Navigating The Choppy Waters Of India’s Solvency And Bankruptcy Code

28th July, 2023 - 7:23 am Categories: IBC 0 Comments

Introduction

The Insolvency and Bankruptcy Code, 2016 (referred to as IBC or the Code) is India’s bankruptcy law, designed to consolidate the existing framework by creating a comprehensive statute for handling insolvency and bankruptcy cases. The introduction of IBC aimed to completely overhaul India’s financial distress resolution system, as the prevalence of Non-Performing Assets and debt defaults was on the rise, and earlier loan recovery mechanisms like Lok Adalats, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), and Debt Recovery Tribunals were proving ineffective.

Working of the Code

Both businesses and individuals fall under the purview of this Code, which establishes a time-bound process for resolving insolvency. In case of debtor default, creditors take possession of the debtor’s assets and have 180 days to settle the bankruptcy. During this period, the Code protects debtors from resolution claims by creditors to ensure a smooth resolution process. The Code creates a unified platform for creditors and debtors of all categories to resolve bankruptcy while consolidating existing legal rules.

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According to the Insolvency and Bankruptcy Board of India (IBBI), the primary aim of the IBC is resolution, which involves salvaging a firm as an ongoing entity through reorganization, changes in ownership, acquisitions, and other methods. The secondary goal is to maximize the market value of assets owned by the corporate debtor, and the third objective is to promote entrepreneurship, credit availability, and balance interests. The Code considers the sequence of these functions as sacrosanct.

What Exactly Are The “Choppy Waters”?

Looking through this lens, the IBBI data shows 3,400 cases filed under the IBC in the past six years, out of which more than 50% of the cases resulted in liquidation whereas merely 14% of the cases went through the primary aim of the Code which is a proper resolution. There was a small ray of light during 2016 and 2017, but by 2018, a similar fate was met by most of the cases and only 15% to 25% cases were approved for resolution plans.

In contrast to the frequently sluggish phases of prior mechanisms, the IBC was marketed as a time-bound mechanism. The capacity to act quickly is essential here to prevent further erosion of the business’s financial stability or the worth of its assets. The IBC initially set a 180-day timetable for completing the settlement procedure, with a 90-day extension allowed.

Later, the IBC was revised to extend the completion deadline to 330 days, or about a year. Although in 2018, while the deadline was 180+90 days, the majority of cases—from those involving corporations owing less than 50 crores to those owing more than 1000 crores —were resolved in less than 300 days.

On the other hand, cases involving businesses that owed more than 1,000 crores were resolved in 772 days in FY22. According to specialists, the average number of days required to settle these situations has climbed substantially over the course of the past five years.

Additionally, it is expected that creditors will be able to recover the full amount of their unpaid claims when a settlement occurs. The sale of the company’s assets is fragmented, however, when liquidation occurs. This implies that the value that may be realized by resolution should be greater than through liquidation, which would be the final option.

Yet, the difference between both of these valuations has narrowed over time, and in the fourth quarter of 2022, the sum realized was less than what the assets ought to have garnered had they been liquidated.

A haircut is the amount of debt waived by the lender as a percentage of the pending claims. In 2021, the Parliamentary Standing Committee on Finance stated that throughout the five-year term of the IBC, creditors had to take an 80% haircut in over seventy percent of the instances.

Essar Group has a debt of 42,000 crores at the end of 2015.The corporation has no choice except to restructure its whole debt. Essar Steel was forced to pay Creditors a staggering 54,547 crore. After several years of challenges, ArcelorMittal’s resolution plan, which included a 42000-crore payback, was approved by the committee, and the transaction was completed quickly. ArcelorMittal Nippon Steel India was rebranded.

With the exception of a few high-profile sales, mostly of steelmakers like Essar Steel India Ltd., the recovery rate for creditors has only been 24%, according to Macquarie. India may be able to isolate wealth more quickly than in the past, but it cannot yet extract a lot out of perished companies.

