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Is IBC, 2016 Effective?

Is IBC, 2016 Effective?

Aditya Kaushik, Young Professional, NITI Aayog

 

Four years down the line, how is the Insolvency and Bankruptcy Code (IBC), 2016 working? Given the behavioural transformation, the performance ought to be seen in totality. It should be seen in terms of what happens under the IBC, on account of the IBC and within the shadow of the IBC. Till June, 2020, 250 companies were rescued, while 955 companies were referred for liquidation. According to IBBI, the resolution plans have yielded about 191 percent of the realizable value for the Financial Creditors on an average of 380 days, a far cry from previous regime which took about 1500 days on an average to resolve. Thus, the IBC has bought about a marked improvement in higher credit realization and considerably shorter resolution process.

The IBC, 2016 is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Until few years back, the process of winding up of companies was regulated by the Companies Act 1956 and was under the superintendence of the court which was not so efficient and also resulted in undue delays. After the enforcement of the IB Code, 2016, the winding up procedure is now under the supervision of National Company Law Tribunal (NCLT) ensuring quick and prompt action in the early stage of debt default by a firm and hence, results in optimum recovery rate. The IBC repealed two pieces of legislation: the Presidency Towns Insolvency Act 1909 and the Provincial Insolvency Act 1920 and amended 11 others.

The prime objective of IBC is to rescue Corporate Debtors in distress. The Code specifies a time-bound insolvency resolution process, which needs to be completed within 330 days including any litigation. The fulfillment of IBC’s objectives is evident from the cases that have seen successful resolutions. Although, the number of companies that are under liquidation process is almost four times that of companies that have been rescued, but value-wise the assets of these 250 already rescued companies are four time that of 955 companies under liquidation.

This code is seen as one of the most crucial structural reforms. It has been one of the enablers in in improving India’s Ease of Doing Business (EODB) ranking from 130 in 2016 to 63 in 2020. The IBBI has provided a clear and transparent road map for investors to wind up their business.

Although, the IBC has been effective to a great extent so far, but the compliance to timelines remains an issue. The earlier envisaged timeframe of 180 days (+90 days extension) has been increased to 330 days set for resolving the issues; yet the resolution plans are unable to comply with the revised timeframe. On an average it takes 380 days for resolution plans to reach a conclusion.

The timeframes are not met in most of the cases because of the delay in court process. The National Company Law Tribunals and National Company Appellate Tribunal (NCLAT) are laden with matters. The number of benches is sixteen while the total number of bench members is just 20 thus the bench members seems to be overburdened. Further, the resolution process involves a number of stakeholders worth competing interest and therefore resolution is complex as well as time consuming. Moreover, recently a number of issues have been raised by various stakeholders regarding valuers having unspecified degrees being enlisted as Registered Valuers by IBBI. Such anomalies may deteriorate the Valuation Profession and its credibility thus acting as an obstacle in swift resolution process.

The major challenges visible in the resolution process are overburdening of NCLT benches functioning around the country, credibility of registered valuers and the sole authority given to the committee of creditors (CoC) to control the RPs without any guidelines. Hence, the immediate need would be to enhance institutional capacity of the NCLT benches. Also, there is a need to bring in more transparency in selection of RPs.

Altogether, the IBC process is one of the major reforms which if implemented effectively and in a time bound way will provide major gains for the corporate sector and the economy as a whole.

 

Aditya Kaushik is a Young Professional, NITI Aayog. Views expressed are personal.