Mint Explainer: Why bankruptcy reforms should be the new govt’s top priority

The longer the delay, the larger the haircut for lenders, a point that veteran banker Uday Kotak and several research reports made on the IBC anniversary citing data published by the Insolvency and Bankruptcy Board of India (IBBI). Very few insolvency cases have been resolved within the stipulated period of 330 days; in such cases the recovery has been close to 50%.

Mint looks at the cause of delays and what the new administration can do to improve outcomes for lenders and debtors.

What does the data say about the success of the IBC in resolving insolvency?

The IBBI data show that 947 resolution plans were approved till the end of March, resulting in 32% realisation against the admitted claims. A total of 7,567 cases were admitted till 31 March since the Code was notified on 28 May, 2016. 

Of these, 2,224 cases were either withdrawn or closed on appeal/review/settled. Liquidation orders were passed for 2,476 cases, and another 1,920 are going through the corporate insolvency resolution process (CIRP). 

The IBBI January-March 2024 newsletter states that creditors had realised ₹3.36 trillion under the resolution plans against total claims of ₹10.46 trillion, which was higher than the fair value of ₹3.20 trillion and ₹2.08 trillion of liquidation value.

In a note in the newsletter, IBBI chairperson Ravi Mittal wrote: “The resolution process, on an average, is taking 679 days to conclude as against the standard timeline of 330 days." 

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Mittal added that the data of the resolved cases indicated a direct correlation between the length of the resolution process and the recovery rate–cases resolved within shorter timeframes tend to yield higher recovery rates, while the longer resolution periods coincide with diminished recovery rates. 

Thus, for cases resolved within 330 days, the recovery was 49.2% of the creditors’ claims compared to just 26.1% for cases that took 600 days or more. But just about 15% of the cases were resolved within 330 days. 

What is causing a delay in the resolution of cases within the stipulated period?

While the IBC was envisaged as a time-bound process with timelines prescribed for important activities, there has been considerable delay at every stage from the date of default to filing, from filing to admission, and from admission to final resolution, noted a committee set up by the IBBI to suggest a framework for use of mediation under the IBC. 

“The predominant cause of delay has been the filing of a plethora of interlocutory applications at each stage of the process, eventually unnecessarily burdening the limited judicial capacity," it said in its January report.

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The panel noted that though insolvency resolution under the IBC was not an adversarial process, its implantation had become litigious as multiple contentious issues were brought before the National Company Law Tribunal (NCLT) for resolution by parties such as the corporate debtor, creditors, members of the Committee of Creditors, and at times, by the appointed resolution or insolvency professional for the conduct of the CIRP. 

Third-party filing also contributed to the proliferation of litigation during CIRP. This created several systemic bottlenecks, leading to cascading delays in the resolution process and increasing pendency.

The IBBI chairperson had also expressed similar concerns in the January-March newsletter. “The delays often due to litigation by multiple stakeholders with competing interests, erodes the value of already distressed corporate debtors further, and minimises the recovery value to the creditors."

A research report by IBBI published in February 2021 identified maximum delays at four stages of the resolution process:

• issue of expression of interest, 
• issue of the final list of resolution applicants, 
• issue of a request for the resolution plan, and 
• approval of the resolution plan. 

There were also delays in the admission of applications for CIRP. Against the prescribed timeline of 14 days for admission of an application, the study found that admission of an application took as many as 133 days on an average, mostly because of delay on the part of the adjudicating authority. There were delays at every stage. 

What is the way forward?

It is proven that delays in the resolution process led to substantive erosion of the asset value, which is not the intended objective of the IBC. Quickening the process to adhere to the prescribed timelines might not be possible in the near term even if there is a substantial expansion of the capacity of the NCLT to handle more cases, given how litigious the process has become. 

There is also a need to reduce the load on the courts. That can happen only when out-of-court settlements are considered as the first option. There are already many cases that are being withdrawn and resolved among parties after admission of application.

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The government had started considering a framework for voluntary mediation of insolvency cases. The report of the IBBI committee is before it. Among other things, the committee suggested that the mediation process should be used to iron out differences before the application for resolution is admitted by the NCLT. 

“Given huge delays at the admission stage, the gap between the occurrence of default, the filing and subsequent admission of applications under IBC can be effectively utilised to iron out differences through the mediation process," it said.

The new government’s agenda needs to include strengthening the NCLT with adequate personnel and benches to speed up the process at one level, continue with capacity building for all involved in the process, including the insolvency professionals, and most importantly, encourage out-of-court settlements.