An in-depth review of the Insolvency and Bankruptcy Code's impact on business failures, debt recovery, and corporate revival. Insights by Anant Merathia
Exactly, 10 years ago, in the run-up to the 2014 Lok Sabha elections, Narendra Modi, who was the BJP’s prime ministerial candidate, had said that traders have more risk-taking capacity than soldiers. His statement stems from the fact that failure is inherent to any business venture. And when a business venture, it affects the whole family of the businessman. Therefore, in an attempt to ring fence entrepreneurs and minimise the impact of the failure and protect the stakeholders of a company such as employees, and suppliers among others, the BJP government had enacted an institutional mechanism through the Insolvency and Bankruptcy Code, 2016 (IBC) to address resolution of business failures.
IBC was a revolutionary attempt to cleanse perennial litigation that begins after a financially distressed company defaults on its loans. Several hundreds of companies and lakhs of employees have benefitted from a relatively easy resolution process devised by IBC.
After seven years of IBC’s journey, corporate litigation and disputes resolution lawyer Anant Merathia reviewed the progress of the insolvency law in his book ‘Defaulter’s Paradise Lost’. In his book, Merathia takes the reader through the journey and evolution of the IBC.
In his interview with Deccan Chronicle, he touched upon various issues relating to IBC and successfully defended the law from its regular critics.
Excerpts from the interview:
What has been the effect of IBC on MSMEs?
In the initial years following the enactment of the IBC, there was a considerable lack of clarity regarding whether a promoter of an MSME could participate in the insolvency resolution process of his/her own company which actually created a significant challenge.
Many companies in this sector were pushed to liquidation due to these initial teething issues of the law. However subsequently, Section 29A of the IBC, a pivotal criterion for eligibility in submitting a Resolution Plan, saw some exceptions being introduced through Section 240A (introduced on 18.01.2018) benefiting MSMEs. These modifications aimed to provide relief by exempting certain entities from stringent provisions, thereby allowing promoters not identified as willful defaulters or falling under specific disqualifications to bid for an MSME's Resolution Plans.
What was the impact of Section 32A on debt waivers?
Section 32A of the Insolvency and Bankruptcy Code (IBC) was introduced in 2019, with the primary objective of absolving Corporate Debtor (CD) of liabilities pertaining to any offence committed before the initiation of the Corporate Insolvency Resolution Process (CIRP). However, at a practical level, challenges remain. Some investigating authorities tend to continue proceedings against the CD even after the approval of the resolution plan by the NCLT.
Regarding debt waivers, the impact of Section 32A is significant. While one can certainly criticise that huge waivers are given by such absolving of liabilities owing to past offences as far as the company is concerned; but if the objective of revival of companies under IBC has to be met; a framework has to be created and strengthened wherein potential investors and RAs do not fear about getting entangled in past legal baggage and are in a position to show interest in companies undergoing CIRP.
What was the average debt recovered in percentage terms and absolute figures through IBC?
The recovery rates within the IBC framework have been a subject of considerable scrutiny and discussion; so to begin with “recovery of debt” whether in percentage or absolute terms is neither the objective of this law nor should it be the only parameter for judging its success or failure.
Having said that, when one reviews and assesses the data provided by the Insolvency and Bankruptcy Board of India (IBBI), it reveals that, on an average, creditors have realised about 32 per cent of the admitted claims and a staggering 169 per cent of the liquidation value from resolved cases under IBC.
This indicates to us that there was a fundamental flaw in our corporate credit assessment and disbursement mechanism wherein huge amounts were disbursed against overvalued assets and there was a failure at that point by lender institutions, no proper due diligence, misdirection of disbursed funds, indiscriminate lending based on non-merit based parameters and more.
How much debt was waived off under the IBC and what was the number of companies that availed of this facility?
Now before getting into the numbers, one needs to conceptually understand that the origin of this whole issue of heavy debts becoming NPAs lies elsewhere which is seldom spoken about.
Waiving off of debts has been part of the “one-time settlement (OTS)” culture in corporate India wherein many companies had settled their overdue amounts with their financial institutions by way of an OTS, wherein the banks actually recovered more or less the same or maybe a bit better quantum vis-à-vis the IBC. Merely because it was a private treaty and did not meet the public eye; the scope of criticism or questioning the same is less.
While debts no doubt have been waived, it is not something new in India and that it was not happening in India prior to IBC; it’s just that access to information being easily available allows assessment, criticism and questioning. While there is nothing wrong in the above, it is only fair that one looks at this from a holistic and the historical background of debt recovery laws and percentages in India especially since the 1980s.
Now coming to the numbers, as on December 31, 2023, 891 CIRPs ended in successful resolution plans dealing an amount of Rs 3.21 lakh crores against the total admitted claims of Rs.10.07 lakh crores. Effectively the recovery was about 32 per cent at an overall level against the total claims made which means that the waiver was to the tune of approximately 67 per cent.
How have the companies performed post the resolution process?
