In the pre-IBC era, recoveries were enforced through the RDDBFI Act and SARFAESI Act. Under both acts the recovery mechanism was handled through DRT tribunals. Under SARAFESI the recovery was proposed to be done through the mortgaged assets whereas under the RDDBFI Act recovery was expected from mortgaged assets as well as assets belonging to borrowers and guarantors.

Tedious process

“It’s true to a large extent. Though the RBI tried to formulate schemes to revive defaulting companies, most of them were unsuccessful due to rising NPAs. There was a lack of proper insolvency law, and the process of winding up companies was tedious. Most of the defaulting companies would go for a winding-up petition. Secured creditors would either enforce their securities under the SARFAESI Act or relinquish their securities and await payment after the liquidation of the company’s assets, along with a list of other creditors,” explains Anita Gandhi, Whole Time Director, Head of Institutional Business, Arihant Capital Markets Ltd. Gandhi says that “the major drawback of the SARFAESI Act, 2002, was that there were no rights available to unsecured creditors”.

“The major thrust was persuasion as was defined in the Code of Conduct of each bank. Of late, banks started employing recovery agents who were paid a commission on the basis of the recovery amount. The agents adopted ethical and non-ethical means of recovery and many untoward incidences took place,” points out Paanse. “Today, this practice is still prevalent to some extent but RBI tried to control it by issuing various guidelines from time to time on the deployment of recovery agents.

Under the State Co-operative Act, the recovery process was defined for co-operative banks in various states governed by their respective state laws. The fact remains that the banks are still focused on recovery by salvaging the assets and are not thinking seriously about recovery through revival,” adds Paanse. “Predominant concepts like ‘time value of money’ and ‘maximisation of asset value’ were totally ignored,” adds Khetan.

Also, there was no uniform mechanism available for the discharge of formidable liability except for the rehabilitation schemes that wee propounded and proposed by companies under the Aegis of SICA through the BIFR route. These fora were also governed under archived laws which had not evolved over the decades, even as industrial and economic activity grew at a fast pace post the 1992 liberalisation.

With an objective to change all this, in 2016 the Modi government introduced the Insolvency and Bankruptcy Code, 2016 (IBC) a law which created a consolidated framework that governed insolvency and bankruptcy proceedings for companies, partnership firms as well as for individuals. Most of the old legislation and the legislative bodies were scrapped.

The IBC Code was introduced to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as opposed to the debtor-in-possession system. “When insolvency is triggered under the IBC, there can be two outcomes: resolution or liquidation. All attempts are made to resolve the insolvency by either coming up with a restructuring or new ownership plan, and if resolution attempts fail, the company’s assets are liquidated,” explains Gandhi.

She says the first objective of the IBC is resolution – saving a business as a going concern through restructuring, change in ownership, mergers, and other methods. The second objective is to maximise the value of the assets of the corporate debtor, and the third objective is to promote entrepreneurship, increase the availability of credit, and balance interests. Considering these factors, it is certainly not a futile exercise in principle.

“The IBC was introduced in India in 2016 to provide a time-bound process for resolving insolvency in businesses and individuals. The most important drawback of IBC is that the core purpose is defeated as the pace of resolution is very slow. Several cases have been dragging on for years leading to delays in the resolution process, resulting in a loss of value for the assets of the debtor,” says Paanse.

“Another drawback is that IBC disproportionately favours the interests of creditors over the insolvent entity and its stakeholders. The fee charged by professionals engaged in the insolvency resolution process is too high and not affordable by small business. Last but not least, the integrity of those involved plays a very significant role,” adds Paanse. He suggests that the IBC process can work well only if the resolution professionals, the lenders who form the committee of creditors and the NCLT bench all have the same goal in mind – to maximise the value at which the asset is sold.

Recent data from the IBBI March 2023 newsletter indicates that the average duration for case resolution has increased significantly, reaching a high of 632 days for OCs in FY22-23, up from 528 days in FY21-22 and 458 days in FY20- 21, and a high of 613 days for FCs, up from 531 days and 463 days, respectively.

“Since inception, out of 6,571 admitted insolvency cases, a mere 678 have had their resolution plans approved, fetching creditors 32 per cent of their total claims. That means creditors including banks faced a deep loss of 68 per cent at the aggregate level in these 678 cases. Within these cases too, recovery is patchy and only a handful of them have faced a reasonable value. About 2,030 cases ended up in liquidation and these were largely cases that had languished in the early insolvency regime. The hope of recovery was abysmal to start with. That said, a bunch of fresh cases too has gone into liquidation owing to a long timeline leading to deep erosion of asset value,” says Khetan.

