Why India’s bankruptcy system needs to be fixed

What was the intention behind preparing IBC?

The IBC, which was enacted in 2016, came at a time of rising loan defaults. The intention was to bring about a paradigm shift in the corporate crisis resolution regime in the country. It focuses on resolving bankruptcies of corporations, individuals and partnerships in a time-bound manner. It was introduced with the objective of simplifying insolvency and bankruptcy proceedings, safeguarding the interests of all the stakeholders – the company, employees, debtors and especially creditors, and timely revival of the company. The Insolvency and Bankruptcy Board of India is the regulatory body implementing the Code.

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What changes are being proposed?

The average number of days taken to resolve a case has increased to 679 days in the first half of FY 2023 as compared to 230 days in FY 2018. The changes currently under consideration seek to address inter-creditor disputes, which have been identified as a major cause of delays. The process is being proposed to be divided into two phases – the first phase will focus on finding potential buyers and handing over management to the acquirer. Phase II will address distribution of proceeds among creditors and resolve inter-creditor disputes. The proposed steps will try to revive the units with better management, wherever possible.

What progress has been made in its objectives?

Till September, 5,893 cases were filed under the Corporate Insolvency Resolution Process (CIRP). Of this, 3,946 were closed (553 had resolution plans) and 1,947 are operational. 2,531 were initiated by financial creditors, 3,008 by operational creditors and 350 by corporate debtors. 64% cases were more than 270 days old while only 25% cases were resolved within 180 days.

What were some of the obstacles?

Most of the cases went beyond the deadline as many of the affected promoters/corporations stalled the cases by approaching the courts. Pending cases like JP are pending between NCLT, NCLAT and Supreme Court. They have exceeded the resolution time limit by miles. However, efforts have been made to make IBC more efficient. For example, homebuyers can now be considered financial creditors. The onset of the pandemic resulted in the government deferring the provisions of the IBC.

Why is IBC seen as a game-changer?

IBC has proved to be a deterrent to many unscrupulous borrowers and provides tools to the banks to be reasonably sure about the recovery of NPAs. The fear of losing control of the firm motivates the debtors to pay their dues. Till September, 23,417 applications for CIRP initiation, with underlying default amount 7.31 trillion, were resolved before admission. Indirectly, the code provides an exit route by closing commercially unviable units.

Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH.

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