Insolvency and Bankruptcy Code: Challenges, Reforms and the Road Ahead

Introduction

The Insolvency and Bankruptcy Code of 2016 (hereinafter referred to as “IBC”) has transformed the insolvency resolution process in India by changing the approach in handling financial corporate distress. J. Nariman aptly described IBC as the “defaulter’s paradise lost,” underlining its utility in rescuing defaulters through resolution plans and, if that fails, by closing the company to liquidate its assets. The main objective of IBC is to maximize asset value and ensure the timely resolution of insolvencies.

This blog aims to identify the challenges and bottlenecks hindering the existing insolvency procedure. It will also suggest reforms to enhance the effectiveness of the current insolvency regime.

Pre-IBC Regime and the Need for Reform

Prior to the enactment of IBC, debt resolution used to be governed under multiple legislations, such as:

• Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”)[1]
• Recovery of Debt Due to Banks and Financial Institutions Act 1993 (“RDDBFI Act”)[2]
• Sick Industrial Companies Act, 1985 (“SICA”)[3]

The insolvency resolution process under the erstwhile regime used to take about 4.3 years[4] to conclude, which led to a significant decrease in the value of assets. This diminishment of asset value negatively impacts the creditor’s ability to recover bad loans. Therefore, there was a pressing need for a law that ensures efficient and timely resolution of debt recovery in India.

Implementation of IBC and Its Initial Success

With much deliberation, IBC was implemented in May 2016, through an act of the Parliament and, it yielded results soon after its implementation. It inculcated a culture of corporate accountability and provided for an improved and faster debt recovery solution.

According to the Ease in Doing Business Report, 2019, India significantly improved its ranking, moving from 108th position in 2018 to the 52nd position in 2019,[5] in the criteria of insolvency resolution. This improvement in ranking reflects the success and effectiveness of IBC, which has emerged as a panacea for debt-related challenges faced by the Indian Economy at that time.

Existing Challenges and Need for Reforms

It has been eight years since its inception, and there have been remarkable changes. However, despite this progress, there are still some concerns about the existing IBC processes, indicating a pressing need for further reforms. Finance Minister Nirmala Sitharaman has also confirmed that the Insolvency and Bankruptcy Code will undergo necessary changes, along with steps to bolster insolvency tribunals throughout the country.[6]

Delay in CIRP and Cases Before NCLT

The IBC sets out that once the corporate insolvency resolution process (“CIRP”) application is accepted by the National Company Law Tribunal (“NCLT”), it should be completed within 180 days or, at most, within 330 days from the date of acceptance. However, as per the official data from the Insolvency and Bankruptcy Board of India (“IBBI”), the average time in resolving insolvency processes at NCLT was 716 days in the Financial Year (“FY”) of 2023-24 and 654 days in FY 2022-23.[7]

This delay in resolving insolvency cases at NCLT is because of administrative inefficiencies, inconsistent judgments and several litigations and challenges initiated by the stakeholders involved.

Case Example: Jet Airways

For instance, in the case of Jet Airways, the National Company Law Appellate Tribunal (“NCLAT”) issued a flawed order by disregarding the judgement of the Supreme Court, which directed the consortium to deposit Rs. 150 crores in cash as part of the resolution plan.[8] The NCLAT, on the contrary, directed the consortium to pay the same using the performance bank guarantee.[9] This highlights how inconsistent decisions are causing delays, ultimately resulting in stakeholders paying the price for the same.

Admission Delays and Institutional Shortages

One of the key concerns here is the extensive delay in admission of insolvency cases by the NCLT, which averaged at 468 days in FY 2020-21 and 650 days in FY 2021-22[10], leading to substantial erosion in the value of assets.

These unfilled vacancies are further exacerbating delays in the process of debt resolution and adversely impacting the functioning of the courts.[12] Not only that, recovery rates from the IBC process were 32% as of September 2023[13], down from 43% in March 2019[14]. This decline in recovery rates can also be attributed to the same delays, which leads to depreciation in the value of assets and thereby reduces the overall recovery for creditors. Lower recovery rates may also discourage creditors from filing suits in NCLT under the IBC.

Reform Suggestions

Given that IBC laws have been amended more than 90 times[15], yet another round of reforms is necessary to effectively address and resolve the above-mentioned issues.

• Expedite admission of cases: Stricter timelines for acceptance or rejection by NCLT
• Expand judicial capacity: More judges + more benches; ensure no key positions remain unoccupied
• Incentivize timely filings: Provide benefits such as reduced fees for early filing
• Maximize asset value: Speed up proceedings to prevent depreciation during delays
• Improve recovery rates: Reduce costs of insolvency proceedings to protect creditor payouts

Creditors must also be educated about the detrimental effects of delays and the importance of timely filings of insolvency applications.

Conclusion

In conclusion, the government is planning to amend the Insolvency and Bankruptcy Code and its rules to reduce delays in the resolution process, to increase recovery rates for the creditors, addressing the shortage of key members in bankruptcy courts and adopting technology-driven solutions to create a more efficient and transparent insolvency environment. There must also be regular checks and reviews of the IBC framework to ensure effective management of the insolvency proceedings and the resolution process. While considerable progress has been achieved since the inception of IBC in 2016, it is now time to further enhance the insolvency mechanism to strengthen our insolvency framework for a robust Indian economy.

References:

1. Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, No. 54, Acts of Parliament, 2016 (India).
2. Recovery of Debts Due to Banks and Financial Institutions Act, 1993, No. 51, Acts of Parliament, 1993 (India).
3. Sick Industrial Companies Acts, 1985, No. 1, Acts of Parliament, 1986 (India).
4. https://prsindia.org/policy/report-summaries/implementation-of-insolvency-and-bankruptcy-code-pitfalls-and-solutions
5. https://www.businesstoday.in/latest/economy-politics/story/how-ibc-helped-improve-india-ease-of-doing-business-rankings-235937-2019-10-24
6. https://www.thehindu.com/business/budget/budget-2024-fm-nirmala-sitharaman-says-changes-will-be-made-to-ibc-to-strengthen-tribunals/article68435687.ece
7. https://www.livemint.com/industry/ibc-economic-growth-rate-cea-insolvency-and-bankruptcy-code-non-performing-assets-nclt-companies-act-11727794192034.html
8. SBI v. Murari Lal Jalan & Florian Fritsch Consortium, (2024) 8 SCC 1.
9. Murari Lal Jalan v. SBI, 2023 SCC OnLine NCLT 3059.
10. https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1402#F5
11. https://www.business-standard.com/india-news/vacancies-in-company-law-tribunals-hinder-insolvency-resolutions-sc-124111100501_1.html
12. https://www.livemint.com/news/nclt-bankruptcy-courts-resolution-ibbi-ibc-nclat-members-debt-resolution-corporate-affairs-judicial-technical-members-11733396041655.html
13. https://iica.nic.in/images/Report-2024/IBC-Brief-Q4-2023-24.pdf
14. https://www.thehindu.com/business/falling-recovery-rates-and-increase-in-resolution-time-dent-ibcs-success-says-crisil/article67570542.ece
15. https://www.livemint.com/opinion/online-views/ibc-insolvency-and-bankruptcy-code-corporate-debt-insolvency-bankruptcy-debt-recoveries-creditors-nclt-11728267139120.html