The share volume of recovery would take decades to be settled; thus, creditors like banks, institutions and investors dreaded approaching quasi-judicial bodies which were entangled in lengthy procedures, and inordinate delays and had been delivering extremely poor outcomes for years.

A piece of bad news

The first insolvency resolution under this code was submitted by auto ancillary company Synergies-Dooray Automotive Ltd on 23 January 2017 for a debt outstanding of Rs972.15 crore and the order was passed by the NCLT Hyderabad bench on 14 August 2017.

However, the first approved bad-loan resolution plan under the newly formed IBC resulted in an undesired resolution and came as a piece of bad news for the company’s creditors as the recovery approved was a mere 6 per cent or Rs54 crore. They had to take a haircut of 94 per cent. 

According to a senior banker who has dealt with cases in both the pre- and post-IBC era, the first case was a shocker. A related party of the defaulter’s company walked away with the company, leaving the creditors with a 94 per cent haircut. There was a significant conflict of interest, but the plan was approved.

The banker says: “Everyone who thought that the brand-new IBC law would be a panacea for instant and maximum recovery was in for a rude shock. In fact, banks began to rethink exercising their option to drag debtors to insolvency courts and bankers began to wonder whether they should resort to the negotiation route.”

While the case of Synergies-Dooray Automotive Ltd hinted that IBC would not be as promising as it initially appeared, the myth that process would result in maximum recovery was shattered, and this became evident as bigger cases began to pile up. 

With few other options, large NPAs began landing at insolvency courts in the hope of recovery and revival, but baring a few, many went into liquidation.

The example of Kingfisher Airlines aptly demonstrates how the absence of proper insolvency and bankruptcy measures proved costly for the lenders in 2012. Vijay Mallya famously escaped but left behind a default of Rs9,000 crore of loans he took from a consortium of two dozen banks led by the State Bank of India. 

In 2017, the large cases referred for resolution proceedings included Monnet Ispat & Energy which had a total admitted claim of Rs11,478 crore. Amtek Auto had an admitted claim of Rs12,848 crore and Bhushan Power & Steel Ltd an admitted claim of Rs47,902 crore. Additionally, Alok Industries had an admitted claim of Rs30,707 crore and Electrosteel Steels an admitted claim of Rs13,958 crore.

None of these cases resulted in the desired recovery for the creditors, and few had many bidders. For instance, the sole resolution plan for Monnet Ispat and Energy from the JSW Steel-Aion Investments combine which took one year, was accepted by NCLT for a liquidation value of Rs2,457 crore, which translated into a haircut of about 77.69 per cent for the lenders.

In this case, State Bank of India, was the lead bank while other lenders included Bank of Baroda, Bank of India, IDBI Bank, ICICI Bank and Axis Bank. Even Amtek Auto Ltd’s insolvency road was long and bumpy and took 4 years to resolve, something totally against the letter and spirit of the code.

 Lapses galore

Section 12 of the IBC mandates that the Corporate Insolvency Resolution Process (CIRP) must be completed within 330 days – roughly 11 months – from initiation. There were several lapses in the bidding process with bidders like Liberty House of UK being found to have been not acting according to the approved bid norms in the first round, and US-based fund Deccan Value Investors LP (DVI) being declared ineligible in the second round, etc.

Even the Supreme Court of India expressed its unhappiness and stated this deviation from the spirit of the corporate insolvency resolution procedure was against the timeframe set out under the IBC.

DVI eventually received a court order to buy Amtek Auto for R2,619 crore and the lenders led by IDBI Bank, had to take a haircut of around 80 per cent of their advances.

A senior banker mentioned that as the number of cases started to accumulate at NCLT it began to strain the infrastructure. One bench was already handling several cases and when more were assigned this naturally resulted in congestion. When Covid hit in 2020 manpower became a huge problem, leading to a depletion in the number of members who were handling the problem.

Commenting on infrastructure challenges, Varghese Thomas, Partner, J Sagar Associates says: “Delays on account of infrastructure challenges and lack of sufficient members has significantly undermined the confidence of creditors in the IBC process. The code in itself is robust and dynamic but the implementation of the same is where we are falling short.”

In March 2021, JSW Steel bagged Bhushan Power & Steel Ltd as part of the resolution process by paying Rs19,895 crore to creditors which included Punjab National Bank, Oriental Bank of Commerce, IDBI Bank and UCO Bank. They took a haircut of close to 60 per cent on their lending of Rs47,902 crore.

