IBC: A Path to Recovery or Reorganization?

Khyati Tuli*

Owing to the comments made by the Bankruptcy regulator, Mr. Sahoo, there seems to be a stir of debates concerning what the true objective of Insolvency and Bankruptcy Code hereafter ‘IBC’) is. In a recent webinar, the Insolvency and Bankruptcy Board of India Chief, while citing the Tinberg rule, had emphasized that IBC is, in fact, a reorganization mechanism rather than a path to recovery.[i] The completion of 5 years of IBC has certainly led to some questions regarding its efficacy especially in relation to the massive haircuts taken by financial creditors in the case of Videocon Industries which amounts to a whopping 96%.[ii]This has raised several eyebrows over the possible deficiencies in the code and has even caught the attention of the Centre.[iii]It is, hence, pertinent to question the true objectives of IBC and whether the same can be realized vis-à-vis the mechanism being seen as that of recovery or that of reorganization.

Objectives of IBC

It is imperative to mention that before IBC, the mechanism of liquidation and winding up of a company was governed by the Companies Act, 1956.[iv]This, however, had several drawbacks which included unnecessary delays and a poorly organized system for creditors and their claims. Creditors did not have any proper forums for grievance redressal and the submission of claims proved to be a tedious task. Hence, the main objective with which the IBC was drafted was to resolve this mechanism into a simpler and more efficient system. This led to the creation of the Corporate Insolvency Resolution Process(CIRP) which can be initiated by creditors of a corporate debtor when defaults in payments occur. To fulfill the objectives of CIRP further, the government also enacted the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Currently, as per the Insolvency regime, the procedure of liquidation is under the supervision of the National Company Law Tribunal (NCLT) and the timelines duly mentioned under the code governing the procedure.

One may agree that the IBC, despite being at a nascent stage, has been somewhat effective so far. However, one cannot deny that the drawbacks continue to surround the code especially with respect to certain ambiguities in the process of claims, which involves various stakeholders who may hold competing interests. Despite a timeline being set out, its compliance continues to be an issue. In 2020, the original timeline of 180 days was increased to 330 days but the same proved to be futile. As of 2021, on average it takes 459 days for any resolution plan to conclude.[v] The obvious reason cited for the delay is the constant overburdening of the NCLT and the NCLAT.

As per the Act, the prime objective of IBC continues to be a rescuer for corporate debtors in distress.[vi] It aims to provide an easy exit with a structured mechanism, as well as, to resolve the existing conflicts that may arise between the creditors and the debtors. It aimed to shift the regime of ‘debtor in possession’ to that of ‘creditor in control’.

Falling Trend of Recovery

According to the recent data by the Insolvency and Bankruptcy Board of India, as of 31st March 2021, a total of ₹2 lakh crore was recovered by banks and other financial institutions from 348 cases of insolvencies.[vii] In these cases, the total claims by banks amounted to ₹5.16 lakh crore. It shall be noted that there is a cause of concern fuming over the high percentage of liquidation and the continuously declining recovery rates. The Videocon Case[viii]and the Siva Industries Case[ix]are just two examples out of several dozen cases where more than 85% of haircuts were accepted. The NCLT has also asked IDBI bank in the Siva Industries case to explain the reason for such one-time settlement.[x] Trend has shown that the recovery rate for banks has been less than 20-30% in average cases. It cannot be denied that the major losses usually suffered are by the Banks, which have seen a dismal recovery in many cases. It is alarming to know that despite there being a framework designed to assist creditors, the bankruptcy process could recover only about 39 paise for each rupee of the defaulted loan.[xi] Main cause of concern for the falling trend seems to be the fact that the IBC has already entered its fifth year and has seen landmark judgements and constant amendments despite which delays and lower recoveries continue to cloak the positive aspects of the code. As per Siby Antony, Chairman of Asset Reconstruction Company Association of India, IBC may not necessarily be the right solution for banks.[xii] He emphasized that the IBC is a recovery tool where once a resolution fails, a liquidation is inevitable. This is a cause of concern for banks who undoubtedly have mounting NPAs, which may be a ticking time bomb for the Indian Economy. Under the total of 1604 closed cases as of March 2021, only 14% have found a resolution.[xiii]This is an alarming figure which leads to a lot of questions concerning how the IBC has fulfilled its objectives. The IBC has certainly come under scrutiny for its recent trends of settlement.

