Beyond insolvency: IBC is enforcing discipline, boosting recovery

IBC instills discipline among corporates
From fostering entrepreneurship to streamlining processes, the IBC's impact extends far beyond resolving bad debt.

The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 brought about a dramatic shift in corporate insolvency resolution in India. This legislative framework consolidated and amended existing laws, aiming to expedite resolution, maximise asset value, foster entrepreneurship, and balance stakeholder interests. While successes in resolving stressed assets have been notable, ongoing challenges and opportunities for refinement make a complex picture.

The remarkable growth in the resolution of stressed assets in recent years underscores the effectiveness of this framework. In 2023, a record number of 273 firms were rescued through the IBC, a significant increase from 160 in the preceding year. This surge in resolutions led to a substantial increase in the recovery of dues, with creditors realising ₹67,000 crore in 2023, compared with ₹20,860 crore in 2022. This suggests a robust upward trajectory in the effectiveness of the IBC, fuelled by the broader economic recovery post-pandemic and the growing number of bidders for stressed assets.

The uptick in resolution numbers in 2023 also mirrors the broader economic momentum witnessed after the pandemic. The appointment of additional members to the National Company Law Tribunal (NCLT) over a year through September 2023 has played a pivotal role in expediting the resolution process. This development has enhanced the efficiency of the IBC, leading to an improved recovery rate.

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Preventive impact of IBC

One significant aspect of the IBC has been its impact on credit discipline among borrowers. Since its adoption, a substantial number of insolvency cases have been withdrawn before admission, suggesting that debtors are increasingly motivated to settle their dues to avoid insolvency proceedings. This preventive impact of the IBC has been instrumental in fostering a culture of financial responsibility and credit discipline in the corporate sector.

Despite these positive developments, the IBC framework is not without challenges. Delays in the resolution process remain a significant concern. As of September 2023, a considerable percentage of ongoing corporate insolvency resolution process (CIRP) cases had exceeded the stipulated timeline of 270 days, including the extension period. These delays, highlighted by RBI Governor Shaktikanta Das, have implications for the erosion of asset value, reducing the potential recovery for creditors and affecting the overall efficacy of the resolution process.

Governance and operational hurdles

The IBC’s governance and operational framework also present hurdles. Litigations and objections from various stakeholders, including erstwhile promoters, competing resolution applicants, and dissatisfied creditors, contribute to the delays in resolution. Additionally, the lack of effective coordination among creditors and operational challenges from regulatory bodies and private contractors of the corporate debtor further complicate the resolution process.

Internationally, India’s approach towards corporate insolvency under the IBC mirrors a global trend where countries are reforming their insolvency laws to cope with economic challenges. For example, the US Bankruptcy Code and the UK’s Insolvency Act have undergone significant amendments to better address corporate failures and safeguard economic interests. Similarly, the European Union has been actively harmonizing insolvency proceedings across member states to improve the predictability and efficiency of cross-border insolvencies.

These global trends emphasize the need for dynamic insolvency frameworks that can adapt to evolving economic landscapes, reinforcing India’s ongoing efforts to refine the IBC. The comparative success of these international models provides valuable insights for India in enhancing its insolvency resolution processes, particularly in areas like expediting resolutions, improving creditor recoveries, and ensuring a more efficient insolvency process.

Several measures are proposed to enhance the IBC framework. These include ensuring a distinction in weightage for various categories of debtors based on the degree of risk absorbed and maintaining a financial creditor-led resolution framework. Additionally, addressing systemic inefficiencies and fostering an environment conducive to swift and equitable resolutions is imperative. The use of technology, strengthening of judicial infrastructure, and regular stakeholder awareness programs are crucial steps in this direction.

While the IBC has made significant strides in improving the insolvency and bankruptcy regime in India, addressing the challenges of delays, improving governance, and implementing course corrections are essential to optimize its effectiveness. The future of the IBC will likely be shaped by its ability to adapt to these challenges and continue to evolve in response to the changing economic and legal landscape.