In Alok Industries Ltd with an admitted claim of Rs30,707 crore, NCLT approved the resolution of the approved bid of Reliance Industries for an amount of Rs5,052 crore to the financial creditors, a haircut of close to 84 per cent, while in Electrosteel Steels Ltd, NCLT approved Vedanta’s Rs5,320 crore resolution plan and the financial creditors had to take a 62 per cent loss or haircut for advances.

Later in 2017, Ruchi Soya Industries which had admitted claims of Rs12,146 crore was bagged by Baba Ramdev’s Patanjali Ayurveda for Rs4,223 crore a haircut of 65 per cent. The case went up to the Supreme Court since Singapore’s DBS Bank, which had voted against Patanjali’s resolution plan, had appealed against NCLAT’s decision of allowing distribution of the bid amount but lost. 

In 2018 and 2019, prominent NPAs referred to the NCLT included Videocon Industries Ltd where financial creditors had to take a haircut of 95 per cent with a claim of close to Rs65,000 crore; Reliance Infratel with a claim of about Rs42,500 crore resulting in a realizable amount of Rs4,267 crore, a haircut of 90 per cent; Jet Airways with a claim of Rs15,432 crore in which the haircut was 93 per cent and DHFL which had an admitted claim of Rs87,248 crore and was bagged by Piramal Housing for Rs37,167 crore resulting in financial creditors incurring a loss of 57 per cent.

Some would argue that the IBC has its positive side as well. They contend that a significant number of CIRPs were successful, and that the size and value of the debt also matters. According to official figures, a total of 6,571 CIRPs were initiated from 1 December 2016 when the provisions related to CIRPs came into force, until the end of March 2023. Of these, 4,515 have been closed.

Of the CIRPs closed, the CD was rescued in 2,485 cases, of which 959 have been closed on appeal or review or settled, 848 have been withdrawn, and 678 cases have ended in approval of resolution plans, while 2,030 have ended in orders for liquidation. The point is that in cases where the default amount is large, say beyond Rs1,000 crore the statistics are different.

As per figures given in the IBBI’s January-March 2023 quarter review, of the 678 CDs rescued under the Code, 117 had admitted claims of more than Rs1,000 crore. Till December 2022, 102 such CDs have yielded resolution plans. One more CIRP with admitted claims of more than Rs1,000 crore was later reported as yielding a resolution plan during that period.

 Mere 17 per cent recovery

According to data from IBBI since the inception of the IBC the number of borrowers with admitted claims of over Rs1,000 crore was 165 and the collective aggregate claims amounted to Rs6,94,000 crore. However, their assets were valued at only Rs40,000 crore.

During January-March 2023, 14 such CDs have yielded resolution plans. The realisable value of the assets available with these 117 CDs, when they entered the CIRP, was only Rs1.51 lakh crore, though they owed Rs8.09 lakh crore to the creditors. This clearly means that the creditors which in most of these cases are banks, have recovered a mere 17 per cent of the assets of top corporates rescued under IBC.

The review also says that of the 2,030 CDs ending up with orders for liquidation, 176 had admitted claims of more than Rs1,000 crore. Till December 2022, 165 such CDs had ended with orders of liquidation. During January-March, 2023, 11 more CDs ended with orders for liquidation. These CDs had an aggregate claim of Rs7.39 lakh crore. However, they had assets, on the ground, valued only at Rs0.41 lakh crore.

“There is an unrevealed and undisclosed naturally formed nexus albeit without intention which is hampering and overpowering the IBC process thereby resulting in poor recovery and providing a hibernating zone to the defaulting borrowers. Checks and balances need to increase in this area to enhance recovery,” suggests Khetan.

Basically, the fact of the matter is distressed companies liquidated under the bankruptcy code, have far outnumbered those rescued and this is not a good sign, and it is worrying that the average resolution period goes much beyond the stipulated 330 days. This is a challenge and the government has to give it serious thought and put a plan into action.

In an article penned in the Indian Express in August 2021 by MS Sahoo when he was chairman of the IBBI, he made the point that IBC was a tool in the hands of stakeholders to be used at the right time, in the right case, in the right manner. He wrote: “They (creditors) should use it in the early days of stress, when value of the company is almost intact, and close the process quickly before value recedes further to minimise or even avoid haircuts. Post disposal of the pre-IBC legacy matters, as ‘recent’ stress cases are dealt with, the haircuts would perhaps be pleasing to the eye.”