One of the major reasons why the IBC may have potentially failed is the writing off of loans by government-owned banks. This leads to a possible reluctance to participate in a complex and sometimes ambiguous process of revival. This negative risk-averse attitude may be a reason for the decline of the code.[xiv]Additionally, the Resolution Professionals, the CoC and the NCLT are failing towards fulfilling the common objective- maximising the value at which the asset is sold. Further, the complexity of the mechanism especially with respect to the taxing process of CIRP and the distribution of assets during liquidation, coupled with the fact that the law is in fact at a very developing stage, makes IBC a legislation with a few hits and some misses.

The Road Ahead

Following certain causes of concerns raised over the course of 5 years, it becomes necessary for stakeholders to analyse and understand what the true objective of the code maybe. From the purview of a corporate debtor in distress, the IBC may come across as a rescue mechanism for reorganization. Such a recovery is possible through the elaborate yet convoluted process of CIRP. However, upon flipping the coin and seeing the point of concern for creditors, IBC may act as a source for recovery to the extent possible. These two sides of the process certainly do seem to stir a debate with respect to what regime might be protected under IBC and what may not. However, one can only hope that the interests of both parties are not compromised at any step and are protected equally. This can only be achieved once the ambiguities are removed, writing off loans is minimized, Resolution Professional System is strengthened and lender’s commitment to revival is promised coupled with strict adherence to given timelines.

*The author is a fourth-year student at Amity Law School, Delhi

[i]Arpan Chaturvedi, IBC’s aim is reorganization not recovery says bankruptcy regulator, BLOOMBERG QUINT (July 6th, 2021, 5:00 PM), https://www.bloombergquint.com/law-and-policy/ibcs-aim-is-reorganisation-not-recovery-says-bankruptcy-regulator.

[ii]Press Trust of India,Videocon insolvency: Creditors to take 96% haircut on loans; NCLT says bidder ‘paying almost nothing’, INDIA TODAY (July 6th, 2021, 8:09 P.M), https://www.indiatoday.in/business/story/videocon-insolvency-creditors-to-take-96-haircut-on-loans-nclt-says-bidder-paying-almost-nothing-1815646-2021-06-16.

[iii]Govt may review IBC provisions as lenders settle for haircuts as high as 94%: Report, MONEY CONTROL (June 28th, 2021, 7:30 P.M), https://www.moneycontrol.com/news/business/govt-may-review-ibc-provisions-as-lenders-settle-for-haircuts-as-high-as-94-report-7086371.html.

[iv]The Companies Act, 2013, § 271, No. 18, Acts of Parliament, 2013 (India).

[v]Recovery From IBC Keeps Falling; Bankers Take 60% Hair Cut In 348 Resolved Cases So Far, NEW INDIAN EXPRESS (July 1stth, 2021, 6:00 P.M), https://www.newindianexpress.com/business/2021/may/29/recovery-from-ibc-keeps-falling-bankers-take60-hair-cut-in-348-resolved-cases-so-far-2309311.html.

[vi]Aditya Kaushik, Is IBC 2016 Effective?, NITI AYOG (June 27th, 2021, 6:08 PM), http://niti.gov.in/ibc-2016-effective.

[vii]Supra, 5.

[viii]IA 196-2021.

[ix] IBA 453/2019.

[x] Dev Chatterjee,Explain Logic In One-Time Settlement Of Siva Industries: NCLT To Lenders, BUSINESS STANDARD (June 30th, 2021, 5:00 PM),

https://www.business-standard.com/article/companies/explain-rationale-in-one-time-settlement-of-siva-industries-nclt-121062000302_1.html.

[xi]Vivek Kaul, Why the IBC Process Is Often Falling Short, MINT (July1st, 2021, 5:09 PM),https://www.livemint.com/news/india/why-the-ibc-process-is-often-falling-short-11625498657438.html.

[xii]Amol Dethe, IBC Is Less Of Resolution And More Of Liquidation, BFSI, (July 5th , 2021. 3:00 P.M), https://bfsi.economictimes.indiatimes.com/news/banking/ibc-is-less-of-resolution-and-more-of-liquidation/81662229.

[xiii]Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, January – March, 2021 | Vol. 18.

[xiv]PN Vijay,Bankruptcy Code: The God That Is Failing…, FINANCIAL EXPRESS (July 6th, 2021, 5:00 PM),

https://www.financialexpress.com/opinion/bankruptcy-code-the-god-that-is-failing/2223528/.