According to a probe by The Hindu Data Team, 33 of the 85 firms that owe more than 1,000 crores had to face haircuts of more than 90% throughout the settlement process. In the instance of Videocon Group, creditors were forced to accept a 95.3% haircut. Finance Minister Nirmala Sitharaman has highlighted that creditors cannot be assumed to give up 95% of their claims, despite the fact it is likely that some enterprises were previously in a non-operational status prior to initiating the Insolvency and Bankruptcy Code (IBC) procedure.

The Standing Committee has pointed out additional challenges within the IBC. These relate to the behavior of the Insolvency Professionals (IPs) and the Committee of Creditors (CoC). The Committee noticed that the CoC had significant authority in adopting resolution plans and selecting IPs, and it called for more transparency and the development of a professional code of conduct for the CoC.

Regarding insolvency professionals, the Standing Committee highlighted that 61% of the 203 professionals examined since 2016 faced disciplinary action led by IPAs and the IBBI. This indicates the importance of having a single regulatory body to ensure optimal standards and transparency in the functioning of IPs.

Conclusion

In an effort to resolve the backlogs, the Parliamentary Standing Committee proposed that the NCLT allow the insolvency application and transfer management of the business no later than 30 days from filing. It proposed recruiting beforehand considering the predicted number of cases, noting an over fifty per cent shortfall in the Tribunal as opposed to the authorized capacity.

The commission further suggested that the NCLT establish separate benches for IBC matters. The Committee advised extending the pre-packs option to all corporates following evaluation in order to minimize case burdens. The pre-Packed Insolvency Resolution Process (PIRP), unlike Corporate Insolvency Resolution Process (CIRP), allows the debtor to carry on running the business while the resolution procedure is underway.

The IBBI has additionally requested a new standard for evaluating haircuts. It was recommended that haircuts should instead be viewed as the difference between the value realized and what the firm takes with it when it enters an IBC rather than as the gap between the creditor’s claims and the actual amount realized. According to this contention, a company’s worth may have already drastically decreased by the time it is subject to the Code’s procedure, hence the value realized should be based on the company’s current assets rather than its prior assets.

Author: Kaustubh Kumar is a fourth-year law student at the National University of Study and Research in Law, Ranchi, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

1. A charter of responsibilities of IPs and CoC IBC laws – insolvency & bankruptcy (IBC), Companies Act & Sarfaesi, https://ibclaw.in/a-charter-of-responsibilities-of-ips-and-coc/?print-posts=print
2. Case note: Judgement of the Supreme Court in the Essar Steel Case – Insolvency/bankruptcy – India Case Note: Judgement Of The Supreme Court In The Essar Steel Case – Insolvency/Bankruptcy – India, https://www.mondaq.com/india/insolvencybankruptcy/1058270/case-note-judgement-of-the-supreme-court-in-the-essar-steel-case
3. Explained: The insolvency and bankruptcy code (IBC)- where does it stand today? The Hindu, https://www.thehindu.com/news/national/explained-what-is-the-insolvency-and-bankruptcy-code-ibc-and-where-does-it-stand-after-more-than-five-years-of-being-in-place/article65969421.ece
4. For a 90% haircut, try India’s bankruptcy salon mint, https://www.livemint.com/companies/news/for-a-90-haircut-try-india-s-bankruptcy-salon-11625443411590.html
5. Insolvency and Bankruptcy Code – Insolvency/bankruptcy – India Insolvency And Bankruptcy Code – Insolvency/Bankruptcy – India, https://www.mondaq.com/india/insolvencybankruptcy/627706/insolvency-and-bankruptcy-code
6. Manupatra Articles, https://articles.manupatra.com/article-details/INSOLVENCY-AND-BANKRUPTCY-CODE-AMENDMENT-ACT-2021-CRITICAL-ANALYSIS

The insolvency and Bankruptcy Code: All you need to know PRS Legislative Research, https://prsindia.org/theprsblog/the-insolvency-and-bankruptcy-code-all-you-need-to-know