The Insolvency and Bankruptcy Code: Transforming Indiaās Financial Landscape
Introduction: The Need for Financial Reform
Like many economies, the Indian economy has experienced tremendous growth over the last couple of decades. However, the growth of the Indian economy has not been without growing pains, most importantly, an increasingly strong veil of bad loans and unresolved bankruptcies. Financial institutions have essentially been unable to recover dues from companies that have gone stale for years, limiting the free flow of credit and investor confidence. Thus, in response to the persistent complexities around resolution, the Insolvency and Bankruptcy Code (IBC), 2016 was enacted; inaugurating a new era marked by the identification of reforms around corporate and financial restructuring.
It sought to unify a series of different insolvency laws, and to provide a simple, fast, and even mechanism for settling insolvency and bankruptcy across the corporate, individual, and partnership sectors. Almost nine years after its introduction, the IBC continues to remain an innovative piece of legislation that has changed the financial environment in India for the better.
What Is the Insolvency and Bankruptcy Code (IBC)?
The Insolvency and Bankruptcy Code, 2016 is a holistic legislation offering time-bound processes to settle insolvency in India. It encompasses companies, partnership firms, and individuals – There are other resolutions where the process is less rigid and slower for example under sepecialized insolvency resolution processes like the Banking Regulation Act but the IBC essentially provides creditors with the ability to initiate insolvency proceedings against debtors’ defaults and resolve an issued within the maximum of 270 days (including extensions) under the process imposed by the IBC, with certainty and expectation of position.
Prominent Features of IBC
- Time-Limited Resolution Process
Before the IBC came into effect, bankruptcy cases in India could drag on for years. The IBC has a 180-day resolution process, which can be extended for a further 90 days. The resolution process will end if a resolution is not found and the company will go into liquidation. The time limitations are effective as they force stakeholders to act quickly.
- Creditor in Control
The IBC promotes creditor control not debtor control. Creditors are now committee into a Committee of Creditors (CoC) that include mostly financial creditors. This is completely different from the previous model that was debtor in possession and better incentives decision making.
- Institutional Mechanics
The IBC has given birth to a new universe of institutions such as:
ā¢ Insolvency Professionals (IPs), who run the resolution process
ā¢ Insolvency and Bankruptcy Board of India (IBBI), who regulates IPs and institutions
ā¢ The National Company Law Tribunal (NCLT), and Debt Recovery Tribunal (DRT) to adjudicate.
- Cross Border insolvency
The IBC does not contain broad cross-border insolvency provisions, but recognizes the need for cross-border core insolvency, and factored this idea.
There are amalgamation and pre-packaged insolvency on the horizon, so how is an entire cross border insolvency scheme possible, relative to the Model Law on Cross-Border Insolvency (UCITRAL Model Law).
Successes of the Insolvency and Bankruptcy Code
1. Improved recoveries
Banks were only able to recover 20ā25% of dues in India before the IBC came into effect. Accounts over one year overdue would go unaccounted and bound to the loss of the bank. After the IBC came into effect there were several cases of recovery of over 40ā50% of total claims.
2. Quicker Resolutions
Although it does not adhere consistently to the 270 alt-day limits, the IBC has lowered times to resolution significantly. Compared to old statutes, many cases now resolve within a year. This is a remarkable speed up in performance.
3. Changing Borrower Behaviour
The biggest impact – albeit the most underappreciated – is on behavior: the risk of becoming control less has motivated many default borrowers to pay dues (sometimes significant amounts) before insolvency applications are even heard, referred to as pre-admission settlements.
4. More Investor Confidence
The perception of increased transparency, predictability and administrative ease has enhanced ease of doing business rankings in India helping domestic and international investors view India as being a more stable investment prospects.
Challenges and Critiques
1. Delays arising from time limits
For all of its promise, however, it is clear that many cases now exceed the envisaged 270-day limit because of legal challenges, infrastructure, or bidders, causing the code to lose sight of its primary promise – timely resolution.
2. Lender haircuts
In some resolutions, lenders took haircuts exceeding 90%, which calls into question the fairness and effectiveness of the process. Further a moral hazard occurs as this means promoters can walk away with less than 10% loss.
3. Case overload
The NCLT and NCLAT are swimming in cases and have neither capacity nor infrastructure to process the large number of cases that have commenced in the insolvency space. There is where system/resource overload occurs.
4. Legal Ambiguities
The IBC is a relatively new law and has been amended a geat deal since it is introduced and there have been considerable judicial interpretations, which have caused some uncertainty. Issues like treating homebuyers as creditors, prioritizing operational creditors and dealing with the quota of resolution plans stormed by promoters have all contributed to the malaise.
High-Profile Cases under IBC
1. Essar Steel
One of the landmark cases, where ArcelorMittal acquired the company after a long legal dispute. The case set precedents for the treatment of operational versus financial creditors.
2. Jet Airways
A rare case of cross-border insolvency, where proceedings were initiated in respect of Jet in both India and the Netherlands. It highlighted the lack of international support for cross-border insolvency
3. Dewan Housing Finance Corporation Ltd (DHFL)
The first financial service provider resolved under IBC. The Piramal Group acquired the DHFL, showing clearly IBC’s superiority over a jurisdiction of ancillary proceedings beyond manufacturing or infrastructure companies.
Recent Amendments and Judicial Developments
- The government has demonstrated nimbleness in reacting to emerging issues with amending the code:
- Pre-packaged Insolvency was introduced for MSMEs, which takes a hybrid approach of informal negotiation with formal procedures.
- The Supreme Court has explained the role of the Committee of Creditors (CoC), in that creditors’ commercial decisions would not be subject to court review absent egregious unfairness.
- Changed have been proposed to clarify the handling of cross-border insolvency and the process of voluntary liquidation.
Impact on the Indian Economy
1. Value Realisation from Stressed Assets
IBC has been successful in value realisation for businesses that have greatest economic use. Turnarounds on swareukable value and jobs and the value of both tangible and intangible assets are preserved.
2. Decrease in Non-Performing Assets (NPAs)
IBC has been a key component in the declcining Gross NPA ratios of banks in India. It works together with other measures of asset reconstruction companies and bad banks etc.
3. Financial Discipline
The IBC has been contributing to financial discipline; meaning entry of the legal structure creates fear for white-collar business and incudes corporate governance with reasonable borrowing.
International Comparisons
Internationally, in comparison to other countries’ approaches to insolvency:
the IBC is quicker than most traditional approaches (e.g., US Chapter 11); is meant to be compatible with international best practices, yet does not have mature mechanism for cross-border insolvency; and there are experts who claim India has not improved creditor rights enforcement and reduced protracted processes.
Conclusion
The future of the IBC depends upon:
Institutional capacity is strengthened: by reducing the time taken to appoint professionals, improving education and training of insolvency professionals, and employing technology;Litigation is reduced: through clearer and less ambiguous language to reduce litigation;Cross-border norms are increased: this will be especially important as Indian companies are doing more business internationally; and Increase pre-pack and out-of-court options: in order to reduce demand on tribunals and enable quicker resolutions.
Before concluding with some optimistic observations, it is important to recognize that it is still early days for the IBC. Nevertheless, the Insolvency and Bankruptcy Code, 2016 is indicative of a significant turning point in how we deal with financial distress in India. Although it still has challenges, the IBC has provided scope for disciplining chaos and structure in a somewhat chaotic system. While IBC’s success should not only be measured by recoveries, it represents a real chance at providing clarity to companies, lenders and creditors in that default will have consequences.
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