IBC: A Dynamic Framework, Now Shaping for Version 2
Author is Chairman, Governing Board of IIIPI of ICAI. He can be reached at ashokhaldia@hotmail.com and eboard@icai.in.
1. IBC – A Showcase Legislation
IBC has been considered as showcase legislation and a major economic reform in India, hailed, among others, by the World Bank as reflected in improvement in India’s ‘Ease of Doing Business’ ranking. The founding principle of IBC is to rescue ailing businesses as going concern rather than simply recovering dues through liquidation.
Empirical Performance Metrics (Since Inception to June 2021)
The promise of IBC framework is reflected in the fact that since inception, realization by Financial Creditors under resolution plans in comparison to liquidation value, is 174%, while the realization by them in comparison to their claims is 39%, much better than that in earlier regime.
So far, 396 business have been rescued through resolution plans from which ₹ 2.54 lakh crore have been realized. This amount is 174% of value of these companies at the time of initiation of the CIRP i.e., liquidation value amounting ₹ 1.46 lakh crore. Furthermore, 254 companies which were liquidated, have yielded ₹ 1,207 crore against their asset value of ₹ 1,195 crore. While these numbers are impressive, the contribution of IBC in bringing about qualitative changes in the industry ecosystem and in particular, relationship between a company and its financial and operational creditors have been enormous and long-lasting.
2. IBC – Evolved and Further Evolving
In the initial couple of years, the jurisprudence got settled particularly through judgments bringing clarity on constitutionality of law, roles/responsibilities of different pillars in ecosystem, and primacy of COC’s commercial wisdom. This was aided by timely amendments in the form of, inter alia:
- Section 29A Disqualification: Debarring existing management to participate in resolution process as applicant. The former amendment proved to be a significant deterrent in altering the psychology of borrowers away from hitherto divine right to continue in the saddle of a distressed corporate. And this behavioural change in fact has resulted in large number of prospective insolvency cases being withdrawn or settled out of court.
- Real Estate Allottees Recognized as Financial Creditors: Allowing allottees in real-estate project, to participate in resolution process as financial creditors. This latter amendment on the other hand, was an embodiment of public interest being promoted by the economic legislation like IBC in an unprecedented way.
During about five years’ period since inception, six amendments in IBC have been promulgated, which indicates complexities involved in implementation of IBC in Indian context on one hand and alacrity of the regulator in squarely responding to those, on the other. The momentum for IBC to adapt to newer emerging realities, is expected to continue in future as well.
3. COVID-19 A Black Swan Event as a Catalyst in Shaping IBC
Having begun on a positive note, the IBC regime in India had been gearing up for the next phase comprising cross-border, pre-pack, Individual and group insolvency framework(s) amongst others, when the covid pandemic struck the economy hard as a black swan event, one wave after another and more deadlier. The covid pandemic crippled most businesses resulting in shutdowns, job losses, and labour-migratory challenges. This halted the Indian economy in its tracks, adversely affecting several development agenda of the Government.
Macroeconomic & Banking Distress Indicators
The recent data of the Ministry of Statistics and Program Implementation reveals that the country’s GDP shrunk by 7.3% in 2020-21. The estimates suggest that about 10 million skilled and non-skilled workers migrated from metros and urban areas to villages.
In the context of insolvency regime, these developments meant impending surge of distressed businesses on one hand and least probability of finding a suiter or rescuer as resolution applicant, given the uncertainty and priority for remaining liquid. As an unintended outcome of said predicament, this also meant that more businesses would be pushed into liquidation as against the preferred course of resolution. The small and medium business segment was even more vulnerable in this context. As per an initial estimate the NPAs in Indian banks were likely to nearly double from ~7.5% of gross bank advances in Sept.’20 to ~13.5% in Sept.’21, stung by the twin balance sheet problems, not to talk of consequent cascading impacts. The financial meltdown seemed imminent and drastic efforts were need of the hour.
4. Resilient Response by Stakeholders
Upon onslaught by first covid wave and amid the country-wide lockdown, the Government and regulatory bodies launched many counter-offensive measures. Within insolvency resolution ecosystem, the stakeholders tried best to come to terms with harsh reality marred by lack of technological solutions.
