As we move along, it is important to bring attitudinal changes in the way creditors perceive the IBC
One should not get dissuaded by the number, but must stay focused on the long-term benefits that the IBC will yield.
By Neeti Shikha
American politician Tim Johnson once said that bankruptcy represents a longstanding commitment in this country to helping people get a fresh start. With a similar intent, India made its first attempt to provide for a market-centric resolution of insolvency through the Insolvency and Bankruptcy Code (IBC). As the IBC is due to celebrate its fourth anniversary on May 11 this year, some argue that it is on its “way to hell” (‘Bankruptcy Code: The God that is failing…,’ FE, March 31; https://bit.ly/3uEt3Mt). While concerns regarding the IBC are not unfounded given the inordinate delay by the National Company Law Tribunal (NCLT), the question one has to ask is whether the initial teething problems should jettison its performance of the last four years?
The IBC has been one of the most transformational laws in India; it marked a paradigm shift from debtor-in-possession to creditor-in-control model.
Whenever there is a paradigm shift brought through any law, there are some hiccups in the beginning. Take, for instance, the GST. The GST collections for March 2021 reached as high as Rs 1.24 lakh crore. When introduced in July 2017, it was criticised as having failed to deliver the benefits that were expected of it. But, with time, the performance of the GST has improved.
Every law has teething troubles and, more importantly, there needs to be an infrastructure built around the law in order to enable its full utility. The IBC has brought a discipline in the market.
According to the latest Financial Stability Report released by the Reserve Bank of India (RBI), the corporate insolvency resolution process (CIRP) that leads to resolutions took an average of 433 days as of September 2020. While this is certainly beyond the prescribed period of 330 days, it is much lesser than the old regime where the average time taken for an insolvency resolution was four years.
According to the Insolvency and Bankruptcy Board of India (IBBI) newsletter, 49.61% of the CIRPs that were closed yielded orders for liquidation, as compared to 13.41% ending up with a resolution plan. One must note that 73.48% of the CIRPs ending in liquidation were earlier under the Board for Industrial and Financial Reconstruction (BIFR). In any case, the success of an insolvency regime is not to be determined by the number of companies liquidated. If a regime can save 10% of the companies admitted for insolvency, it is a good law because companies admitted to insolvency are like patients on a deathbed. So, 13.4% survival rate of admittedly mortal companies shows that there is hope in the system. One should not get dissuaded by the number, but must stay focused on the long-term benefits that the IBC will yield. Exit of companies should be made easy and timely—objectives that the IBC aims to achieve.
There are certainly issues regarding the expertise of insolvency professionals (IPs) who are at the helm of affairs. IPs not only suffer from expertise deficit, but also trust deficit. While in the UK the process of becoming an IP is a rigorous one, in India it has been fairly easy.
However, one has to applaud that given the newness of the regime, IPs have risen to the challenge. It is incorrect to expect an IP to act as turnaround experts. IPs in India act merely as a postman who work alongside the committee of creditors. Their role is largely to coordinate with the stakeholders and take forward the resolution process through consensus building. More importantly, turnaround of a stressed company needs the expertise and intent of all the stakeholders in the value chain, and not IPs alone. There is a need to align the expertise and objectives of all the stakeholders for turnaround of such companies, including creditors.
Further, the NCLT and the National Company Law Appellate Tribunal (NCLAT) are swarmed with cases. As per official records, as many as 19,844 cases were pending before the NCLT as on July 31, 2020. Of these, 12,438 cases were from the IBC. As the load of cases is expected to go up, there is a dire need to have dedicated insolvency courts and alternate dispute mechanism for insolvency resolution.
As we move along, it is important to bring attitudinal change in the way creditors perceive the IBC. It should not be seen as a recovery mechanism. More importantly, we need to speed up the judicial infrastructure to ensure that the implementation challenges can be overcome. We need to move with the leap of faith. After all, Rome was not built in a day.
The author is head, Centre for Insolvency and Bankruptcy, Indian Institute of Corporate Affairs. Views are personal