The Insolvency and Bankruptcy Code (IBC) was enacted to ensure cultural change in the insolvency and bankruptcy landscape. It established a new framework for insolvency resolution and liquidation. Strict timelines were introduced and a code for judicial restraint at every stage of the process was made into law. It also established the Insolvency and Bankruptcy Board of India (IBBI) as an independent regulator. There was a belief that the IBC would revolutionize the insolvency and bankruptcy system in India; After completing five years, the jury is still out on whether the IBC has been successful in achieving its objectives.
In many ways, IBC got off to a good start. This created new classes of professionals who were unrestrained by the burdens of the past, and a new jurisprudence developed for insolvency resolution in India. The government and IBBI have been mindful of the challenges in implementing, clarifying and resolving issues as and when they arise. Yet, they failed to make the IBC fully operational even after five years of its implementation in 2016.
The National Company Law Tribunal (NCLT), which was the dispute resolution forum under the companies law, was also designated as the adjudicating authority for the Corporate Insolvency Resolution Process (CIRP) and liquidation. Statistics show that the NCLT has become a major platform for insolvency resolution and liquidation post 2016 onwards. According to the government’s data for the financial year 2019-20, 19,733 cases were registered in the NCLT, of which over 61 per cent were IBC cases. Such rapid increase in cases in NCLT can be controlled only by setting up of Regional Benches in different states and increase in bench strength in NCLT. However, at present, 40% of the sanctioned strength of 63 members are vacant. Many regional benches are not fully functioning, leading to diversion of resources to other benches. Eventually, the Supreme Court was forced to intervene and direct the government to fill the vacancies.
The success of the IBC was based on judicial discipline, and to an extent it has outperformed its predecessor SICA (Sick Industrial Companies Act). For CIRP, the IBC set a strict time-frame of 180 days, which can be extended up to 90 days at the discretion of the Adjudicating Authority (AA). This was extended to 330 days in 2019 by amending the IBC. However, the IBBI report states that the average time taken for CIRPs, which result in resolution plans, was 406 days (excluding the time allowed by the AA), while those that ended in liquidation took an average of 351 days to conclude. In many cases it took a long time.
The delay may have contributed to a significant drop in value and major haircuts for creditors. Delays have resulted in more liquidations than resolution plans. As per available data, out of 2,653 CIRPs that were closed, AAs passed liquidation orders in 48.13% of the cases. The number of corporate debtors going ahead with a resolution plan was at a low 13.12%.
The delay in most of the cases is due to repeated judicial interference. Timelines have rarely been adhered to in the IBC, and attempts to set deadlines under it have been repeatedly thwarted by courts, with the Supreme Court making the word “mandatory” in the 330-day timeline merely advisory in nature. as read.
In the real estate sector, the law has seen significant policy confusion. Despite several amendments and policy flip-flops, homebuyers are largely marginalized in the CIRPs of real estate companies. Today, homebuyers are reported to have difficulty reaching the threshold of 10% or even 100 homebuyers. However, such a limit is necessary to ensure that projects are not stalled at the behest of a disgruntled home buyer, given the number of stakeholders in some of these cases.
Arguably, IBC may not be the best mechanism for resolving miscellaneous complaints of home buyers, and authorities like RERA may be better suited for this purpose. However, the law may need to strike a balance between the rights of home buyers under RERA and the rights of creditors under IBC. Despite the fact that homebuyers have not fared better under IBC, real estate is the second largest sector in which the IBC petition was filed.
The IBC report card may not be as rosy as one might have expected. However, it has performed much better than the earlier efforts. IBC brought about a cultural change, and cultural changes require patience and tenacity. To that extent, it is a work in progress. Each of the various stakeholders in the process, such as the government, regulators, courts, creditors and corporate debtors, need to work together to achieve optimum results of the process. While some have risen to the occasion, one hopes that others will also join the rally.
Abhishek Tripathi is the Managing Partner of Sarthak Advocates & Solicitors.
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