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ARTICLE AD BOX
Summary
Thanks to amendments and a growing volume of case law, loan repayment has improved sharply in India. But the Insolvency and Bankruptcy Code has some way to go before it can speed up resolutions, reduce asset losses and fulfil its potential.
In terms of its broad sweep, few pieces of legislation compare with India’s Insolvency and Bankruptcy Code (IBC), which completes a decade of existence on 28 May.
However, a dispassionate assessment of how far the IBC Act has met its objectives shows we still have a way to go. Its basic aims were lofty: “to consolidate and amend the laws relating to reorganisation and insolvency resolution... in a time bound manner for maximization of the value of assets,” to “promote entrepreneurship [and] availability of credit and balance the interests of all stakeholders, including alteration in the order of priority of payment of Government dues,” and to “establish an Insolvency and Bankruptcy Board of India.”
One of the overriding goals was to reduce the time taken for insolvency resolution. Under the law of 2016, this was mandatorily limited to 330 days, inclusive of one extension and time taken by legal proceedings.
Alas, over the past 10 years, this has been observed more in the breach than in practice. Delays, usually on account of long-drawn out legal battles, have taken their toll, resulting in enterprise-value depreciation. And since most cases involve public sector banks as aggrieved creditors, they adversely impact the public interest.
Within a span of just 10 years, the Act has been amended as many as seven times—most recently last month—in a bid to resolve cases in a speedy and fair manner.
Insolvency cases are marked by divergent interests. As injunctions obtained by obstructive promoters, third-party litigators or competitors have grown common, even the admission of applications can be fraught with friction.
The Code has also had to contend with awkward judicial rulings, as in the Rainbow Papers case of 2022, where recovery of sovereign debt was put in the first-priority category, on par with dues of secured financial creditors, albeit the 2016 Act relegates sovereign dues to the fifth level.
The latest amendment signals a clear intent to minimize procedural delays that stretch resolution timelines and erode the value of assets. To tackle operational glitches, it stipulates mandatory timelines (14-30 days) for National Company Law Tribunal (NCLT) benches to pass orders related to case admission, as also for resolution plans and liquidation approvals.
This is expected to crunch the process. But then, it is unclear how courts will manage to clear their case-loads. It would be an uphill task, given the bulky backlog of pending applications, estimated at about 7,000 just at the admission stage.
One way out would be to offer a quicker pathway. Thus, speed is also the aim of India’s new Creditor-Initiated Insolvency Resolution Process (CIIRP) framework, which lets financial creditors opt for a partly ‘out-of-court’ approach (in cases of eligible borrowers) for plans to get an NCLT nod within an outer limit of 195 days.
Moreover, unlike the regular path, it minimizes disruption by letting the borrower’s management retain control of operations, with creditor rights safeguarded by a veto held by resolution professionals over key board decisions. While it seeks a balance between lender and borrower interests, the CIIRP’s timeline is yet to be tested.
A decade on, the Code is still a work in progress. But thanks to successive tweaks and a growing volume of case law, it has vastly improved credit discipline, especially among large borrowers. The latter can no longer take bankers for a ride in the expectation of gaming the system. That’s a significant win in itself.
English (US) ·