A journey of Insolvency and Bankruptcy Code (IBC)
Preamble & Legislative Intent of the Code
“It is an undisputed fact that Insolvency and Bankruptcy Code, 2016 (‘Code’) was enacted to remove critical building block of Non-Performing Assets involving lacs of crore to a mature market economy. The Preamble of the Code provides Insolvency Resolution of Corporate Persons etc & its reorganization in a time bound manner for maximization of value of assets of such organizations and to promote entrepreneurship apart from releasing dead capital to working capital.”
1. Journey Process & Its Result
It reveals that there are still multiple options to get the amount realized from such Non-Performing Assets of Scheduled Commercial Banks. A look at the data available on the Web reveals that the mechanisms are Lok Adalats, DRT’s, SARFAESI Act, Civil Procedure Code & IBC. Although the purpose of each one of this channels has different goal; in terms of number of cases referred to Lok Adalat is number one but in terms of value IBC is number one.
Comparative Recovery Performance (FY 2019–2020): Lok Adalat vs. IBC
| Recovery Mechanism | Cases Referred | Amount Involved (₹) | Amount Recovered (₹) | Recovery (%) |
|---|---|---|---|---|
| Lok Adalat | 59,86,790 | ₹ 67,800 Crore | ₹ 4,211 Crore | 6% |
| Insolvency and Bankruptcy Code (IBC) | 1,986 | ₹ 2,24,935 Crore | ₹ 1,04,117 Crore | 46% |
* Note: The percentage of recovery in IBC or in any channel will vary from year to year basis.
Enactment and implementation of the IBC brought India’s overall ranking in the World Bank’s “Doing Business” Report from 142 to 63.
Significant leap of 85 positions in the specific sub-index of “Resolving Insolvency” under the World Bank framework.
IBBI Cumulative Resolution Statistics (Till June 2022):
- Total Cases Commenced: 5,636 cases.
- Cases Closed: Closure has been achieved in 3,637 cases.
- Rescue Rate: 53% of total closed cases got rescued.
- Liquidation Value vs. Realization: Under approved Resolution Plans, creditors realized ₹ 2.35 lakh crore against a liquidation value of only ₹ 1.31 lakh crore (while the Corporate Debtors owed ₹ 7.67 lakh crore).
- Recovery Efficiency: Although creditors realized 30% of total admitted claims, they achieved more than 178% of the liquidation value!
We all speak and that’s what the approach of the Code is from the ‘Debtor in possession’ regime under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA, already repealed) to the ‘Creditor in control’ regime under IBC making the Insolvency system with the intention of strengthening creditor control. This is in line with the UK Insolvency Law.
Implementation of the Code through Tribunal system is tried with the objective of faster resolution; However, the composition of the Tribunal continued with the Judicial Members and Technical Members. In the Court system where the Hon’ble High Courts & District Courts are manned by the Judicial Officers alone and perhaps pendency in these courts moved the legislature to consider Tribunal format. Now the system has been settled by the judicial hierarchy of the Constitutional Courts. No doubt, it puts more pressure on the Technical Members for getting the arithmetical figure of disposal with the cooperation of Presiding Officer of the Bench. The Technical Members are equally responsible for disposal with highest grade of integrity.
2. Law Settled on IBC: Comprehensive Legal Propositions
Certain propositions of law which have been developed in the Code in the last five years of judicial interpretation and rulings by the Hon’ble Supreme Court and NCLAT are as follows:
3. Committee of Creditors (CoC) vs. MSME/SME
What is being observed in general that Committee of Creditors (CoC) who are the Financial Creditors decides the distribution of realized amount amongst themselves and employees of the Corporate Debtor and least concerned for the other Operational Creditors primarily the suppliers who are MSME/SME who have less bargaining power while accepting a purchase order from the Corporate Debtor. Corporate Debtors when they are large business houses; these suppliers mostly MSME and SME’s have zero bargaining power and have to enter into an unilateral contract where the Debts are not secured.
The CoC As Supreme Authority: “The large suppliers always ask for letter of credit payment term even in indigenous payment. Committee of Creditors have become the King as their collective wisdom is not justiciable and thereby the approved Resolution Plan and realization there from after meeting the CIRP costs etc get distributed amongst themselves. Lot of talks are going on for developing professional Code of conduct for the CoC. However, as it looks apparently that developing such Code may not have much impact rather it will act as a leap sympathy to these (MSME/SME) operational creditors.”
Case Illustration: The MSME Supplier Dilemma in the Aircraft Manufacturing Industry
A view has also cropped up why these MSME/SME continue to supply to these organizations when they failed to get the amount realized in earlier supplies.
In the Aircraft Industry where lot of items are developed by these (MSME/SME) vendors at much lower costs and they become the permanent suppliers for that particular programme. In order to reduce their costs, they always procure materials for the full programme which reduces their average costs and they can beat obsolescence also in the large manufacturing programme.
