Plug IBC Delays to Optimise Recoveries

Prior to the ‘Insolvency and Bankruptcy Code’ becoming law, there were nearly a dozen laws dealing with bankruptcy/insolvency and some of them were more than 100 years old. The Narendra Modi government enacted the Bill for Insolvency and Bankruptcy Code, and the same is being considered a major economic reform. 

According to the IBC, once a debtor goes bankrupt, his property could be easily taken over by creditors. It says that if 75% or more of the committee of creditors agree, action can be taken in 180 days from the date of admission of the application for such action (with 90 days’ grace period, subject to the approval of the NCLT). If even then the debt is not paid the person/firm will be declared bankrupt/insolvent. Assumption of the IBC was that with the new law in place, delays in recovery of loans and associated losses would automatically come to an end. 

When an economic unit becomes bankrupt, it is unable to repay its debts and clear liabilities. However, lack of clarity in law makes it difficult to deal with such situations. In these circumstances, not only are creditors put to heavy loss, even the unit which goes bankrupt has to undergo huge agony. Though, IBC can’t be termed as a failure, but the fact is that there is a gap between its stated expectations and the experience on the ground. 

According to RBI Governor, since the inception of IBC, till January 2024, 7,058 corporate debtors have been admitted into the CIRP, of which 5,057 cases have been closed and 2,001 corporate debtors are under various stages of resolution. Of the cases which have been closed, around 16% yielded successful resolution plans; 19% have been withdrawn under Section 12A of IBC, where largely the debtors agreed for full or partial settlement with the creditors; 21% were closed on appeal or review; and in 44% of the cases, liquidation orders have been passed. 

However, when we go into the details of those 2001 cases, which are under different stages of resolution, we see that as on September 2023, 67% of the ongoing CIRP cases had already crossed the total timeline of 270 days including possible extension period of 90 days. More concerning is the fact that, the average time taken for admission of a case during financial years, 2020-21 and FY 2021-22 stood at 468 days and 650 days respectively. There could be various reasons for delay in disposing appeals filed by financial creditors. One of this is that many a times courts get into the commercial aspects of the transaction. 

Such long degree of delays is likely to substantially erode the value of the assets, and therefore causing huge loss to the creditors and thereby, defeating the very purpose of the IBC. This also makes it increasingly difficult to attract potential buyers coming forward. A recent report of the Standing Committee on Finance (2020- 2021) identifies two key stages where most delays occur in a corporate insolvency resolution process (CIRP):

First, admission of an application for initiating CIRP; and Second, approval of resolution plan by the NCLT.

Regarding, admission of an application for initiation of CIRP, sometimes, disagreements among stakeholders, also cause delays. The law says that if 75% or more of the CoC agrees, then the CoC may take certain actions during the process of resolution. But many times, creditors and other stakeholders can't agree on a resolution plan and it can hold up the process.

Disputes between various stakeholders involved in the insolvency process, such as creditors, debtors, and potential buyers, can lead to lengthy court battles and delays.

The major problems faced in finding resolution in cases of insolvency and bankruptcy are related to systemic inefficiencies stemming from the shortage of staff to cumbersome points of law, related to processes and procedures, which is used by scrupulous and wilful defaulters to delay the resolution.

Though, by now Supreme Court has resolved several basic questions pertaining to the legality of IBC, but those issues keep emerging from time to time. While the jurisprudence on any important piece of legislation like IBC will keep evolving, courts need to take up this task of avoiding undue delays.

Share This