The IBC has had a profound impact on the economy, with the gross non-performing-asset ratio of banks having fallen to a 12-year low of 2.8% at the end of 2023-24 from 11.2% in 2017-18.
Banks prefer to resolve loan defaults under the IBC over loan recovery through the Debt Recovery Tribunal or enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
As complexities grow, India’s distressed asset market has evolved and innovation has taken centre-stage. To this end, the IBC has some distinctive features, such as participation in decision-making by only financial creditors once insolvency proceedings begin, eligibility criteria for potential resolution applicants, immunity from prosecution for past criminal actions, and the sale of a business as a going concern for liquidation.
Since its rollout, IBC regulations (18 in all) have been amended more than 90 times, underscoring its evolution to reflect the realities of resolution and dealmaking.
The judiciary has contributed to the evolution of insolvency jurisprudence—for example, by upholding the primacy of the committee of cr editors’ commercial wisdom.
Recently, the National Company Law Tribunal permitted interim distribution of surplus funds available with a corporate debtor to its creditors in accordance with the distribution waterfall prescribed under Section 53 of the IBC. This was the first time such a distribution was allowed before a case had been resolved.
As of 30 June, about 3,293 corporate debtors have been rescued under the IBC. Despite this accomplishment, IBC-resolved accounts have led to the realization of only around 32% of the debt admitted. This raises the question: What about the rest?
Resolution of corporate insolvency is at the heart of the IBC. But an effort must be made to reduce the high proportion of unrealized claims. It may be time to review our IBC learnings and strengthen the regime.
While 3,293 corporate debtors were rescued, 2,547 are undergoing liquidation and success stories in this process are few and far between. While it is commendable that debts are being recovered, here are three measures that should help recover the balance 68%.
Avoidance transactions: We can improve realization for creditors by reversing ‘avoidance transactions’ (i.e., preferential, undervalued, extortionate or transactions that defraud creditors).
For this, applications are filed by insolvency professionals, but their success so far has been low. As of 30 June, about 1,245 applications have been filed, involving dues of about ₹3.7 trillion, of which only 313 applications involving dues of about ₹6,676.6 crore have been dealt with.
Hearings of avoidance applications are typically deferred as the emphasis is on approval of a resolution plan. Apart from urgency over the expeditious approval of a plan that resolves the case, that may also be on account of a judicial backlog. However, it is desirable that greater emphasis be placed on avoidance applications to enhance the chances of a time-bound recovery.
Proceedings against personal guarantors: With the Supreme Court upholding the constitutional validity of provisions related to personal guarantees, creditors have another tool for recovery.
As of 30 June, about 3,184 applications have been filed for initiation of a personal insolvency resolution process, and merely 26 of these have yielded the approval of a repayment plan. In these approved cases, creditors have realized merely 2.16% of the admitted claims.
While the data may not be enough, considering that the Supreme Court order was issued in November 2023, it may be useful for insolvency practitioners to re-evaluate this form of legal recourse to enhance recovery levels.
Delink resolutions from disputes: Resolutions under the IBC tend to get inordinately delayed, with a long stretch of time from process initiation till the implementation of a resolution plan. As of June, resolved accounts took an average of 571 days for conclusion.
This is far from the IBC’s original objective of ensuring resolution within 180 days. While infrastructural challenges exist, prolonged litigation over inter-se rights and entitlement by various stakeholders is a matter of concern.
One way to address this would be to delink the resolution process from litigation that may not have a direct bearing on it. For instance, although the IBC envisages a creditor-led process, in various cases, there are inter-creditor issues (related to security sharing, for example) that may cause substantial delays. It is time to insulate resolutions from such disputes.
Recently, to address concerns around procedural delays, the Insolvency and Bankruptcy Board of India constituted an expert committee which proposed a creditor-led insolvency resolution framework to facilitate the creation of a hybrid model for an ‘out-of-court’ insolvency process. The proposal is welcome as it would strengthen the country’s insolvency regime.
Beyond the IBC: A strong and predictable insolvency and restructuring regime will help establish a stable investment regime. While the IBC’s journey has had many success stories, 32% recovery is not a badge of honour. All efforts must be made to recover a significantly larger proportion.
These are the authors’ personal views.
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