The Insolvency and Bankruptcy Code was launched in 2016 as a comprehensive legislative framework to manage insolvency issues in India. The law applies to companies, partnerships, and individuals, aiming to streamline the process of resolving insolvency and bankruptcy cases.
The purpose of this regulation is to establish a time-bound and creditor-centric process for insolvency resolution, enhancing the credit environment and fostering business development. The Insolvency and Bankruptcy Board of India (IBBI) was created under the IBC to implement and regulate the insolvency and bankruptcy resolution processes, including corporates, partnerships, and individuals.
The adjudicating bodies for these cases are the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT). In seven years since its implementation, the IBC has resolved Rs. 3.16 lakh crore of debt in 808 cases, offering higher recovery rates compared to previous mechanisms.
Issues Impacting IBC’s Success
While the IBC has played a key role in resolving stressed assets and ameliorating the credit culture, a recent report by subsidiary CRISIL Rating indicates challenges affecting its successful implementation. These include dwindling recovery rates, limited judicial bench strength causing decelerated case processing, time-consuming default identification, and extended resolution times that have increased from 324 days to 653 days. These obstacles have resulted in diminished asset values, sub-optimal recoveries, and delays in initiating proceedings.
IBC Amendments and Achievements
In an effort to boost its effectiveness, the IBC has undergone a series of amendments in the past year. This includes approval of asset sales or resolution plans on a segregated basis, increased NCLT benches, and revised claim filing timelines. Sector-specific modifications have also been introduced to tackle unique challenges.
The IBC’s deterrent effect is apparent as borrowers, fearing company loss, have preemptively settled over Rs. 9 lakh crore in debt before insolvency proceedings. This underscores a significant behavioral shift among borrowers, underscoring the efficacy of the Insolvency and Bankruptcy Code in promoting timely settlements.
Suggested Interventions for IBC Improvement
CRISIL Rating suggests a CDE approach to boost the IBC’s performance, where C stands for Capacity augmentation, D stands for Digitalisation, and E stands for Expansion of pre-pack resolutions to large corporate entities. Capacity augmentation involves improving the infrastructure and human resources of key institutions responsible for IBC implementation, such as the NCLT.
Digitalisation refers to building a digital platform that connects all stakeholders involved in the IBC process to eliminate data asymmetry, enhance transparency, and facilitate faster decisions. The expansion of pre-packaged insolvency resolution process (PPIRP) to large corporates could deter value erosion due to time.
Legal Insights
Understanding the role of institutions like the NCLT and DRT is crucial for deeper insights into the IBC functioning. Also, understanding previous year questions from UPSC Civil Services Examination related to insolvency and bankruptcy can provide a comprehensive outlook on the topic.
With the implementation of these interventions, it is hoped that the IBC will continue to evolve and adapt to respond to the dynamic economic environment and maintain its pivotal role in fostering a robust credit culture and business ecosystem.