First thing, there might not be a single case where the haircuts would have been pleasing to the eye of the creditors, secondly it is only wishful thinking that creditors should invoke IBC when the stressed company is almost intact.

One thing that professionals across the insolvency and bankruptcy sector were unanimous about in their views was that lack of infrastructure was an issue – both the NCLT and NCLAT infrastructure as well as at the other judicial forums. For a CIRP to be approved, especially in large NPAs the process invariably goes through different judicial proceedings right up to the Supreme Court. “There are several issues, and rotational benches already have a tremendous workload, there has to be a strong support of infrastructure including adequate judicial and technical members and support staff,” says Vaibhav Bhure a leading practitioner in the IBC space.

Bhure added: “Infrastructure is undoubtedly one of the issues which add to cases piling up and delay, thereby stretching the entire resolution process. Thus, it’s the need of the hour to look into this issue seriously by the Central Government so that NCLTs can be further strengthened and the objective behind IBC be achieved in its true sense. With the increase in filings day by day, the issue regarding the adequate overall infrastructure assumes a lot of importance. If one would collate the data as regards the filings and number of benches available then you will see what I mean.”

As of date, the tribunal has 16 benches, six in Delhi, five in Mumbai, three at Hyderabad, two each at Chennai, Kolkata and Ahmedabad, one at Bengaluru, Ahmedabad, Prayagraj, Chandigarh, Cuttack, Guwahati, Jaipur and Kochi.

The solution is rather simple – strengthen the infrastructure for the code. “Benches need to be fortified by enough judges and the number of resolution professionals needs to be increased. There are roughly 4,300 Insolvency Resolution Professionals in the country of which only half have the authorisation to participate in a case,” feels Paanse.

The IBC process needs to be boosted at multiple levels, from infrastructure to a vibrant stress asset market. Until then IBC might begin to resemble its torrid predecessor in insolvency resolution. Appeals against NCLT orders are heard by the National Company Law Appellate Tribunal (NCLAT) which functions at a strength of five courts, four at the principal bench in New Delhi and the fifth at NCLAT, Chennai. NCLAT is also the appellate tribunal for orders passed by the Competition Commission of India (CCI) the National Financial Reporting Authority.

“IBC in its eighth year now, has fallen woefully short in its primary objective of fetching recovery for creditors involved. The processes and recovery resemble a scrapyard. The Code’s comparison to a dumping yard may seem harsh but there is good reason and enough evidence for this,” says Khetan who fears that IBC is falling from the meridian and if not amended diligently and pragmatically, will soon “result in cremation ground for death of companies under stress. Logic, wisdom and prudence should be the three pillars in consideration of every amendment that is to be made in the IB Code”.

Talking about India in the context of other countries. In the World Bank’s 2020 Report on ‘Ease of doing business’ India’s rank in resolving insolvency went from 136 in 2017 to 52 in 2020. However, it still has a long way to go as compared to countries like the US which ranks at 2, Germany at 4, the UK at 14, and Australia and Singapore at 20 and 27 respectively.

So clearly strengthening and making further reforms in enforcing contracts and ‘resolving insolvency’ is one of the most important factors which international businesses and investors scrutinise before making a conscious decision to infuse resources into industries. With the growing international trade integration of businesses increasing exponentially clearly a robust insolvency resolution framework which is fast and reliable is a must.

In February 2023, Supreme Court judge Justice Sanjay Kishan Kaul credited India’s rise in the ‘Ease of Doing Business’ to the introduction of the Insolvency and Bankruptcy Code (IBC), calling it a dynamic law that adapts to the “realities of the Indian society”.

“India’s rank has gone from 142 in 2014 to finally 63 in 2022 – due credit for which should be given to the IBC. In my opinion, IBC has also had a big role to play in India’s new ‘startup’ culture, by creating a conducive environment for budding entrepreneurs,” Justice Kaul said in his address as chief guest at the inaugural conference of the Insolvency Law Academy.

In 2018-19 the World Bank’s report listed India among the 10 economies. The report said that among all the parameters for facilitating business was, “the least reformed area was resolving insolvency.” In the report of 2017-18, India scored zero on this account.

In countries like the US and UK, the Insolvency Regime is very robust and the UK law grants the greatest protection to banks or other parties that contract for a security interest. If a security is ‘fixed’ over a particular asset, this gives priority in being paid over other creditors, including employees and most small businesses that have traded with the insolvent company.