So even if they stopped the supply, all these material costs will become redundant and at the same time they have to pay their employees as the employees are having high skill set so they cannot dispensed with them also.
Need for Legislative Safeguards: All these requires that Insolvency and Bankruptcy Board of India (IBBI) to conduct an impact evaluation study to ascertain the impact of IBC on MSME / SME which is perceived as wiped out to some extent. Hence, there is a need for incorporation of appropriate provisions under the IBC to protect MSME/SME.
4. Reorganization of Corporate Debtor (CD): Restructuring vs. Liquidation
The other area requiring focus is on restructuring the CD / the Company under Corporate Insolvency Resolution Process (CIRP). What is being seen amongst the Financial Creditors / banks that they follow the mechanical system of highest bidder rather than assessing the Operational, Technical & Managerial Competence of the firm in greater details like always purchasing on Lower bidder (L1) basis will not result into lower operational costs if L1 with reference to higher technical feature is not compared. No format in general can provide answer for optimizing the objective function.
The other thing involved is that the Bank officials avoid operational risks, if they are allowed restructuring of loans based on their wisdom rather than opting for IBC. A view that’s why emerged that the IBC is more successful in liquidation than restructuring which laid to the amendment of the Code in the year 2018 which came on 06th June, 2018 by Ministry of Corporate Affairs. The voting threshold was reduced to 66% from 75% for all important actions like approval of Resolution Plan, extension of CIRP period and so on and so forth and for routine decision, it was reduced to 51%.
Liquidation Statistics (IBBI Dec 2021)
The data available with Insolvency and Bankruptcy Board of India (IBBI) / Web reveals that as of December, 2021 out of 3,247 CIRP cases that were closed, 46% have ended in orders for liquidation, and out of that 77% were already ordered for resolution under BIFR.
Regulation 37 Restructuring Tools
Regulation 37 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 allows Resolution Professional multiple mechanisms for restructuring the Corporate Debtor including but not limited to sale of a part of assets or transfer of part of assets or through merger or consolidation of Corporate Debtor.
Judicial Pioneers in Group Resolutions & Cross-Border Insolvency:
Although the provisions for ‘group resolutions’ are awaited into the IBC, the judicial side has permitted such resolution in case of Jet Airways and Videocon Group Resolution Process. In Jet Airways it even involved marginally cross border Bankruptcy and Insolvency.
5. Startup & IBC: Paradigm Shift from Moral Stigma to Risk Mitigation
Legislative Framework as were existing from time to time prior to the IBC are as follows:
Companies Act, 2013
Chapter XIX (Revival & Rehabilitation of Sick Companies – omitted by I&B Code w.e.f. 15.11.2016) & Chapter XX (Winding Up by the Tribunal).
RDDBFI Act, 1993 (Repealed)
Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Granted special rights to unsecured/secured creditors for recovery of defaulted debts.
SICA, 1985 (Now Repealed)
Sick Industrial Companies Act, 1985 for revival of sick companies (applicable to industrial companies only). Moratorium provision under SICA was misused by defaulters to keep creditors at bay.
Colonial Insolvency Acts (Repealed)
The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency Act, 1920.
Mostly it was understood under the above framework that it is the moral failure of the promoters along with ulterior motive. Now as we want to give impetus to start ups and we have understood that 90% of startup’s fail even in western countries, the time has come to think differently in the years to come. These failed entrepreneurs are being given lot of weights by the European Countries, if the failure is honest and then it is appreciated. We have to give some leverages to these startup for timely exit.
Real-Life Precedent before NCLAT: The IIT Tech Startup Exit
In a case, few IITan’s wanted to develop certain technology in electronics fields which were not available worldwide and the fund was given by the Government of India to these promoters and later on they could not develop the technology and wanted to ease out, they didn’t have even money to engage lawyers and appeared as “Party in Persons”.
It was perceived by the Bench that they were high integrity people, technically most competent but failure has cropped up in certain process of technical development which was demonstrated by them even before the Bench. The Respondent side also didn’t object and finally the exit was permitted.
Whenever such cases are coming even within the provisions of IBC through Section 10 and if the Hon’ble Judges perceive that it is an honest failure, they appropriately consider and resolve the case. Hence, the startup has to bring “Atma Nirbhar Bharat” without fear of misuse of IBC rather to consider to use the IBC.
The Hon’ble Judges with the experience in District Courts/ High Courts, they are well equipped to grasp whether it is an honest failure or the proposal has come with ulterior motive. This helps the Bench to dispose of within the framework of the IBC.
“However, the time has come to consider Insolvency as an integral part of risk mitigation for a failed organization with more leverages and easy access for startups for adopting voluntary adoption of Bankruptcy Process and not to taint these startups entrepreneur.”