Reforming the Insolvency and Bankruptcy Code (IBC)

Oct. 2, 2024

Why in News?

According to the G20 Sherpa and former CEO of Niti Aayog (Amitabh Kant), the Insolvency and Bankruptcy Code (IBC) is in need of second-generation reforms to acknowledge concerns regarding the present functioning of the Code.

What’s in Today’s Article?

What is the Insolvency and Bankruptcy Code (IBC)?
What is the Process Followed under the IBC?
Issues Faced in the Implementation of the IBC
First Generation Reforms to Strengthen IBC
Way Ahead - Suggestions Given by Amitabh Kant to Strengthen IBC

What is the Insolvency and Bankruptcy Code (IBC)?

Insolvency vs Bankruptcy: While insolvency results from an inability to pay debts due to a lack of assets, bankruptcy occurs when an application is presented to an authority declaring insolvency and requesting to be declared bankrupt, which will last until discharge.
About the IBC 2016:
- It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
- It is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
- It aims to protect the interests of small investors and make the process of doing business less cumbersome.
About IBBI:
- It is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India.
- It was established on 1 October 2016 and given statutory powers through the IBC 2016.
- It functions under the Ministry of Corporate Affairs and covers Individuals, Companies, Limited Liability Partnerships and Partnership firms.

What is the Process Followed under the IBC?

When a corporate debtor (CD) or a company, which has taken loans to run its business, defaults on its loan repayment, either the creditor or the debtor can apply for the initiation of a CIRP.
- CIRP stands for Corporate Insolvency Resolution Process (CIRP), which comes under Section 6 of the IBC.
Earlier, the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh.
- But, considering the stress on companies amid the pandemic, the government increased the minimum amount to ₹1 crore.
To apply for insolvency, one has to approach a stipulated adjudicating authority (AA) under the IBC. The various benches of the National Company Law Tribunal (NCLT) across India are the designated AAs.
The Tribunal has 14 days to admit or reject the application or has to provide a reason if the admission is delayed.
The CIRP or resolution process begins once an application is admitted by the AA. The amended mandatory deadline for the completion of the resolution process is 330 days.

Issues Faced in the Implementation of the IBC:

Delay in resolving bankruptcy cases:
- The IBC aims to resolve bankruptcy cases within a set time frame, but the average time taken to complete the process is longer than the stipulated 330 days.
- Time taken for insolvency resolutions at the NCLT averaged 716 days in FY24, up from 654 days in FY23.
Low approval rate:
- Only a small percentage of cases end with approved resolution plans. Average time taken for the admission of cases increased to 650 days in FY22 from 468 days in FY21.
- Even after approval, final resolution plans are often challenged, which can lead to further delays.
High number of liquidations: A large number of cases end up in liquidation, which goes against the IBC's goal of resolving bankruptcy.
Low recovery rates:
- There is an inverse relationship between the time taken for resolution and the value recovered, highlighting that delays are eroding creditor recoveries.
- The rate of recovery for creditors as a percentage of admitted claims fell to 27% in FY24 from 36% in FY23.
Lack of operational NCLT benches: Many NCLT benches are not fully operational due to a lack of infrastructure and support staff.
Issues with valuers: Some stakeholders have raised concerns about the credibility of valuers enlisted as registered valuers by IBBI.
Ambiguity in definitions: The definitions of liquidation value and other concepts are ambiguous, and court judgments contradict each other.

First Generation Reforms to Strengthen IBC:

Ever since IBC was enacted and IBBI was formed, consistent efforts were made to make it a potent debt resolution tool for bringing cultural shift towards loan repayments.
Several amendments were made to make it more effective as the law experienced hiccups on its way to implement it.
For example, the motive behind introducing the IBBI (Insolvency Resolution Process for Corporate Persons) (2nd Amendment) Regulations 2023 is to facilitate the smooth functioning of the CIRP.

Way Ahead - Suggestions Given by Amitabh Kant to Strengthen IBC:

Speaking at the IBBI’s annual meeting, Kant called for a second generation of reforms to strengthen the IBC 2016.
India must consider -
- Outsourcing court management for insolvency proceedings to private players (like in the case of Passport Seva Kendras that are operated by TCS Ltd) to cut delays and boost creditor recovery.
- Amending the IBC to clarify key legal principles and enable the implementation of a cross-border insolvency framework.