IBC was passed by the Parliament of India on May 11, 2016 and received assent of President on May 28, 2016. Thus, the provisions of various laws related to resolution of bankruptcy in India Inc. like SARFAESI Act (2002), RDDBFI Act (1993), The Presidency Towns Insolvency Act (1909), The Provincial Insolvency Act (1920), Chapter 19 & 20 of The Companies Act (2013) etc. were replaced by Insolvency and Bankruptcy Code (2016). This was the birth of Insolvency and Bankruptcy Board, an independent body dedicated entirely on administration and resolution of Insolvency and Bankruptcy cases-responsible for the ongoing NPA crisis in the country.
IBC was need of the hour to cope up with the rising NPA’s in the country as they led to liquidity crunch thus hampering growth of the country. The gross NPA of Indian banks increased from Rs 53,917 crores in Sept 2008 to Rs 341,641 crores in Sept 2015 which became a matter of concern for the Indian financial system.
IBC- Two Years down the line:
A few cases resolved by IBC gave unbelievable results. The takeover of Bhushan Steel by Tata Steel gave unexpected results in all elements of insolvency. Bhushan Steel is a plant with capacity of 5 million tonnes of steel per annum but due to the financial distress was producing only 3 million tonnes per annum. Now under the management of Tata Steel, it is expected to produce output to its maximum capacity. Also the recovery rate for creditors was an impressive 63%. Another flabbergasting resolution was in the case of Sharon Bio Medicine, where even the unsecured creditors recovered about 98% of their dues.
On the other hand, a lot of cases gave unpleasant surprises which include Jaypee Infratech, Binani Cement, Essar Steel etc. The biggest trouble for IBC revolves around 12 cases identified by RBI in the process. These consists of some largest companies in the country accounting for about 25% of the total defaults (by value) filed with NCLT under IBC. So the resolution process of these cases is viewed to be as the test for success or failure of IBC.
Until now, 5 out of these 12 cases have been resolved with average period of resolution at 333 days The resolution was as follows:
- Lanco Infrastructure Ltd. was headed for liquidation
- Amtek Auto Ltd. was acquired by Liberty House
- Monnet Ispat Ltd. was acquired by JSW Steel Ltd.
- Bhushan Steel Ltd. was acquired by Tata Steel. Ltd.
- Electrosteel Steels Ltd. was acquired by Vedanta Ltd.
In the remaining 7 cases, more than 415 days have passed but no resolution is achieved and neither there seems a way working for them. This period has far exceeded the timeline of maximum 270 days prescribed by IBC. Also, according to IBC, if the resolution process is not completed within a span of 270 days, the company should be subjected to liquidation. But neither of these 7 companies have been directed to the process of liquidation.
As mentioned above, the IBC seems to be a master piece on paper but its implementation in real life scenarios does not appear to be much satisfying.
In a span of two years after introduction of IBC in 2016, over 1,322 cases have been admitted under CIRP against the corporate debtors according to the data by Insolvency Bankruptcy Board of India (IBBI). Among these, 91 cases were closed upon ‘appeal and review’, 260 companies have been ordered for liquidation and only 66 cases have been resolved under IBC until now. About 905 cases are still ongoing with much of them still to be resolved even after the maximum stipulated period of 270 days.
In 66 resolution cases, the realization by creditors is around Rs. 80,000 crores against the amount settled in cases disposed at pre-admission stage around Rs. 2.02 lakh crores. This by itself undermines the significance of the resources and time spent in the resolution process under IBC.
The major issue in implementation of IBC appears to be non-adherence of strict deadline of maximum 270 days to resolve the CIRP’s. According to the experts, this is the biggest hindrance in the implementation of IBC.
Status of Corporate Insolvency Resolution Process
|Status||No. of firms|
|Closed on appeal/review||91|
|Closed by resolution||66|
|Closed on liquidation||260|
|>180 days <= 270 days||180|
|>90 days <= 180 days||159|
|<= 90 days||298|
From the above table we can see that among ongoing 905 cases, 268 are still ongoing above the time limit of 270 days and 180 are running on the extended period of 90 days.
The major reason for liquidation of 259 companies as against the resolution of only 52 companies is that the resolution value for most of the companies is less than their liquidation value. This means that the selling of the assets of these companies would fetch more value than finding a new buyer for them.
According to IBBI, about 288 companies have filed for voluntary liquidation under IBC. Most of them have stated non-operations and commercial unviability to be the reasons for filing CIRP’s. Even the liquidation process of these companies seems to take longer time than expected as over 100 companies which filed for voluntary liquidation required a span of time between 90 to 270 days before the final report was submitted to IBBI.
Short-fall of NCLT:
The major reason for the inefficiency of NCLT in resolving the CIRP’s within stipulated timeline is the lack of manpower to handle the weight of its workload. With over 10,000 of registered cases ranging from simple to complicated cases, NCLT handles bankruptcy, insolvency and also other company law cases.
While the sanctioned strength of NCLT is of 62 members, NCLT has only 28 members all across the country to hear all these cases resulting in failure to cope up with the burden of insolvency cases that forms 40% of its workload. And as the government is not able to fill the vacant seats, the plan to setup special benches for insolvency cases has taken a back seat. Two such special benches have been setup at Cuttack and Kochi, but the plan to setup more such eight benches is far away from the sight.
Flaws and Evolution of IBC with time:
With IBC being relatively a young legislation, a lot of loopholes were found and exploited by the promoters of the defaulter entities. While drafting IBC, the concerned team has taken care to leave as little ambiguity as possible in the wordings. But the real test of a legislation takes place once it is introduced and starts getting applied on the real-life scenarios.
One such loophole that was exploited by the promoters was by bidding for their insolvent companies through other entities or parties related to them. This flaw directly used to pierce the heart of IBC by giving the control of the debtor company again in the hands of the same promoter responsible for bankruptcy. This flaw was corrected by the government by passing an ordinance on 17th November 2018 making it difficult for promoters or related parties to bid without repaying their existing defaults. The ordinance also prohibits individuals or entities other than those related to promoters and possess a stake in entities responsible for NPA’s in bidding unless the payments they have defaulted upon are cleared.
This move came after a question rose on the eligibility of the two bidders for Essar Steel viz. Archelor Mittal and Numetal. The bid by Arcelor Mittal came under the scrutiny because the company had a stake in Uttam Galva Steel which is an NPA (though the stake was sold by Arcelor Mittal before submitting the bid). Also, Archelor Mittal had a stake in Kazakstan’s KazStroy Services, which in turn was the promoter of an NPA, KSS Petron. On the other hand, the bid by Numetal came under cloud as it is related to Rewant Ruia, a member of the promoter’s family.
This was only one among flaws in the IBC which was corrected by government but yet a lot of loopholes are to be revamped to prohibit their exploitation by the promoters and related parties. These include rebidding of second highest bidder resulting in extension of resolution timeline, treatment of real estate defaults in the same manner as other entities, IP’s giving information to the rejected bidder etc.
From the data and facts discussed above, we can conclude that IBC seems to be a masterpiece in theory but in practical sense it is still in the nascent stage. A lot of improvement in defining the wordings and removing the ambiguity in IBC is to be done to prohibit exploitation of the loopholes by the benefiting parties. The major challenge that IBC faces is the non-adherence of the strict deadlines for resolution of CIRP. Also in most of the cases it is seen that the liquidation process provides more value to the creditors than the resolution process resulting in wastage of time and resources involved in the resolution process.
But as IBC evolves along with time, it can become a sword with sharp edges that’ll cut-off the parasite of NPA’s stick to the Indian Financial System.
(Written by Dhiraj Jadhav, First-Year MMS)