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The Indian experience and evolution of insolvency laws has been slow, in contrast to the economic strides made by India in the past few decades. This gap was addressed with the introduction of the transformative Insolvency and Bankruptcy Code, 2016 (IBC) altering the restructuring and insolvency regime in India. The IBC is designed to consolidate and amend laws relating to reorganisation and insolvency in a time-bound manner.

This article provides an overview of the evolution, framework and impact of the IBC in India, including key statistics and vital landmark cases, with an emphasis on corporate insolvency.

Need for a consolidated code

Before the advent of the IBC, restructuring and insolvency laws in India were fragmented and ineffective. The framework comprised several laws that had varied and conflicting legislation and jurisdiction, creating a “race to collect” among creditors, which often gave the first mover an advantage, leading to inefficient distribution.

The IBC, being a consolidated code, supplemented with establishment of dedicated tribunal and appellate bodies, was a welcome jumpstart to the insolvency regime in India. This overhauled regime is monitored by a central body, the Insolvency and Bankruptcy Board of India (IBBI), which regulates the process as well as the profession of insolvency professionals, including recommending amendments to the IBC.

These practical experiences have led to regular amendments plugging several loopholes and bottlenecks in the short lifespan of the code. Landmark rulings have furtherclarified and settled numerous issues promoting the robustness and processes under the IBC.

Success of the IBC

The soul of the IBC is to restructure and rehabilitate insolvent entities. According to data from the IBBI, as of June 2023, out of 6,815 cases admitted under the IBC, 2,622 (55%) of the closed cases had been rescued. The average recovery for creditors has ranged between 32 to 43 cents per US dollar for an ongoing concern, or about 168 cents/USD on the liquidation value of stressed assets.

The robustness of the IBC has also allowed complex and high-value businesses such as Essar Steel and Bhushan Steel to be rescued, resulting in substantial recovery in excess of USD4-5 billion for creditors in such cases, or a rare 100% recovery of the debt of about USD1 billion for several creditor banks in the resolution of Binani Cements.

The establishment of special tribunals like the National Company Law Tribunal (NCLT) has further expedited the resolution process, substantially reducing the time undertaken for the resolution process.

This success can be furtherassessed by the fact that more than USD100 billion worth of debt stands resolved since inception of the IBC from both direct debt resolution through the Corporate Insolvency Resolution Process (CIRP) and out-of-court settlements.

The IBC process

Admission. The CIRP is a creditor-led process and can be initiated by either a financial creditor, operational creditor, or the corporate entity itself by way of an application before the NCLT. The Supreme Court, in Innoventive Industries, the first insolvency case before it under the IBC, clarified the law that once a debt (over the threshold) is established and the application is complete, then the NCLT is bound to admit the entity into the CIRP.

Upon admission, the NCLT appoints an interim resolution professional (IRP) to take charge of the debtor, its assets and business operations. The IRP is dutybound to ensure the entity runs as a going concern and takes over all assets for resolution.

Committee of Creditors and resolution professional. The first step of the IRP is to create a Committee of Creditors (CoC), each having a voting right based on the value of debt held. The CoC has the authority to confirm the IRP, oversee the CIRP, and approve or reject resolution plans submitted by prospective applicants towards the debtor.

All decisions of the CoC require a minimum of 66% majority vote, and their approval is crucial for many decisions including the acceptance of a resolution plan. As held by the Supreme Court, the commercial wisdom of the CoC is paramount and cannot be interfered with by the judiciary.

The resolution professional (RP) once confirmed plays a crucial role in managing the debtor’s assets, running the business as a going concern, and facilitating the resolution process by preparing an Information Memorandum, and inviting and scrutinising potential resolution plans.

However, the role of the RP including his/her duties have not been short of controversies, where the Supreme Court has confirmed in the resolution of Essar Steel (rescued by ArcelorMittal India) that the RP is only a mere facilitator of the CIRP and accordingly affirmed fetters on his/her powers.

Moratorium. Upon admission, there is an imposition of a moratorium or automatic stay on all pending legal proceedings, and prohibition on the initiation of new civil proceedings against the debtor entity including the stoppage of interest payments.

Such period is initially imposed for 180 days (extendable for another 90 days, but with a maximum period of 330 days) to allow the RP to file an approved plan before the NCLT. The moratorium helps to prevent asset stripping until culmination of the CIRP, and allows the entity to run as a going concern.

Resolution plan, appeal process and challenges. Resolution plans submitted by prospective applicants are evaluated and approved by the CoC on aspects like technical compliance, rescue process and debt recovery. Once a plan is voted upon and approved, it is submitted to the NCLT for final approval.

The NCLT is to ensure that the resolution plan complies with all statutory requirements, and upholds and safeguards the interests of all stakeholders. The resolution plan becomes binding on all parties upon approval. The acceptance of the plan by the CoC is considered a business decision and cannot be generally interfered with by the courts.

Another important judicial development is the evolution and acceptance of the “clean slate doctrine” initially propounded by the Supreme Court, and now codified, where all previous pending, adjudicated or unadjudicated debts and liabilities are treated as cleaned from the entity on the approval of the terms of the resolution plan by the NCLT.

However, the IBC is not without challenges, with delayed pre-admission timelines (which at times have exceeded 1.5 years), and appeals against NCLT decisions. Additionally, issues such as the valuation of assets, disputes among creditors, and appeals by former promoters of debtor companies against the resolution plans pose significant hurdles in a timely completion of the process.

Liquidation

When no viable resolution plan is approved within the stipulated timeframe, the debtor is ordered into liquidation. The RP is often appointed to the role of the liquidator to oversee the liquidation process, sell the debtor’s assets and distribute the proceeds among the creditors in a piecemeal manner on the basis of priority of debt.

However, secured creditors in liquidation have the option to either enforce their security outside the liquidation process or relinquish their security interest and participate in the liquidation proceeds for common bargaining power.

Extraordinary powers

The RP or liquidator also possesses extraordinary powers to void transactions made prior to admission into insolvency that are deemed undervalued, preferential or fraudulent, to recoup value for the creditors and turn back wrongful gains from unscrupulous promoters. However, these are often delayed by legal challenges by unscrupulous promoters or persons with vested interests.

Conclusion

The IBC has undoubtedly transformed 含羞草社区 insolvency and restructuring landscape, providing a streamlined, efficient and time-bound process for resolving insolvency. Despite the challenges and complexities involved, the IBC has shown significant promise in improving recovery rates for creditors and ensuring the timely resolution of distressed assets.