Introduction
The Insolvency and Bankruptcy Code (IBC) 2016 was implemented with the primary objective of maximizing the value of debtor’s assets, promoting entrepreneurship, ensuring timely resolution of cases, and equally balancing the interests of stakeholders. Over time, however, its effectiveness in achieving these objectives has faced considerable scrutiny. It is necessary to delve deeper into understanding the challenges faced by IBC and considerations for future improvements.
Key Issues Encountered
Low Repayment Percentage: According to the 2023 Financial Stability Report (FSR) presented by the Reserve Bank of India, the current process involves just about 15% payment by the purchaser during the resolution plan approval process. This low repayment percentage raises questions about the effectiveness of the process.
Settlement and Recovery: Instances such as the Reliance Communications Infrastructure Ltd. (RCIL) case have raised concerns regarding the significantly low settlement amounts and extended resolution periods well beyond the stipulated maximum limit of 330 days.
Haircuts and Recovery Rates: A major concern revolves around “haircuts” wherein loans and accrued interest are written off. Promoters leverage this method to their advantage, resulting in low recovery rates for financial creditors.
Realizable Value: The FSR also highlights the low realizable value for creditors, with the average recovery rate recorded at just 10-15% for settled cases of large corporates.
Regulatory Concerns: Reports like the one by the Parliamentary Standing Committee on Finance and the FSR, point out various concerns, including low recovery rates, high haircuts, and delay in the resolution process.
Details of the Insolvency and Bankruptcy Code, 2016
The IBC is a legislative framework designed to address bankruptcy and insolvency across companies, individuals, and partnerships within a specific timeframe. The IBC Amendment Act in 2021 introduced alternative insolvency solutions for micro, small, and medium enterprises (MSMEs) to ensure outcomes that were quick, cost-effective, and value-adding.
IBC Proceedings: Roles and Responsibilities
The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings. Adjudication is performed by the National Companies Law Tribunal for companies and the Debt Recovery Tribunal for individuals. The insolvency resolution process is initiated upon default by either the debtor or creditor, with professionals overseeing the process.
Liquidation Process
The liquidation process involves the sale of the debtor’s assets, where the proceeds are distributed in a predetermined order. This includes first covering insolvency resolution costs, followed by paying back secured creditors, workers and other employees, and lastly, unsecured creditors.
Recommendations for Improvement
To enhance the effectiveness of the IBC, measures such as ensuring higher repayment percentages in resolution plans, stricter evaluation criteria, and incentivizing timely repayments are crucial. Narrative transparency in resolution processes can also help keep all stakeholders updated on case statuses. It’s also necessary to reevaluate the concept of haircuts to prevent misuse by promoters and ensure fair distribution of losses. Strengthening the NCLT and a comprehensive review of the IBC are urgently needed to more effectively achieve the original goals of this legislation.