Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code (IBC), which was introduced in 2016, was designed to streamline and strengthen India’s insolvency resolution process. However, recent developments suggest that the effectiveness of IBC is now under strain. Concerns have emerged about delays, judicial interventions, and deviations from the original intent of the law.

About the Insolvency and Bankruptcy Code (IBC) in India

The IBC was enacted with the aim of consolidating and simplifying the insolvency resolution process in India. It replaced several fragmented laws and created a unified, time-bound mechanism that facilitates the resolution of distressed assets while strengthening the rights of creditors.

Evolution of the IBC

Before the introduction of the IBC, India had several mechanisms for addressing insolvency, but these were often slow and ineffective. These included:

• Sick Industrial Companies Act (SICA),

• Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), and

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).

These frameworks were insufficient, leading to the rise of Non-Performing Assets (NPAs), a decline in lender confidence, and a slow recovery process.

Core Principles of IBC

1. Time-Bound Resolution:

   • The IBC mandates that insolvency cases must be resolved within 180 days, extendable to 330 days in exceptional cases. This strict timeline aims to minimize asset erosion and restore economic activity quickly.

2. Creditor-in-Control Model:

   • Unlike earlier frameworks where debtors retained control, the IBC empowers creditors to take charge of the resolution process. This has improved credit discipline and borrower accountability.

3. Maximization of Asset Value:

   • The IBC emphasizes maximizing the value of distressed assets, whether through restructuring or liquidation, ensuring creditors recover the highest possible value.

4. Equitable Treatment of Stakeholders:

   • It ensures that creditors—both financial and operational—are treated fairly by providing a structured hierarchy for claim settlement.

5. Promoting Entrepreneurship and Fresh Start:

   • The IBC encourages entrepreneurial risk-taking by offering a clean exit for failed businesses, which promotes fresh starts and reduces the stigma of failure.

6. Institutional Support and Transparency:

   • Institutions like the Insolvency and Bankruptcy Board of India (IBBI) and National Company Law Tribunal (NCLT) play a key role in ensuring transparency and accountability in the resolution process.

Present Status of IBC

The IBC has seen significant activity since its inception. Over 30,000 cases involving defaults worth ₹13.8 trillion have been settled before formal admission. Additionally, creditors have recovered around 32.8% of their claims through the process. However, there are mounting concerns over the declining number of corporate insolvency resolution cases, with the number dropping from 1,262 cases in FY23 to 723 cases in FY25.

Challenges Facing the IBC

1. Delays in Resolution Process:

   • Despite the time-bound resolution mandate, the IBC process often exceeds the 330-day limit. Some cases have taken over 717 days to resolve, which leads to value erosion and undermines investor confidence.

2. Declining Corporate Insolvency Cases:

   • There has been a noticeable decline in the initiation of insolvency cases under the IBC, raising concerns about the law's effectiveness in addressing corporate distress.

3. Low Recovery Rates for Creditors:

   • Creditors have recovered only around 31-32% of their claims in recent years, which is lower than expected and highlights inefficiencies in the resolution process.

4. Judicial and Regulatory Challenges:

   • Frequent Supreme Court interventions have sometimes reopened settled cases, creating uncertainty. Additionally, inconsistent tribunal rulings and regulatory uncertainties have added unpredictability to the insolvency process.

5. Institutional Capacity Issues:

   • NCLT has struggled with vacancies and insufficient infrastructure, resulting in significant delays in case resolution. Despite recent efforts to improve staffing, the backlog remains a concern.

6. Shift in Creditor Preferences:

   • Financial creditors are increasingly looking to explore alternative mechanisms, such as the securitization of stressed assets, rather than referring cases to the IBC. This reflects a shift in approach toward distressed assets.

Way Forward

To address these challenges, several measures should be considered:

1. Timely Resolution:

   • The primary goal of IBC—time-bound resolution—needs to be strictly adhered to. Delays should be minimized to maintain investor confidence and reduce asset erosion.

2. Creditor Rights Protection:

   • The original framework, which prioritizes creditor claims, should continue to be upheld to maintain the balance between creditors and debtors.

3. Judicial and Executive Alignment:

   • It is crucial that courts and regulators work in harmony to preserve the IBC's original intent. A coordinated effort will ensure smoother implementation and avoid reopening settled cases unnecessarily.

4. Institutional Capacity Enhancement:

   • Strengthening NCLT and other adjudicating bodies by improving staffing and infrastructure can significantly reduce backlogs and improve case resolution speed.

5. Exploring Alternative Mechanisms:

   • Encouraging creditors to utilize a mix of options, including securitization and other structured debt resolution models, can provide flexibility in tackling distressed assets effectively.

Conclusion

While the IBC has undoubtedly been a significant reform in India’s insolvency landscape, its implementation has faced several challenges, including delays, low recovery rates, and institutional capacity issues. To ensure its continued success, timely resolutions, a focus on protecting creditor rights, and greater alignment between the judicial and executive branches are key steps forward.