While India’s Insolvency and Bankruptcy Code (IBC) was hoped to bring speedy justice, the law hasn’t delivered its promises. In the present fiscal, it is expected that nearly 300 cases of corporate insolvency will be resolved, it is still a far cry from the caseload that the law, which is now in its seventh year, must be able to handle. The system needs to gear up to handle three times that caseload, corporate affairs secretary Manoj Govil said on Sunday.
There has been a pipeline of pending cases which require urgent capacity building so that around 1,000 cases can be handled. This number could go up and down depending on the economic climate, Govil said.
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7 year report card of IBC
There are a host of issues ailing the bankruptcy code due to which default cases have been languishing without resolution. The law is caught in a maze of litigation, new interpretations, amendments (as many as 84 to date), challenges from stakeholders, and new precedents set by the Supreme Court.
Of the total 678 cases admitted for IBC, only one in ten were resolved successfully, as of data available by July 2023. While IBC mandates that a case must be resolved within 6 months of admission, or a maximum of a year if one factors in litigation, it took nearly 614 days on average for closure of cases. The average recovery value is also abysmally low. Only one third of the value of the claims could be recovered ever since this game-changing law came into force in 2016.
IBC was hailed as a holy grail for speedy resolution of defaulting companies. The law is being deployed as a recovery tool, not just by operational creditors or suppliers, but also financial creditors.
What is causing delays in IBC resolution
One of the major issues with resolution delays is a higher number of vacancies at the National Company Law Appellate Tribunal (NCLAT). However, nearly 90% of such positions have been filled and the rest are also in process, Gogol said at the seventh anniversary of the Insolvency and Bankruptcy Board of India (IBBI).
To fine tune the existing law, the government is also considering proposals for amendments in the Insolvency and Bankruptcy Code (IBC). The larger aim is to bring down delays. Another reason for delays is international disputes and to resolve the same, the government is also holding inter-ministerial discussions to be a signatory to the United Nations Commission on International Trade Law (UNCITRAL) for resolving cross-border insolvency.
Analysts and partners at law firms are of the opinion that though the law is mature, the participants are not mature enough to implement the law. The need is to bring some initiatives on skill development before improving the law. Without upskilling the people who are involved in the process with tailored training modules for different stakeholders, no significant change can be noticed in IBC resolutions.
Moreover, experts feel the IBC also needs intent, judges with subject expertise, trust in the banking system and an ecosystem of investors who invest in distressed assets. There is also a need to periodically review IBC to make sure it is aligned with the changing business environment.
The MSME sector has been impacted the most by the coronavirus pandemic and the government had then introduced a simpler, pre-pack insolvency model. The MSME sector is still not out of the shadows and needs a helping hand. The challenge is to resolve stress in the sector. Hence, a need arises to fine-tune the prepackaged insolvency process and the personal insolvency code. This will help resolve stress in the micro, small and medium enterprises (MSME) sector.
The existing model didn’t find many takers, with only four companies opting for it. Considering the advancement in technology and AI, The existing systems need to be upgraded to handle data and case management with the use of artificial intelligence (AI).
The industry insiders are also of the opinion that the government must integrate IT systems of the IBC with other platforms such as goods and services tax (GST) so that the data can move seamlessly.
All said and done, there has been an improvement in the number of cases resolved under IBC. In the financial year 2022-23 (FY23), an 80% increase over the previous year was reported in case resolution. Until August this year, 135 cases had been resolved, according to the IBBI data. Creditors have recovered around Rs 3 trillion through the IBC, and the recoveries stood at more than Rs 51,000 crore last year.