Late, your name is IBC: Insolvency framework quickly losing credibility, needs a booster shot
Recovery falling even below the liquidation value of assets admitted under the Insolvency and Bankruptcy Code (IBC) process shows why the IBC ecosystem is in desperate need of repair. As this newspaper reported on Friday, the recovery rate from creditors reached a record high of only 10.2% of admitted claims in January-March 2022. This is the second consecutive quarter of disappointing figures – the achievements in October-December 2021 were only 13.4%. While it is true that the performance of the IBC should not be judged on the basis of the data of a few quarters and that the size of the achievements should not be the main criterion, the fact is that the overall achievements since the entry in force of the IBC are modest at 32.9%.
Bidders for banks’ toxic assets are dwindling as the pandemic has reduced the appetite of potential buyers, but factors like a large number of ‘dead cases’ from the Council for Industrial and Financial Reconstruction regime etc. also contributed. The delays and bottlenecks facing National Company Law Tribunals (NCLT) resolution cases have aggravated the situation. Just over two-thirds of companies in resolution, according to the Insolvency and Bankruptcy Board of India (IBBI), exceeded the Code’s 270-day deadline for resolution. Delays not only directly contribute to the erosion of value, but they also deflate buyers’ enthusiasm for the IBC process. Take the example of Jaiprakash Associates. Although filed under IBC in September 2018, the case has yet to be admitted. Even Jaypee Infra, directed to the IBC by RBI, has yet to see a resolution nearly five years after being taken to court. The deadline for admission was 14 days when the IBC came into force. In many cases, the delays give developers ample time to embezzle funds and empty company coffers even as banks helplessly watch an asset lose value. A big part of the problem is the insufficient strength of the NCLTs. Against the sanctioned strength of 63 out of 15 benches, a response to an RTI query showed there were only 22 judicial members and 25 technical members. With a slew of retirements expected this year, the BAC process is likely to be beset by further delays. There is also the problem of shorter terms granted to many members and the reluctance of the government, in some cases, to grant extensions even when these members were entitled to them.
It’s not just the NCLT throwing a spanner in the works. Even Committees of Creditors (CoCs) do not perform well on speed. As former IBBI Chairman MS Sahoo and CKG Nair pointed out in a recent column in this article, commercially wise CoCs should be able to identify companies for liquidation by the 30th day of the Business Insolvency Resolution Process (CIRP). But, 255 CIRPs that ended in liquidation in April-December 2021, took, on average, 615 days. Indeed, while a majority of CIRPs who followed the full course should have resulted in the rescue of the companies concerned, 76% of those who followed the full course ended in liquidation. Obviously, the erosion of value due to delays cannot be the NCLT’s sole fault. Given that in many cases it was lending without due diligence that landed banks in the bad asset soup, such delays seem unforgivable. To avoid any collusion between lenders and potential buyers, a code of conduct is necessary.
The IBBI has proposed making it mandatory for the CoC to share all documents related to a distressed business with the insolvency resolution practitioner. She also proposed setting deadlines for the preparation of the information note and the completion of the evaluation exercise. These, if implemented, would be important steps forward. The fact is, IBC could find itself in the same club as its predecessors in India’s resolution history if the timeframes at the NCLT are not corrected. The credibility gap must be corrected, immediately.