“Upon onslaught by first covid wave and amid the country-wide lockdown, the Government and regulatory bodies launched many counter-offensive measures. Within insolvency resolution ecosystem, the stakeholders tried best to come to terms with harsh reality marred by lack of technological solutions.”
Multi-Pronged Legislative & Judicial Interventions
- Increase in Default Threshold: The Ministry of Corporate Affairs (MCA), through a notification in March 2020, increased the minimum default from ₹ 1 lakh to ₹ 1 crore for filing insolvency cases.
- Suspension of Sections 7, 9 & 10: With the promulgation of The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 filing of fresh insolvency cases on account of default due to Covid was prohibited, by suspending Section 7, 9, and 10 of the IBC for a period of six months w.e.f. March 25, 2020. However, the suspension continued till March 24, 2021, through two consecutive extensions. Any default occurring during the said Covid period on or after March 25, 2020 was deemed to be Covid-induced and hence was made ineligible for initiating insolvency during such period.
- Exclusion of Lockdown Timelines: IBBI came out with clarification in the regulations for excluding Covid period from the mandated timelines under the IBC framework.
- Virtual Courtrooms & Digitization: Leading from the front, Hon’ble Supreme Court started virtual hearing of cases from March 2020 through videoconferencing and took up about 7,000 cases till June’20. Hon’ble NCLAT started virtual hearing from June 01, 2020, with detailed Standard Operating Procedures (SOP) for online hearing. Subsequently, NCLT benches too resorted to online hearings. MCA initiated implementation of e-courts across all 16 benches of NCLT. Government relaxed timelines for various compliances under Companies Act, and IBBI provided virtual filing/viewing of regulatory forms.
- RBI Restructuring Frameworks: To ease economic distress and unburden IBC, Reserve Bank of India (RBI) rolled out ‘Resolution Framework for COVID 19-related Stress – Financial Parameters’. During the second wave, RBI announced Resolution Framework 2.0 in May 2021, expanding scope to small businesses after IBC suspension was not extended beyond March 24, 2021.
- Pre-Packaged Insolvency Resolution Process (PPIRP) for MSMEs: In April 2021, the Government amended IBC via ordinance introducing PPIRP—providing a quicker, cost-effective, and less invasive semi-formal regime allowing out-of-court resolution while preserving statutory sanctity. The minimum threshold for triggering PPIRP for MSMEs was fixed at ₹ 10 lakh (compared to ₹ 1 crore for CIRP).
- Creation of NARCL (Bad Bank): Government launched National Asset Reconstruction Company Limited (NARCL). Under regular operations, 22 stressed loans amounting to over ₹ 80,000 crore are slated to be transferred from various banks to NARCL for focused resolution including via IBC.
5. The Paradigm Shift Towards IBC 2.0
Amidst the chaotic environment triggered by covid waves, a paradigm shift had been playing out without probably attracting much attention. The public interest is the soul or underlying theme of insolvency law that can be served through ethical conduct of its stakeholders. The pandemic has heightened the imperativeness of public interest and ethics in the minds of stakeholders across the insolvency ecosystem.
Moreover, as a parallel narrative, stakeholders across the board including courts, regulators, lenders, professionals, and others resorted to technology as an enabler and a force multiplier, in unimaginably swifter ways. The usage of these solutions though available even earlier, has been advanced by constrains posed by the pandemic. IBC now is poised towards its version 2, having established foothold as per its initial design and made salutary impact both in quantitative and qualitative terms:
- Digital NCLT & Template Orders: NCLT has embarked on a major initiative to digitize its services, notably e-filing and virtual hearings. As this is work in progress and should continue even during post-Covid period, template-based application and orders would be the way to go.
- Platform for Distressed Assets (PDA): IPs started using ‘platform for distressed assets’ (PDA), for instance, created by Information Utility, NeSL. Such technological solution enables accessing and managing Record of Default (ROD), end-to-end case management, Virtual Data Room (VDR), e-Voting, and e-auction platforms covering expressions of interest and interim finance.
