7 years of The Insolvency and Bankruptcy Code, 2016

7 years of The Insolvency and Bankruptcy Code, 2016

News: The Insolvency and Bankruptcy Code (IBC), introduced in 2016, has been a transformative tool in resolving stressed assets and improving the credit culture in India.

What is the IBC, 2016?
• The Insolvency and Bankruptcy Code was enacted in 2016, and it replaced all the existing laws with a uniform procedure to resolve insolvency and bankruptcy disputes.
• The code aimed to address the issue of Non-performing Assets (NPAs) and debt defaults.
• The code aims to resolve insolvencies in a strict time-bound manner. The IBC, 2016 initially set a 180-day deadline for concluding the resolution process, allowing a potential extension of 90 days. However, subsequent amendments to the IBC extended the overall timeline for completion to 330 days.
• The Code creates a new institutional framework. This framework facilitated a formal and time-bound insolvency resolution process and liquidation.
• The Framework includes – Insolvency professionals, Insolvency professional agencies, Adjudicating authorities, National company law tribunal (NCLT), Debt Recovery Tribunal (DRT), Insolvency and Bankruptcy Board of India.

What are the positive outcomes of IBC 2016?
• Better recovery rates of creditors – Under the IBC regime recovery rates are 43% while under previous mechanism where DRT, SARFAESI act, Lok Adalat handled the resolution process, the average recovery rate was 23%.
• Since its inception in 2016, IBC has resolved Rs. 3.16 lakh crore of debt stuck in 808 cases in seven years, according to CRISIL.
• Shift of focus to ‘Resolution’ rather than Liquidation
• Shift from ‘debtor-in-possession’ to ‘creditor-in-control’- The creditor-in-control model hands control of the debtor to its creditors and relies upon the managerial skills of a newly appointed management to take over an ailing company and ensure business continuance.
• IBC's deterrent effect is evident as borrowers, fearing the loss of companies, have proactively settled over Rs. 9 lakh crore in debt before cases entered the insolvency process.

What are the challenges linked with IBC 2016?
• The primary aim of Insolvency and Bankruptcy Code, was to promote resolution, but it has actually resulted in more liquidation.
• Recovery rates have witnessed a significant decline from 43% to 32% between March 2019 and September 2023.
• Resolution and liquidation cases have been taking longer than the mandated time of 330 days. For example- In cases of over Rs 1,000 Crore, the average resolution time has risen to 772 days in FY2022 from 274 days in FY2018.
• The IBC resolution process is impeded by a shortage of judges, resulting in a deceleration of case processing. This, in turn, contributes to prolonged resolution times.
• Longer delays in the IBC process, has resulted in larger haircuts, as the value of sick companies tends to diminish at an increasing pace over time.

Way Forward
• CRISIL Rating suggested a CDE approach to enhance the IBC’s performance. For example, C stands for Capacity augmentation which involves enhancing human and infrastructure resources.
• The NCLT benches must be filled with competent financial professionals, who must use the Insolvency and Bankruptcy Code’s platform as a resolution tool instead of recovery tool.
• The ADR mechanisms like mediation, arbitration and settlement must be explored first.