DHANENDRA KUMAR

is former chairman, Competition Commission of India, and executive director for India at the World Bank.

If one analyses recent reforms for their economic and social impact, the Insolvency and Bankruptcy Code (IBC) of 2016 would rank among the top. According to a World Bank release (tinyurl.com/25rkm2hs), “[The] establishment of a modern insolvency regime in 2016 as part of a comprehensive strategy to reform corporate laws paved the way for [India’s jump of] 14 places to move to 63rd position from 77th, in global Ease of Doing Business rankings. As a result [of the IBC], the overall recovery rate for creditors jumped from 26.5 to 71.6 cents on the dollar”.

One of the IBC’s primary aims is to provide a legal framework for dealing with individuals or entities unable to meet their financial obligations. It seeks to balance the interests of various stakeholders involved as it facilitates an orderly and fair resolution of insolvency that aims to maximize recoveries and overall value.

While various ministries, the Insolvency and Bankruptcy Board of India (IBBI) and judiciary have worked together to address implementation challenges, the most significant indicator of the IBC’s effectiveness—economic recovery—has somehow shown a drop, of late. A recent report by CRISIL states that the recovery rate under the IBC fell from 43% to 32% between March 2019 and September 2023. Average resolution time too has increased from 324 to 653 days.

A tale of delay: There are several instances of delays in the disposal of creditors’ appeals. Sometimes, courts get into the commercial aspects of transactions unrelated to legal aspects. The Supreme Court (SC) has observed that the commercial wisdom of the Committee of Creditors (CoC) cannot be questioned. Rightly so. Once the CoC takes a decision on whether to approve a resolution plan or not, it should not be subject to court review if no legal provision is violated.

In the Essar Steel matter, the SC observed that it is the commercial wisdom of a majority of creditors which determines, through negotiation with the prospective resolution applicant, how corporate insolvency is to be resolved. Similarly, in the SREI Multiples case, the SC said that once a resolution plan is approved by the CoC, no modifications are permissible, unless it is contrary to the IBC’s mandate. Since the Code’s inception, a total of about 6,815 insolvency cases have been admitted. Of this, some 2,800 are still undergoing resolution under its process, with claims worth trillions of rupees at stake. While each insolvency case may be unique, a few common elements are found to have kept recoveries clogged. In February, the Standing Committee on Finance observed in its 67th report that India’s insolvency process has been stymied by delays that far exceed statutory limits. This panel found that actual recoveries on the ground may be as low as between 25% and 30%.

Delays in insolvency resolution may be attributed to three major factors. Let’s take up each.

First, the admission of cases at the National Company Law Tribunal (NCLT) sometimes takes a long time. As per CRISIL, average delays at the preIBC admission stage increased to 650 days in 2021-22 as compared to 450 days in 2018-19.

Second, frivolous appeals drag the process back, sometimes leading to severe erosions of asset value. This abuse of judicial processes, plus a lack of finality within the stipulated period, causes undue delays. This was highlighted in a recent speech by a deputy governor of India’s central bank who observed that a few parties, including loan defaulters, have used court proceedings to delay resolutions.

Third, the NCLT system has a pendency burden of over 20,000 cases on account of capacity constraints that the ministry of corporate affairs is looking into.

Interpretation issues: While these externalities may take years to fix and may require financial and operational intervention, the IBC’s effectiveness is also impacted by differences of opinion between CoC members and the approach taken by insolvency tribunals in interpreting the law. In some cases, the CoC approved a resolution plan but a CoC member or another aggrieved party dragged it to an appellate tribunal or higher court. For instance, in the Rathi TMT Saria case, the resolution applicant’s plan was approved by its CoC in February 2020. Before it could receive the NCLT’s consent, a CoC member filed an application at the NCLT, which rejected it in July 2023, only to see the aggrieved member go to the NCLAT, which also rejected it. It took almost three years to get an approval.

The Videocon Industries case also faces similar challenges. The Mumbai bench of the NCLT allowed SBI’s application in August 2019. A Vedanta Group entity, Twin Star Technologies Ltd, submitted a resolution plan in November 2020. Although the NCLT approved it in June 2021, it was challenged by a few CoC members. This case is now pending before the SC in yet another example of a long delay.

Considering that the assets of an insolvent company can deteriorate rapidly, it is crucial for the tribunal and its appellate system to observe timelines provided under the Code. Persistent delays in insolvency resolution have implications that extend beyond insolvent companies. Delays not only result in value erosion, they impact all stakeholders from employees and suppliers to small businesses and their dependents. We must streamline the process, lest the IBC also goes the way of the Sick Industrial Companies Act.