The Insolvency and Bankruptcy Code (IBC) 2016 has had a reasonably good beginning with the Insolvency and Bankruptcy Board of India (IBBI) being made operational from December 1, 2016. The Bankruptcy Code aims to improve the ease of doing business in the country by facilitating smoother and time-bound settlement of insolvency and faster turnaround of businesses, along with creating a database of serial defaulters. According to available data, more than 120 cases have already been filed with the National Company Law Tribunal, the adjudicating authority on corporate insolvency matters.
The cases have been filed by operational creditors, financial creditors or the companies themselves for adjudication under the new bankruptcy code. NCLT has admitted around 85 matters, but most of the cases are in the initial stage with interim Insolvency Resolution Professionals (IRPs) appointed. The IRPs are mandated by the code and IBBI regulations to appoint valuers to determine liquidation value, collect claims and set up the committee of creditors involved in a case. The IRPs are then tasked with suggesting a resolution plan after taking into account business viability, debt size, etc. They are empowered to solicit help from industry specialists, investment bankers and other competent personnel while structuring a resolution plan.
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The resolution plan can be in the form of debt restructuring, one-time settlement of debt, merger/de-merger, sale of the business, etc. The committee of creditors has 180 days to approve the resolution plan from the date of admission of the company under the insolvency process. The same can be extended by 90 days in genuine cases where a resolution is about to happen. In case the committee of creditors cannot approve any of the resolution plans, then the company would go directly into liquidation.
Since the IBC provides for a time-bound framework, it puts enormous pressure on the promoters as wells as the lenders to fast-track a compromise formula or run the risk of the asset being liquidated. The new law has surely put an end to the practice of promoters/management indefinitely deferring the resolution process at various fora such as BIFR, DRT, arbitration, etc.
With an estimated Rs6 lakh crore in accumulated NPAs, creditors, particularly banks, are expected to be the main beneficiary of this law. Yet, a quick analysis of the cases filed so far reveals that creditors have so far largely refrained from approaching NCLT under the Bankruptcy Code. Among the seven applications filed by financial creditors so far, only three have been filed by banks and these are related only to small accounts. It is likely that banks are first testing the efficacy of the new code with small cases and are waiting for the new mechanism to be streamlined. There could also be the apprehension in banking circles that the liquidation value could end up being much lower than the book value of bad assets.
However, after the recent ordinance that empowered Reserve Bank of India to go all out against bad loans, it is now likely that the central bank will push banks aggressively to take the Bankruptcy Code route for resolution of stressed assets. It is likely that priority will be given to first resolve 50 large stressed asset cases in a time-bound manner, including invoking insolvency proceedings. This will make recoveries both higher and faster. At the same time, RBI is expected to bring clarity on accounting treatment of those stressed assets against which insolvency proceedings have been initiated under Bankruptcy Code.
On its part, the government needs to increase the number of benches of NCLT for speedy disposal and ensure quick transfer of cases from high courts to the tribunal. Further, there are also a few challenges. The first challenge is attracting high-quality insolvency professionals to set up the institution, build best practices and assist the board for effective implementation of the bankruptcy code. The second challenge will be for judges and professionals to meet the deadline of 180 days for arriving at a resolution plan.
Despite the teething challenges, the new law, with its time-bound approach, surely provides a refreshing change and makes it easier for creditors to recover loans faster. While the old insolvency process was riddled with bottlenecks and loopholes, thereby allowing vested interests to sabotage or cause inordinate delays, the implementation of IBC will give confidence to lending institutions and go a long way in improving the flow and availability of credit in the economy. IBC 2016 will evolve with time. It is thus critical that various stakeholders vigorously adopt it and refer to it for a resolution so that the law succeeds.
Writer: Manoj Kumar