Where does IBC stand five years after RBI's 'dirty dozen' announcement?

Before Insolvency and Bankruptcy Code, 2016, the insolvency and bankruptcy laws in India were multilayered and fragmented. IBC created umbrella legislation for insolvency resolution of all entities in India -- both corporate and individuals. 

IBC’s journey so far has been a mixed bag. In the last two years, the debt resolution of sick companies slowed down considerably after initial euphoria saw several successful acquisitions by top companies, including the Tatas, Reliance, and the world’s largest steelmaker, ArcelorMittal.

The problems include a very high haircut-- as much as 95% in some cases for banks-- and delays in the resolution process. The provisions of the code, that came into effect in December 2016, aimed to serve two purposes. To save businesses that are viable and facilitate the exit of those that are not.

Since then, as many as 5,258 insolvency cases have been filed by lenders. Of these, 3,403 cases have been closed until March this year.

Of the 3,406 resolved cases, nearly 47% of companies were liquidated and 17% were withdrawn after 90% of lenders agreed, following an offer made by the promoter. Around 22% of the cases are still ongoing, while in 14% of the cases, the resolution plan has been approved.

Apart from overburdened courts, a serious problem faced by lenders was that asset reconstruction companies (ARCs) are not allowed by the RBI to bid for bankrupt companies. 

Legal experts say that frivolous challenges and interference by erstwhile promoters -- directly or indirectly-- to delay the resolution process must not be entertained.

The IBC prescribes a time limit of 180 days for resolution, extendable by another 90 days. However, an outer limit of 330 days has also been prescribed for the completion of the resolution process, including the time taken for litigation.

The 480 cases which yielded resolution plans took on average 450 days for the conclusion of the process. And of the ongoing cases, 66% have been pending for more than 270 days. 

But the IBC’s track record has been better than the earlier laws. The realisable value of the assets available with the 480 companies rescued was only Rs 1.31 trillion though they owed Rs 7.61 trillion to creditors. The resolution plans realised Rs 2.34 trillion, which is around 178% of the liquidation value of the corporate debtors.

Financial creditors recovered 32.89% of their claims, which only reflects the extent of value erosion by the time the companies entered the insolvency process. Yet it is the highest among all options available to creditors for recovery. 

[Byte of Sonam Chandwani, Managing Partner, KS Legal & Associates]

June 13th marked the completion of five years since the RBI identified 12 highly stressed debtors for insolvency resolution under the IBC.  

These 12 accounts were popularly referred to as the ‘dirty dozen’. They had an aggregate outstanding claim of Rs 3.45 trillion as against a liquidation value of Rs 73,220 crore. Out of these, the resolution plan has been approved for eight, two are still undergoing insolvency proceedings, and liquidation has been ordered in the case of the other two.

The recovery ranged from 115% to 387% of the liquidation value for the eight cases that were rescued through resolution plans. 

Bhushan Steel’s resolution was done and dusted in under 300 days, Essar Steel’s took a gruelling 865 days because of litigation. 

Meanwhile, the lofty haircut taken by banks in several cases like Siva Industries and Videocon Industries came up for criticism by the lower courts, the Supreme Court made it clear that if lenders, in their commercial wisdom, think the offer is good for all stakeholders, then the NCLT and the NCLAT must not interfere.

Courts have played a pivotal role in modelling the IBC and paved the way for evolving jurisprudence. As the insolvency law matures, one can expect the average time for a resolution to shorten. One should judge the success of IBC not just from the point of view of recovery percentage. There are other parameters to judge its success too. As a key economic reform, it shifted the balance of power from borrowers to creditors and instilled a significantly increased sense of credit discipline among debtors.