Established out of a vacuum, the NCLT had no institutional experience. A dozen NPAs, comprising 25% of total NPAs, were pushed into IBC by RBI at the nascent stage (July 2017) of the law.
Lack of closure in many insolvency cases in the mandatory 270 days is being interpreted by some as a sign of the looming dark storm over the Insolvency and Bankruptcy Code (IBC). The scepticism, to say the least, is unfair.
There are many causes behind missed timelines. A sound legislation, IBC was hastily drafted. Gaps were spotted following operationalisation in December 2016, prompting stakeholders to frequently approach the National Company Law Tribunal (NCLT) to seek clarifications. The NCLT started functioning with scant infrastructure. Established out of a vacuum, the NCLT had no institutional experience. A dozen NPAs, comprising 25% of total NPAs, were pushed into IBC by RBI at the nascent stage (July 2017) of the law. Another three dozen big cases followed. The stakes were high in these cases and they captured the mindscape of the nation. But the success of IBC was not to be measured only from the outcome of these 12 cases. This, surely, was not the intent.
The government amended IBC twice and the Insolvency and Bankruptcy Board of India tweaked the regulations over a dozen times. On top of that, section 29A was introduced in November 2017 when many cases had made significant progress. Disqualification of promoters caused disruptions, requiring recommencement of process in many cases. India does not have a developed market for distressed assets. With promoters disqualified, the pool of bidders shrunk further. This, too, caused slowdown of closure. The cadre of insolvency professionals was built from scratch. It is only normal they take a reasonable time to gain a grip on the insolvency process. Promoters struggled to reconcile with the reality of losing control of their companies, leading to litigation in many cases. Bankers, too, took time to comprehend their new role in the creditor-in-control avatar of IBC. It was well known that IBC will have to sail through some rough currents in initial days. Why be so terribly disappointed?
Notwithstanding the odds, IBC has progressed leaps and bounds. In a little over two years, 14,000 cases have been filed, of which the NCLT ordered commencement of resolution process in 1,858 cases, 152 were closed on appeal, review or settlement, 91 were withdrawn on account of settlement under section 12A, 94 yielded resolutions and 378 resulted in liquidation. As on March 31, 2019, 1,143 cases were undergoing resolution process. The resolution process yielded resolution of 94 cases, resulting in the settlement of claims of financial creditors of Rs 1,73,359 crore. These cases include six out of the 12 large accounts. The overall recovery is 43% (Rs 74,497 crore) to financial creditors, while the corresponding liquidation value is Rs 38,443 crore. This is, by no means, a small feat to achieve in a little over two years.
Comparing it with the painfully slow speed of cases in the pre-IBC regime, the progress made by IBC in 27 months appears to be a sprint. Earlier, the average life of cases recommended for restructuring was 4-8 years and those recommended for winding up even longer. The recovery rate (cents on the dollar) in India was 25.7, as opposed to 71.9 in high-income countries. In 2014, India ranked at number 134 on the list of 189 countries in ‘closing a business index’, which jumped many notches up to 108 after IBC.
Judging IBC from the prism of failed timelines in a few initial cases is taking a narrow view of the law. A good insolvency law enables market participants to accurately price, manage and control default risks and corporate failure, and encourage sound credit practice. It enhances access to credit while reducing its cost. An effective exit law promotes responsible corporate behaviour by encouraging higher standards of corporate governance and financial discipline to avoid consequences of insolvency. With the introduction of IBC, the defaulter’s paradise is lost. A behavioural change can be seen amongst borrowers. Default is now taken seriously and debtors are cuffing out money to clear their dues.
IBC has weathered initial storms. There is no reason to be alarmed because timelines have been missed in some cases. Setting a 180-day timeline was, in any case, an immensely aspirational (though commendable) goal, as such short timelines do not exist even in the UK, where it takes 1-2 years for cases to close. This is not to say we should wait and watch. As Joyce Meyer said, “Patience is not the ability to wait, it’s how we behave while we’re waiting.” Some calm, composed and objective measures are required, without indulging in finger pointing. The infrastructure of the NCLT has improved significantly, and with the appointment of 32 new members, proceedings are expected to only speed up.
IBC has passed many litmus tests. There is no reason why it will not continue to weather rough storms and march with greater strides. The view from the high road is only sweet.