- Distressed Asset Market Infrastructure: Development of market for distressed assets in India via information portals (such as Investment Grid platform by Govt. of India), innovative financing products, and institutional structures compatible with financing stressed assets, reinforced by NARCL (Bad Bank).
- Virtual CoC Meetings: Virtual meetings by lenders as COC members, allowing senior officials from remote locations to participate effectively, thereby enhancing the quality and pace of decisions, supported by compliant document retention and digital storage solutions.
- Individual, Group & Cross-Border Insolvency: IBC is catapulting into the next phase marked by individual insolvency, group insolvency, and cross-border insolvency frameworks. Government-appointed committees are examining procedural and substantive aspects in alignment with international experience. Individual insolvency will provide significant ‘ease of exit’ and immense professional avenues.
- Mediation & Negotiated Settlements: Mediation and arbitration in a far more expeditious and transparent manner may become the first and preferred option for stress resolution for MSMEs, and eventually expand to larger corporates. While CIRP was envisaged as a last resort, market realities made it the first preference; pre-pack frameworks and mediation restore out-of-court negotiated settlements.
- Code of Conduct for CoC Members: In pursuance of value maximization and timeliness, a formal code of conduct for COC members is expected soon, ensuring enhanced trust, accountability, and objectivity in commercial decisions.
6. IIIPI of ICAI – A Prominent Player in Shaping of IBC
The Indian Institute of Insolvency Professionals of ICAI (IIIPI) as front-line regulator and the largest IPA in India, has aligned its strategy and work-plans with the changing paradigm, and has now been recognized as a valued partner in IBC framework.
IIIPI Institutional Scale & Vision
As a body representing more than 60% of IPs having role in managing 75% of the CIRPs so far in the country, IIIPI is cognizant of and is gearing up well to play its developmental role as a front-line regulator and quasi-judicial body in ensuring holistic development of insolvency profession as is reflected in its vision statement:
“To be a leading institution for development of an independent, ethical, and world-class insolvency profession responding to needs and expectations of the stakeholders.”
IIIPI focused on being a think tank for policy and implementation measures, towards strengthening of IBC and IPs, formulating best practices, apart from capacity building measures including webinars, virtual trainings, web-based discussion forum for members, e-publications, publishing a high-quality quarterly journal, and covid helplines for members. In this direction, very recently, IIIPI presented a report of a roundtable to IBBI in respect of ‘Impact of covid Resurgence on Insolvency Regime’. IIIPI is bracing for IBC version 2.0 with many aces up its sleeves including research initiatives with the research fund being set up, development of best practices to strengthen the insolvency ecosystem, and capacity building programs.
7. Summing Up: The Glass Is Filled and Filling Up
In nutshell, IBC has not only been a revolutionary step, but it has revolutionized the entire industrial ecosystem. IBC has virtually become a model law for the world. It is an evolutionary and transformational law as it brings the regime in a phased manner, keeping in view the ground realities and complexities of the Indian economic, industrial, political, and social systems and is poised for next stage of evolution.
“IBC has not only been a revolutionary step, but it has revolutionized the entire industrial ecosystem. IBC has virtually become a model law for the world.”
Expanding the adoption of technological solutions as such, besides keeping impact of any more Covid waves at bay, could go a long way in improving the dispensation, efficiently and effectively even during post-covid period. Of course, much depends upon the stakeholders and the pillars of IBC, including regulatory bodies and judiciary to take the legacy forward.
As acknowledged in the recently released report by parliamentary committee, by allowing closure of non-viable firms, wherever required, the Code enables an entrepreneur to get in and get out of business with ease, undeterred by failure (honest failure for business reasons).
In the final analysis and drawing the analogy for IBC’s achievement of its intended objectives, it is neither a glass half full nor half empty, it is in fact a glass which is filled and is filling up. The stakeholders would need to increasingly focus on entire value chain beginning from healthy investment decisions avoiding sickness at the conception stage, to identifying incipient sickness and finally on resolution of distress in a commercial manner under a credible and legally sustainable framework.