave rise to complications in the case of Jet Airways Limited v.
State Bank of India & Anr.[19] Dutch
trustees were consequently granted permission to take part in and assist with
the process of developing a debt payback plan. This was the first international
bankruptcy case under the IBC.[20]
The way India handles cross-border
insolvency appears to fall somewhere between modified universalism and
territorialism. India's refusal to ratify the Model Laws preserves the
independence of its legal system and the judges' discretion. By doing this,
India can safeguard small businesses from claims made by global corporations
while also prioritizing its residents. However, it would be ignorant to
not consider the drawbacks of the Indian approach. Doing business in India is
discouraged for foreign investors because of the preferential protection
afforded to local creditors and the unpredictable nature of the judicial
discretion to recognize foreign judgments. Furthermore, because of the distance
between foreign jurisdictions and India, there is a longer learning curve and
more expensive transaction expenses for foreign parties involved in international
transactions.[21]
Despite being hailed as a major
change, the IBC has certain disadvantages. One significant drawback is the
National Company Law Tribunal's (NCLT) excessive workload, which causes delays
in the resolution procedure. In a written reply to the Rajya Sabha, the
Minister of State for Finance and Corporate Affairs, Anurag Singh Thakur,
stated that as of September 2019, 10,860 cases were pending before the NCLT.
the quantity of cases falling under IBC and the insufficiency of NCLT benches.[22]
The goal of the expedited resolution procedure will be undermined by the
growing backlog of cases. Even though one of the key tenets of IBC is the
prompt settlement of cases, the average resolution time is still very high at
590 days. Compared to the recently established cap of 330 days, it is 80%
greater.[23] When it
comes to cross-border bankruptcy situations, the absence of a clear structure
might make things more difficult when it comes to international creditors. In
addition, there is concern about corporate abuse via the 'haircut' technique. In
terms of an IBC, a haircut is the difference between the loan amount and the
real value of the asset provided as collateral to lenders or creditors in such
circumstances, or having to bear the brunt of it. A haircut is a decrease in
the value of an asset. It represents how the lender feels about the possibility
that the asset's value will decline. However, in terms of loan recovery, it
refers to the discrepancy between the amount owed by the borrower and the
amount they have paid the bank. August 2017 saw the enactment of the first
insolvency resolution order under the IBC for Synergies-Dooray Automobile, a
manufacturer of automobile parts, requiring lenders to accept a 94% haircut.
Since then, the lenders have sent a number of cases to the NCLT for prompt
settlement. The government asserted in April 2018 that more than Rs. 4 lakh crores
worth of NPAs had been recovered under the IBC process, which was seen as
a magic bullet for recovering bad loans. Subsequent RBI statistics, however,
revealed that the true recovery figures were significantly lower. As a group,
these 40 companies' NPAs accounted for 60–65% of all bad loans, bringing
them into the spotlight for the resolution process.[24]
It is necessary to find thoughtful
ways to improve the efficiency of the IBC. To speed up the resolution process
and maximize the realizable value of assets, measures like creating benches to
hear only IBC matters, digitalizing IBC platforms, boosting the role of
resolution specialists, and creating a professional code of conduct for a
committee of creditors (CoC) are all recommended.[25] In
conclusion, the introduction of the IBC in India has surely been a
major turning point in the legal and economic landscape of the nation. Its main
goal was to expedite and simplify the bankruptcy and insolvency resolution
procedures, which would ultimately increase investor trust, encourage
entrepreneurship, and guarantee the effective recovery of bad loans. The Indian
banking industry and the larger business climate have undoubtedly changed for
the better as a result of the IBC. However, it is essential to recognize
the issues and complaints the IBC continues to encounter. Attention must be
paid to the heavy workload of the NCLT and the ensuing delays in the
resolution process. The efficacy of the Code may be jeopardized if the backlog
of cases keeps increasing. The issue of cross-border insolvency persists, as
India's current strategy to recognize international procedures requires
bilateral agreements with other governments, straddling the line between
territorialism and universalism. Even though the IBC has significantly improved
the process for resolving bad loans, there is still an opportunity for
improvement. Maintaining the IBC as an efficient and successful framework for
insolvency and bankruptcy resolution in India will require ongoing review,
revisions, and international cooperation in the area of cross-border
insolvency, amongst several other measures.
