This is an archive article published on May 18, 2023

Opinion Express View on the Insolvency and Bankruptcy Code: Changes are needed to ensure its smooth functioning

The guiding principle should be to cut down the delays in the process and increase the efficiency and effectiveness of the Code

IBC india, Insolvency and Bankruptcy Code, Insolvency, banking and finance, Insolvency and Bankruptcy Board of India, Indian express, Opinion, Editorial, Current Affairs

As more changes to the IBC are in the offing — according to reports, the government is likely to introduce further amendments, perhaps in the monsoon session of Parliament — the guiding principle should be to cut down the delays in the process, ensure smooth functioning, and increase the efficiency and effectiveness of the Code.

By: Editorial

May 18, 2023 06:33 AM IST First published on: May 18, 2023 at 06:33 AM IST

The shift to the Insolvency and Bankruptcy Code in 2016 was a step towards reconfiguring the credit culture in the country, by providing for a time-bound resolution process that tried to move the balance of power in favour of creditors. However, the data that is frequently put out by the Insolvency and Bankruptcy Board of India suggests that the outcomes under this resolution framework have been less favourable than expected. For instance, the time taken for resolving cases generally tends to exceed the timelines originally envisaged and the realisations of creditors, both financial and operational, have been lower than expectations.

At the end

of March, 6,571 cases had been so far admitted under this framework. Considering that around half of these proceedings were initiated by operational creditors, this does suggest that the Code has been able to serve as a powerful instrument for these firms, which are typically small and medium enterprises, to try to recover their dues from the larger companies. Of these admitted cases, 4,515 cases have been closed, while proceedings are ongoing in the remaining. And of the cases closed, a staggering 45 per cent have ended up in liquidation, while the rest have been either resolved, withdrawn or appealed. In the cases where the process has yielded resolution plans, realisations of creditors have been low. Of the total admitted claims of creditors estimated at Rs 8.98 lakh crore in these cases, the total realisable value was only Rs 2.86 lakh crore. This works out to only 31.8 per cent. Then there are the delays in the process to contend with. Of the cases that are currently going through resolution proceedings, almost two-thirds have crossed the 270-day deadline. And in the cases currently undergoing liquidation, 55 per cent have been going on for more than two years. Such delays, beyond the prescribed timelines, are unfortunate as they lead to further destruction in the value of assets.

Over the years, in attempts to improve the functioning and effectiveness of the resolution framework, various changes have been brought in the Code. In 2021, the government also brought in amendments to introduce a pre-packaged insolvency resolution process for MSMEs. This framework provides the space for a direct agreement between the firm’s owners and its financial creditors, with the debtor remaining in control during the process. However, despite its appeal, this framework has not gained much traction. Various stakeholders do not seem to have considered this route an attractive proposition in the case of MSMEs — as per IBBI data, only four applications have been admitted under this framework as on March 2023, one of which has been withdrawn. As more changes to the IBC are in the offing — according to reports, the government is likely to introduce further amendments, perhaps in the monsoon session of Parliament — the guiding principle should be to cut down the delays in the process, ensure smooth functioning, and increase the efficiency and effectiveness of the Code.