India’s G20 Sherpa Amitabh Kant’s call for reforms in India’s insolvency resolution framework to cut delays and boost creditor recovery is latest in the growing chorus for making the Insolvency and Bankruptcy Code (IBC) more effective. Introduced in 2016, the code promised an overhaul of insolvency resolution with the aim to rescue and reorganise distressed companies through a time-bound process, prioritising their survival as going concerns.
Eight years on, while the IBC has had a few successes, it is marred by issues like high case backlog, lengthy delays in admission and resolution, and steep haircuts for creditors. In the recent past, various stakeholders, including RBI Governor Shaktikanta Das and the Parliament’s Standing Committee on Finance, also flagged concerns and the need to rethink the IBC’s design.
While the IBC has fostered a culture of accountability and credit discipline among debtors, its efficiency is being undermined by procedural delays, shortage of personnel, deviations from key principles, and slow implementation of critical provisions.
Procedural delays
“We must acknowledge some concerns regarding the present functioning of the IBC, indicating a need for a second generation of reforms. Analysis of IBBI’s (Insolvency and Bankruptcy Board of India) own data shows that insolvency resolutions at the National Company Law Tribunal (NCLT) averaged 716 days in FY24, up from 654 days in FY23,” Kant said Monday. The prescribed resolution timeline is 330 days.
In February 2024, the Standing Committee on Finance had flagged delays and their impact on the value of stressed assets, and called for a review of the IBC’s design. “…the Committee believe that the design of the Code needs to be reviewed, taking into account the lacunae and roadblocks that have surfaced in implementing the Code so far, so that the very purpose behind its enactment is not defeated. The process of admitting claims also needs to be revisited as huge delays occur at this stage creating a domino effect on the whole resolution process, most critically degeneration of asset value,” the panel said in a report.
Das, too, had flagged the delays in January. “More concerning is the fact that, the average time taken for admission of a case during FY21 and FY22 stood at 468 days and 650 days respectively. Such long degree of delays will substantially erode the value of the assets. There are multitude of factors playing out here, namely, the evolving jurisprudence related to the Code; litigatory tactics adopted by some corporate debtors; lack of effective coordination among the creditors; bottlenecks in the judicial infrastructure, etc,” he said.
Steep haircuts
There is an inverse relationship between resolution time and debt recovery. As of March 31, cases resolved within 330 days saw a recovery rate of 49.2 per cent of admitted claims. For those resolved between 330 and 600 days, the recovery rate was 36 per cent. For those exceeding 600 days, the recovery rate was just 26.1 per cent.
Apart from value erosion for creditors, experts argue that delays are pushing outcomes towards liquidation, defeating the process’s raison d’etre. Till March 31, liquidation orders took an average of 673 days, compared to 847 days for resolution plan approvals. Of the total 5,647 proceedings that were closed, 44 per cent ended in liquidation, 17 per cent in resolution plans getting approved, and the remaining were a mix of withdrawals and closures on appeals, review, or settlement.
IBBI chairperson Ravi Mital recently said IBC cases take time as it is a creditor-led model, not debtor–led, and “the debtor tries his best to ensure that the case is not admitted”, which leads to late admissions and consequently higher value erosion and haircuts for lenders.
“We did a study…when cases are admitted into IBC, they have already lost more than 50 per cent of their value. Now, IBC is not responsible if the creditors bring the cases late. IBC is responsible once a case is brought before (it), and if you look at recovery as a percentage of fair value, we recover 84 per cent,” Mital said.
Industry experts agree that admission delays are hurting the process. Abhishek Dafria, Senior Vice President and Group Head, Structured Finance Ratings, at ICRA said: “We continue to find creditors approaching the NCLT to admit a defaulting corporate debtor with substantial delays, which results in significant erosion of assets…IBC is still not seen as the first step to try and ensure that the company remains a going concern. Lenders are taking other approaches before eventually turning to the IBC.”
Legal issues
While the NCLT should ideally decide on whether a case can be admitted under the IBC within 14 days of an insolvency application, it often takes months and sometimes even over a year to initiate insolvency proceedings. The reason, at least partly, is legal in nature.
“When we speak of admission delays, the law says it is 14 days from the date of filing (the application)…Why doesn’t it happen? The Supreme Court has held that (the timeline) is procedural in nature and hence it is directly not mandatory. Possibly, 14 days seems to be a very short duration. Looking at the situation practically in the current environment, our current infrastructure…14 days looks very impractical,” a senior lawyer told The Indian Express.
In 2022, the apex court had held that admission within 14 days was not a mandatory provision of the IBC and that the NCLT had discretionary powers on deciding whether or not to admit the insolvency application. This means that the NCLT, instead of considering just the default as the sole basis of admission, should also consider the default’s circumstances and the debtor’s arguments.
Kant emphasised the need to “clarify ambiguity on key legal principles,” particularly regarding the supremacy of the Committee of Creditors’ (CoC) commercial judgement and the established priority of claims.
“The Rainbow Papers case highlighted the statutory priorities of VAT (Value Added Tax) versus IBC, stating that the CoC cannot secure their own dues at the cost of statutory dues owed to any government. This seems to contradict the legislative intent behind the IBC, which aimed for lower priority for government dues compared to secured lenders and financial institutions. A statutory amendment or reconsideration by a larger bench is required,” Kant said.
Human resource crunch
It is no secret that the system is choked and understaffed, with NCLT benches grappling with heavy case burden. While there has been an effort from the government to improve the staffing situation, it is still nowhere close to what is needed.
In its February report, the Standing Committee on Finance mentioned that the pendency stands at over “20,000 cases in NCLT at the end of every year”, and called for the enhancement of the NCLT’s sanctioned strength.
“Apart from the human resource gaps, the Committee would like to highlight that the NCLT is functioning with poor infrastructural setup. The Committee recommend that the Ministry (of Corporate Affairs) should prioritise addressing the requirements of the Tribunal urgently and fill the infrastructural and human capacity gaps without further delay. The Committee believe that equipping the NCLT is a crucial step in improving the implementation of IBC especially in timely resolution of cases,” the report said.
The government is already considering amendments to the IBC after a comprehensive review was undertaken last year. According to Kant, India should also consider moves like outsourcing court management for insolvency proceedings to private players.
“It is often said that justice delayed is justice denied…there is a need for tribunal process re-engineering. It is essential to minimise judicial bandwidth on administrative matters while opening non-court functions to innovative non-sovereign or private players to deploy technology for improved court management,” he said.