[1] Rastogi A (CORPORATE RESTRUCTURING AND INSOLVENCY:
CRITICAL ANALYSIS OF LAWS IN INDIA)
[2] Aaditya.bhatt, ‘Historical Evolution of IBC’ (Bhatt
& Joshi Associates, 10 February 2022) https://bhattandjoshiassociates.com/the-insolvency-and-bankruptcy-code-2016/ accessed 10 October 2023
[3] Ibid
[4] (Corporate insolvency resolution process -
indiafilings) https://www.indiafilings.com/learn/corporate-insolvency-resolution-process/ accessed 1 November 2023
[5] ArjunRathod, ‘Understanding the Corporate Insolvency
Resolution Process (CIRP) and Liquidation Process under the Insolvency and
Bankruptcy Code (IBC) 2016’ (Bhatt & Joshi Associates, 4 September
2023) https://bhattandjoshiassociates.com/understanding-the-corporate-insolvency-resolution-process-cirp-and-liquidation-process-under-the-insolvency-and-bankruptcy-code-ibc-2016/ accessed 1 November 2023
[6] ‘Committee Reports’ (PRS Legislative Research,
6 November 2023) https://prsindia.org/policy/report-summaries/implementation-of-insolvency-and-bankruptcy-code-pitfalls-and-solutions accessed 6 November 2023
[7] (n,6)
[8] (n,6)
[9] (n,5)
[10] ‘Amendments to the Corporate Insolvency Resolution
Process’ (JSA) https://www.jsalaw.com/newsletters-and-updates/amendments-to-the-corporate-insolvency-resolution-process/ accessed 4 November 2023
[11] ‘Major Amendments Introduced to the Insolvency and
Bankruptcy Code’ (azb, 28 September 2021) https://www.azbpartners.com/bank/major-amendments-introduced-to-the-insolvency-and-bankruptcy-code/ accessed 4 November 2023
[12] Ibid
[13] Ibid
[14] (n,10)
[15] (n,9)
[16] Rajpal V, ‘IBC and Its Impact on the Banking Sector’
(Black n’ White Journal, 23 November 2021) https://bnwjournal.com/2021/11/23/ibc-and-its-impact-on-the-banking-sector/
accessed 6 November 2023
[17] Ibid
[18] May 5 2023, ‘Comparing Cross-Border Insolvency in the
United States and India’ (International and Comparative Law Review, 21
October 2023) https://international-and-comparative-law-review.law.miami.edu/comparing-cross-border-insolvency-in-the-united-states-and-india/ accessed 6 November 2023
[19] Company Appeal (AT)
(Insolvency) No. 707 of 2019
[20] (n,17)
[21] (n,17)
[22] Sehgal DR, ‘Challenges of Interpretation of
Insolvency and Bankruptcy Code, 2016’ (iPleaders, 10 February 2021) https://blog.ipleaders.in/challenges-interpretation-insolvency-bankruptcy-code-2016/ accessed 6 November 2023
[23] ‘Haircut on Cases Resolved through IBC Not Very
Encouraging, Says Kotak Report’ (Business Insider, 24 March 2023) https://www.businessinsider.in/finance/banks/news/haircut-on-cases-resolved-through-ibc-not-very-encouraging-says-kotak-report/articleshow/98972743.cms accessed 6 November 2023
[24] (Mirza & Associates, Advocates & Attorneys)
https://www.mirzaandassociates.com/haircut-under-insolvency-laws/ accessed 6 November 2023
[25] ‘Standing Committee Recommendations Key to IBC
SUCCESS: CRISIL’ (The Economic Times) https://economictimes.indiatimes.com/news/economy/policy/standing-committee-recommendations-key-to-ibc-success-crisil/articleshow/87505542.cms accessed 6 November 2023