Analyzing and Gaining Insight in IBC’s 3 Years Journey By FCS Shweta Gupta

When the Insolvency and Bankruptcy Code, 2016 (IBC) was implemented in August 2016, it brought great cheer in the Indian market and was hailed by all stakeholders and industry experts as “The Act”. 

It was believed that IBC is a comprehensive, consolidated and single law that lay down a robust framework for Insolvency and Bankruptcy, would resolve cases of the bad loan in the specified time frame. It was seen as an effective tool that would help in the quick recovery of billions of dollars of bad loans from distressed and defunct firms.

Now that IBC is a little over 3 years old it is time to scrutinize and investigate a little to find out if it has performed the way as envisioned. An in-depth analysis of the Insolvency and Bankruptcy Board of India (IBBI) data, which was processed by EY India, through 7 charts tries to give a detailed understanding of how the system has progressed.

#Chart 1.

Source: IBBI, EY India, Business Standard

This chart clearly indicates that the amount recovered by financial creditors has varied, and they're certain is no indication of clear improvement. On the contrary, if we look at the recovery rate in the quarter ending December 2019, it was a meagre 12 per cent, which obviously is the lowest in the last two years.

#Chart 2.

Source: IBBI, EY India, Business Standard

Another important factor that came to light by the data processed by EY India, and as depicted in Chart number 2, is that big-ticket recovery cases, in which huge amounts of claims are staked by financial creditors, take longer resolution time.

#Chart 3.

Source: IBBI, EY India, Business Standard

Chart 3 brings to the fore the average recovery rate, which rises with time, but only till the specified upper limit of 330 days. Henceforth, there is no clarity that beyond the stipulated period of 330 days how fast or efficiently the cases get resolved, yet, one clear indication is that the cases with the higher claims get most delayed.

#Chart 4.

Source: IBBI, EY India, Business Standard

Chart 4 unquestionably depicts that owing to big-ticket cases being resolved in a longer period, the average time taken for resolution or liquidation is gradually going up.

#Chart 5.

Source: IBBI, EY India, Business Standard

The data in Chart 5 interestingly highlights a very crucial aspect that it is advisable to initiate and admit a company in IBC while it is still in operation, as their recovery rate is much higher compared to the defunct companies. Statistics of the data shows that 1/3rd of the companies which were not able to reach a resolution was already defunct.

#Chart 6.

Source: IBBI, EY India, Business Standard

Chart 6 points out that of all the manufacturing companies that went to the National Company Law Tribunal (NCLT), the maximum number of resolutions were witnessed in chemicals and metal firms. In contrast to this, the labour-intensive or employment friendly companies like leather and textile mostly get liquidated.

#Chart 7.

Source: IBBI, EY India, Business Standard

If we talk about which services go for an appeal or review the most, then Chart 7 gives a clear indication that the real estate and construction sector have higher numbers than any other sector. On the other hand, power and hospitality sector companies are more likely to see the highest percentage of resolution.

Last Word

By analyzing and decoding the entire data on IBC it can be conclusively stated that IBC is going in the right direction considering that it has only been three years since it has been implemented.

MS Sahoo, the chairman of the Insolvency and Bankruptcy Board of India (IBBI), is of the view that "Prompt course corrections" have been done to the code, and stressed that, with challenges, the law (IBC) has become stronger.

He opined, “When the law is new, it is natural to face legal and other challenges. A law of such a significance takes years to settle down.”

Discussing the benefits drawn from strong IBC, the IBBI chief explained, “The code is a proactive, behavioural law. The inevitable consequence of a resolution process (the control and management of the firm may move away from existing promoters and managers) deters the management and promoter of the firm from operating below the optimum and motivates them to make the best efforts to avoid default. Further, it encourages debtors to settle default with the creditor at the earliest. With the code in place, the defaulter’s paradise is lost.”

MS Sahoo, further stresses on the need of the creditors, especially financial creditors, to be well informed and take judicious decisions before extending credits. To prove his point he says, “A creditor needs to apply its mind whether it is the right time to initiate insolvency proceedings of a defaulting firm after careful analysis of facts and circumstances, particularly after evaluating other options for the rescue of the firm and options for recovery of default. That is why the code allows discretion to creditors. Such discretion must be used judiciously and must be explicable. In fact, the discretion under the code is a higher-order responsibility.”

Thus, in a nutshell, we can conclude that IBC has stood the test of time and given more hits than misses. Whatever hiccups are being faced in its implementation is because it is still in its infancy and is still evolving. The IBBI’s prompt action has resulted in filling up of potholes in its way, as lots of amendments and provision inclusions have taken place.

Insolvency and Bankruptcy Code has come far, that is, if we compare things in light of the previous provisions, yet, there is a lot to be done to make the system smoother, effective, less time consuming and litigation prone.

"The need of the hour is to take inputs from all stakeholders
and domain experts to understand the problem areas,
and innovate as well as fine-tune the Code further,
to make it a hassle-free experience!"
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