Now positive results of Insolvency and Bankruptcy Code (IBC) are visible. However, it has faced many difficulties in its long journey. This is the culmination of long-term strategy. In other countries, it has taken a long time to bring IBC for insolvency resolution. For example, the first insolvency law in America came into existence on April 4, 1800.
Long Journey of IBC: –
Till 1985, only the Companies Act, 1956 existed to deal with Corporate Insolvency and Bankruptcy in India. The Sick Industrial Companies Act (SICA), 1985 was enacted in the year 1985. However, from its beginning, SICA was not effective due to some flawed provisions. Its section 22 was extensively misused. After this, the Banks and Financial Institutions Act, 1993 came into existence, but this law was also not successful in the matter of recovery. Therefore, a Debt Recovery Tribunal (DRT) was established under this Act. Initially a good recovery was made with the help of this law, but later it couldn’t give desired results. Then, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (SARFAESI Act) came into existence. With the help of this law, good recovery was made in NPA accounts of home loans, but later became ineffective. In the year 2002, the Reserve Bank also introduced the Debt Restructuring Scheme (CDR), under which broad guidelines for debt restructuring were issued by banks. In the same sequence, IBC came into existence in the year 2016.
Good Recovery within three years: –
Within 3 years of its debut, IBC achieved significant success in NPA recovery. Prior to 2016, the recovery of corporate NPA was 16 per cent to 25 per cent, which increased to 43 per cent in FY 2016. This is 12 per cent more than FY15.
Current status of cases: –
As per the latest data, 2542 cases were accepted till September 2019, out of which 1045 cases were resolved through appeals, resolution, liquidation etc. and hearing of 1497 cases is under process.
Need to expedite the solution: –
At present, the cases are not settled within the time limit. Of the 1497 ongoing cases, 36 per cent of the claims are pending for more than 270 days from the date of their opening. As of March 2019, the average resolution time of the 94 cases resolved was 324 days, which is more than the prescribed insolvency resolution time frame of 270 days.
Delay in reconciliation with small amount cases: –
Even in NPA cases of one lakh rupees, operational corporate creditors are filing suit in NCLT. Due to this NCLT is not able to settle large NPA accounts in a timely manner.
Reduction of filed cases in Lok Adalat: –
Since 2016, the cases to be filed in Lok Adalat and their settlement have decreased. It seems that smaller creditors are preferring IBC over SARFAESI and DRT.
Solution on less than bankrupt amount: –
It has been observed that in 84 percent cases, the amount to be recovered is less than the bankrupt amount, which cannot be considered encouraging. More than twenty-three per cent of the accepted cases have been closed by companies, as buyers of stressed assets are not being found due to low demand and slowdown in the economy.
Expect a better recovery in the current financial year: –
Banks will be able to recover around Rs 80,000 crore from disposal of stressed assets under the IBC in the current financial year 2019-20. This estimate has been made in a study by rating agency ICRA. However, the recovery of more than ICRA estimates has been made through IBC till September 2019. Till the second quarter of the current financial year, 156 cases were resolved under IBC, amounting to Rs 3.32 lakh crore. Of this, the total recovery was Rs 1.38 lakh crore, which is 41.5 per cent. The liquidation value of 156 companies was 74997 crores, but the recovery was 184 percent more than the liquidation value.
Small corporate units more inclined for solutions: –
At the end of September 30, 2019, 498 corporate entities started the process of voluntary liquidation, most of which were small corporate units. Of these, 289 corporate units had a paid-up equity capital of less than Rs 1 crore, while 45 corporate units had a paid-up equity capital of over Rs 5 crore.
Amendment in IBC: –
To improve the insolvency resolution process, the Union Cabinet has approved amendments to the Insolvency and Bankruptcy Code (IBC). This amendment will be done through the Insolvency Disability and Bankruptcy Code (Second Amendment) Bill, 2019. The most important of these amendments is Section 32B, which provides for the protection of corporate debtors from past criminal acts.
Effective recovery by IBC: –
According to the latest survey by the industry body FICCI and Indian Banks Association (IBA), the implementation of IBC has accelerated the recovery process of stuck loans and improved the financial condition of banks.
In order to curb the trend of filing cases of one lakh or less in NCLT, the government should increase the minimum limit of Rs 1 lakh for starting litigation in NCLT under IBC as well as the number of NCLT benches in the country should be increased. It has been observed that smaller creditors are preferring IBC over SARFAESI and DRT. This trend is fatal for IBC. Currently, buyers of stressed assets are unable to find due to lack of demand in the market and sluggish economy. For example, 23 per cent of the accepted cases have not been settled due to this. It has been observed that companies like construction, electricity etc. do not have assets. Admission to the NCLT litigation is a waste of NCLT’s time and resources, which needs to be avoided.
It can be said that even though IBC could not produce the expected results in the initial days, but after the completion of 3 years, its positive results have started to come out. With this, the possibility of accelerating the recovery of large NPA accounts has increased, which can prove to be favourable for the health of banks and the economy.
-Sunil Kumar Pandey
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