Looking back at 5 years of India’s Insolvency and Bankruptcy Code
By Gausia Shaikh (REDD Intelligence)
“Speaking words of wisdom, let it be” - The Beatles
India’s Insolvency and Bankruptcy Code (IBC) completed five years since its enactment in May 2016. In the past five years, while resolving complex cases of dire stress in the credit market, the law has borne some harsh criticism. Be it for the delays in the restructuring process, the abysmal recoveries in certain cases, or unpopular interpretations of the law by the judiciary, the IBC has faced a barrage of criticism over its alleged ‘inadequate’ performance, most of which isn’t entirely unfounded. However, amidst the cacophony on creditor recoveries basis a few prominent cases and the discontentment at cases going on for longer than the timelines mentioned in the law, critics tend to forget certain important aspects as to the background in which the law was introduced, as well as in which it continues to develop.
First, the IBC is not a tool for debt recovery. It is a law aimed at resolution of stress in the credit market; the revival of viable firms; and the liquidation of unviable firms. Creditor recoveries are just an aspect of the outcome of the in-court resolution process under the law. Yet, we have critiqued the law primarily on this metric.
Secondly, when the IBC was first introduced, there was an onslaught of big non-performing assets (NPAs) into the insolvency ecosystem, with companies which had seen years of stress and failed attempts at in-court as well as out-of-court restructurings. The law was just dealing with ghosts from the past insolvency law regimes.
It is imperative to understand that a new law can only streamline procedures which have failed in the earlier legal regimes, and ensure protection of rights of all stakeholders in the case of an insolvent company. It cannot be expected to derive high creditor recoveries from zombie firms which have survived way beyond their expiration date. Yet, that was the expectation that the law was tested against.
Lastly, in terms of timelines, critics forget that prior to the introduction of the IBC, winding up proceedings under previous legal regimes in India took more than five years to be completed. The 180-270-330 day timelines mentioned in the law were arguably for a more sophisticated system with appropriate institutional infrastructure where: (i) credit and default records were stored in ‘information utilities’ as information repositories created under the law; (ii) resolution professionals supervising restructuring procedures received cooperation from all stakeholders involved in the proceedings; and (iii) courts and tribunals worked within their limited role in IBC proceedings, while the creditor committee made all commercial decisions.
Unfortunately, the IBC was not born in this environment. Yet, we judged the law not in comparison to the regimes it changed, and within the backdrop of a still developing institutional infrastructure, but we judged it on the basis of the seemingly ambitious timelines written in the text of the law.
The Insolvency and Bankruptcy Board of India (IBBI), as the insolvency law regulator, recently released data on the past five years of the IBC. A study of the data conducted by REDD Intelligence Asia paints a positive picture of the law when perceived objectively, and in cognisance of the above scenarios surrounding the introduction and functioning of the law.
Despite its suspension between March 2020 to March 2021 in response to the coronavirus pandemic, the IBC has dealt with resolving stress of more than 4,000 companies (and counting) in a brief span of five years. Not to mention that while catering to resolution of non-financial corporate debtors as originally intended, the IBC has since also adopted a new role as the temporary resolution framework for financial service providers, with the resolution of Indian housing finance giant Dewan Housing Finance Limited.
During the years following its operationalisation in December 2016, not only has the IBC reduced the resolution timeline to an average of less than two years, but it has also led to a change in the behaviour of credit market participants.
For instance, while promoters afraid of losing control of their companies under the creditor-in-control model of the law have been settling disputes out-of-court, companies which have been rendered unviable over the years have increasingly been using the law as a tool for restructuring as well as to exit the market.
Further, even if one were to look at credit recoveries as a metric for judging the performance of the law, especially for big NPAs, we find that recoveries have far exceeded expectations. For instance, in June 2017, the Reserve Bank of India (RBI), the Indian central bank, had directed lenders to initiate IBC proceedings against 12 big accounts with prominent names such as Bhushan Power and Steel, Bhushan Steel, Essar Steel India, and Jaypee Infratech. Nine of these accounts have since been resolved and each of them has had recoveries of more than 100% of the amount that creditors of these ailing companies would have received had the companies gone into liquidation.
In addition to the above, despite the criticism that the judiciary has faced in its interpretation of the law in the past, it has also facilitated the filling of loopholes where the law has fallen short. For instance, the IBC has not yet introduced a framework for cross-border insolvency. However, when the issue came up in cases like that of parallel Dutch and Indian insolvencies in the case of Jet Airways, the tribunals stepped in and passed orders relying on accepted global principles and practices.
A study of the data on the law shows that as spectators and analysts, we are often quick to judge a law relying on outliers, popular cases, initial numbers, and predictions. However, it is important to not be clouded by such initial indicators of performance of a law, which is but a toddler navigating its way through the treacherous lanes of a complex emerging economy like India.
Further, it may be argued that five years is an insufficient period to pass judgment on a law, especially when routine amendments are being made to the law almost annually to accommodate for new market demands.
That said, the law has visibly failed on one account when considering its performance in the past five years - i.e. on the predictability of outcomes. Important issues raised in the past few years, be it in the context of liabilities of new owners for pre-insolvency offences of an insolvent company, the allotment of spectrum, airport slots and other such unique assets in industries such as the telecom and aviation industry respectively, as well as on the ability of certain entities such as asset reconstruction companies in acquiring insolvent companies under the law continue to be open questions and must be resolved soon.
In a nutshell, a lot has happened in the past five years since the law was enacted, including an unexpected external shock like the coronavirus pandemic. Hence, it is important to give the law some more time before we pass judgment on it. For now, as The Beatles said - “Let it be”.
(*) A modified version of this post was published on the REDD Intelligence website.