Following the Cork Report in 1982, the new policies of the UK’s insolvency law have attempted to try and save a company that is in trouble, minimize losses, and ensure that the burdens placed on employees, the community, creditors, and other stakeholders as a result of enterprise failure are distributed fairly.

In the US, although individual states have laws that govern the relationship between debtors and their creditors, bankruptcy is largely governed by federal law and the United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States” and the Congress has exercised this authority several times since 1801, enacting new laws and amending them from time to time.

The main focus of US insolvency law has been to provide maximum return to creditors (and, if possible, equity holders) of the debtor and, in that context, to reorganise rather than liquidate business debtors to preserve employment and to realise the ‘going concern surplus’ of reorganisation value over liquidation value.

Even China has in recent times made resolving insolvency easier by providing rules for post commencement credit priority and increasing the participation of creditors in insolvency proceedings. This reform applies to both Beijing and Shanghai.

While countries around the world are making resolving insolvency easier by promoting reorganization proceedings India also made resolving insolvency more difficult by not allowing dissenting creditors to receive as much under reorganization as they would receive in liquidation. 

Also, the promoters and own-ers are not allowed to bid. Jet Airways is a classic example of what is wrong. Compare this with the US, where airlines’ wings are not clipped; bankruptcy cases are resolved in a jiffy.

New cases surge

So naturally the big question in everyone’s mind is – is the implementation of IBC itself is in distress due to pendency, is it going the way of the normal civil courts where cases are pending for ages? Most experts are optimistic: they say if the gaps are plugged then it will make a significant impact in the proper implementation of this legislation.

According to Varghese Thomas: “These challenges will have an impact on recovery ratios and the current statistics speak for themselves. At the same time, what the recovery numbers do not show is the improvement in debtor behaviour as a result of the threat of IBC proceedings.”

In a reply to a question in the Lok Sabha on 13 March 2023, Minister of State for Corporate Affairs Rao Inderjit Singh said that till January-end this year, more than 21,200 cases were pending before NCLT. This is a big number by any standards and at the rate at which new cases are being referred to under IBC, the pendency is only bound to increase.

The pile-up of large cases is the real challenge that will have to be tackled if we have to save it from going the way of our civil courts. As it is, India’s corporate debt repayment rate is abysmally low, and even after prolonged recovery proceedings, precedence has shown that lenders have not recovered more than a quarter of their loans – recoveries fall sharply as delays mount.

 There are also cases where promoter debtors who owe to a lot of creditors try to game the whole IBC process, thereby causing further and inordinate delays, thereby frustrating any attempts at a fair resolution. On the other hand, while financial creditors like banks and NBFCs would try to settle for what they would consider reasonable recovery, operational creditors – many of them service providers – are left with no choice and are thereby unhappy with the approved resolution.

According to Santosh Poojari, partner at Bhatia and Poojari Associates, in their experience, smaller operational creditors often have very little representation in the CoC. Smaller players like provider or services have to accept whatever the majority accepts, and do not have the financial capacity to then go into litigation. “The government has to think about these issues including the infrastructure issues and come up with some solutions,” he added.

Take for instance the case in NCLT filed by a group of home buyers of Navi Mumbai-based Monarch Developers as an intervention application against the builder in 2019. Close to 1,500 under-construction flats were sold by the developers spread across Navi Mumbai and the buyers who saw little hope of getting possession of their flats, filed an application at the court seeking participation in the case filed by Capri Global under the IBC.

Talking about the case one of the flat owners said: “It has been so many years and our case does not come on board at all, this despite the fact that a resolution plan has been submitted nearly 2 years ago, it’s so frustrating because we were hopeful that as envisaged under the IBC, we thought the interests of homebuyers will be protected.”

Indeed, as we check the case status, we see that it has been adjourned mostly due to ‘paucity of time matter is not reached’. This is not what the code had envisaged for all types of creditors, but the fact is thousands of such cases linger on for such reasons, and this should be a cause for worry.

So, where is the IBC heading? “Since it is designed more on a global framework, keeping creditors and shareholders’ interests in mind, sticking to timelines, and inducting more professionals into this process will make it more fruitful,” says Gandhi.

“Presently IBC is being halfway implemented as it covers only the corporate entities and not partnership firms. Proprietary concerns and partnership firms are not covered under their umbrella, which mainly belong to the MSME sector. The Indian economy is dominated by the MSME sector and it is the backbone of the Indian economy. About 63 million such units have been estimated in the economy. If such a huge mass is deprived of benefits of IBC, how can we expect IBC to improve the economy?” questions Paanse.