The IBC system is in need for a major overhaul, and some recent legislative changes (pre-packs) may help.
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India's Insolvency Law - operational and legal updates
- The story: While the Insolvency and Bankruptcy Code (IBC) was brought with much fanfare in 2016, it has lost steam in recent years. Due to poor asset valuation and generally downcast economic climate, coupled with suspension of insolvency initiation against Covid-related default, lenders are not opting for resolution under it. Today, about 13,000 cases worth Rs 9 lakh crore pending beyond 180 days were stuck in IBC process.
- Data for 2021: Less than 200 cases were admitted to the National Company Law Tribunal (NCLT) till June '21 after the suspension was lifted on March 24. This was informed by the Insolvency and Bankruptcy Board of India (IBBI).
- As time passes: As the IBC resolution process has matured, lenders have learnt and can assess the prospect of an asset resolution through IBC clearly. If lenders feel a quicker resolution outside the Code through a Swiss Challenge process (a bidding process where each applicant makes a better offer than the existing one, to secure the contract) is feasible, they are likely to avoid a court-monitored process like the IBC.
- The valuation of assets is critical. When lenders see the possibility of suppression in value through IBC because of the time factor, they may look for pre-insolvency options.
- Lenders have resorted to the Reserve Bank of India’s (RBI's) one-time restructuring available till June '21 to address accounts affected by Covid and avoided going to the IBC.
- More tools: Aas markets have matured, more tools exist for resolution like private credit. So borrowers and promoters are taking steps to find a solution — and using the IBC as a last resort. But the speed may pick up once the NCLT Bench strength is reinforced and applications get disposed of more rapidly.
- Creditors are avoiding filing petitions because the Benches are giving long dates due to heavy pendency and
- Once the vacancies of judicial members are filled, the filing of applications against the defaults made after March 31 may start two to three months from now.
- With the current economic climate and fears of an impending third wave, the current trend may continue and lenders may adopt a wait-and-watch approach.
- Threshold: The increase in the threshold of default from Rs 1 lakh to Rs 1 crore under the IBC has also kept the flow of applications from small creditors at a lower level. The move was intended to reduce the filings and thereby the burden on the NCLT Benches. Financial creditors are more likely to adopt the RBI framework for restructuring.
- Data: As per IBBI, as on December 31, 2020, resolution plans were approved in 317 cases and 1,126 cases have been ordered for liquidation. The realisable value for creditors from the approved resolution plans is Rs 2.01 trillion, which is 39.37 per cent of the total admitted claims.
- Pre-packaged insolvency resolution bill passed: The Rajya Sabha gave its nod to the bill replacing the ordinance promulgated in April 2021. The bill amends the Insolvency and Bankruptcy Code (IBC) paving the way for pre-packaged insolvency resolution for small and medium enterprises.
- The proposed amendments will enable the government to notify the threshold of a default not exceeding Rs 1 crore for initiation of the pre-packaged resolution process. The govt. has prescribed the threshold of Rs 10 lakh for this purpose. The bill proposes a new chapter in the IB Code to facilitate the pre-packaged insolvency resolution process for corporate persons that are MSMEs.
- Prepack is a cost-effective and time-barred solution, very suitable for MSMEs.
- The finance minister said this change will help the MSMEs, as there was an inadequacy of existing options.
- There was a feeling that there would be a rise in insolvency after suspension under the code was lifted in March '21. The new solution is less costly, and hybrid in nature. The debtor will be still in control and the creditors will be working together. It will cut the cost and speed up the process because the whole thing will be over in 120 days.
- There would be a penalty for fraudulent or malicious initiation of the pre-packaged insolvency resolution process, or with intent to defraud persons, and for fraudulent management of the corporate debtor during the process.
- The Parliamentar Standing Committee on Finance has recommended that a similar pre-packaged resolution mechanism be put in place for larger corporates as well (just like done for MSMEs).
- Standing Committee unhappy: The Parliament Standing Committee on Finance has said that after six previous amendments, the IBC has deviated from its original objectives. It noted that about 13,000 cases worth Rs 9 lakh crore pending beyond 180 days were stuck in IBC process. It also said that IBC has low recovery rates with high 95 percent haircuts being imposed upon creditors. It called for overhauling the NCLT by taking care of personnel shortages, selecting more experienced judicial members including high court judges, and taking steps to reduce the time taken to admit a case into NCLT and resolving it.
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