Based on a report published by the IIM, Ahmedabad (August, 2023), it was very encouraging to note that the companies that were once struggling to survive had the average sales increased by 76 per cent. While the net margins remained negative but they did break even by the third year. Similarly, on the other factor of average employee expenses; the same had gone up by about 50 per cent and therefore providing significant employment in industry which is a very positive sign and also has a host of positive socio-economic consequences.
The average value of assets of these companies had gone up by 50 per cent and there was about 130 per cent increase in the capital expenditure leading to their balance sheets becoming stronger and having more tangible assets.
Another interesting revelation was that the market capitalisation of the listed companies which underwent CIRP went up from Rs 2 lakh crores to Rs 6 lakh crores. This clearly indicates that the markets did reward the companies once they came out of the resolution process under a more efficient and strong management.
After seven years of IBC’s journey, corporate litigation and disputes resolution lawyer Anant Merathia reviewed the progress of the insolvency law in his book ‘Defaulter’s Paradise Lost’. In his book, Merathia takes the reader through the journey and evolution of the IBC.
In his interview with Deccan Chronicle, he touched upon various issues relating to IBC and successfully defended the law from its regular critics.
Excerpts from the interview:
What has been the effect of IBC on MSMEs?
In the initial years following the enactment of the IBC, there was a considerable lack of clarity regarding whether a promoter of an MSME could participate in the insolvency resolution process of his/her own company which actually created a significant challenge.
Many companies in this sector were pushed to liquidation due to these initial teething issues of the law. However subsequently, Section 29A of the IBC, a pivotal criterion for eligibility in submitting a Resolution Plan, saw some exceptions being introduced through Section 240A (introduced on 18.01.2018) benefiting MSMEs. These modifications aimed to provide relief by exempting certain entities from stringent provisions, thereby allowing promoters not identified as willful defaulters or falling under specific disqualifications to bid for an MSME's Resolution Plans.
What was the impact of Section 32A on debt waivers?
Section 32A of the Insolvency and Bankruptcy Code (IBC) was introduced in 2019, with the primary objective of absolving Corporate Debtor (CD) of liabilities pertaining to any offence committed before the initiation of the Corporate Insolvency Resolution Process (CIRP). However, at a practical level, challenges remain. Some investigating authorities tend to continue proceedings against the CD even after the approval of the resolution plan by the NCLT.
Regarding debt waivers, the impact of Section 32A is significant. While one can certainly criticise that huge waivers are given by such absolving of liabilities owing to past offences as far as the company is concerned; but if the objective of revival of companies under IBC has to be met; a framework has to be created and strengthened wherein potential investors and RAs do not fear about getting entangled in past legal baggage and are in a position to show interest in companies undergoing CIRP.
What was the average debt recovered in percentage terms and absolute figures through IBC?
The recovery rates within the IBC framework have been a subject of considerable scrutiny and discussion; so to begin with “recovery of debt” whether in percentage or absolute terms is neither the objective of this law nor should it be the only parameter for judging its success or failure.
Having said that, when one reviews and assesses the data provided by the Insolvency and Bankruptcy Board of India (IBBI), it reveals that, on an average, creditors have realised about 32 per cent of the admitted claims and a staggering 169 per cent of the liquidation value from resolved cases under IBC.
This indicates to us that there was a fundamental flaw in our corporate credit assessment and disbursement mechanism wherein huge amounts were disbursed against overvalued assets and there was a failure at that point by lender institutions, no proper due diligence, misdirection of disbursed funds, indiscriminate lending based on non-merit based parameters and more.
How much debt was waived off under the IBC and what was the number of companies that availed of this facility?
Now before getting into the numbers, one needs to conceptually understand that the origin of this whole issue of heavy debts becoming NPAs lies elsewhere which is seldom spoken about.
Waiving off of debts has been part of the “one-time settlement (OTS)” culture in corporate India wherein many companies had settled their overdue amounts with their financial institutions by way of an OTS, wherein the banks actually recovered more or less the same or maybe a bit better quantum vis-à-vis the IBC. Merely because it was a private treaty and did not meet the public eye; the scope of criticism or questioning the same is less.
While debts no doubt have been waived, it is not something new in India and that it was not happening in India prior to IBC; it’s just that access to information being easily available allows assessment, criticism and questioning. While there is nothing wrong in the above, it is only fair that one looks at this from a holistic and the historical background of debt recovery laws and percentages in India especially since the 1980s.
Now coming to the numbers, as on December 31, 2023, 891 CIRPs ended in successful resolution plans dealing an amount of Rs 3.21 lakh crores against the total admitted claims of Rs.10.07 lakh crores. Effectively the recovery was about 32 per cent at an overall level against the total claims made which means that the waiver was to the tune of approximately 67 per cent.
How have the companies performed post the resolution process?
Based on a report published by the IIM, Ahmedabad (August, 2023), it was very encouraging to note that the companies that were once struggling to survive had the average sales increased by 76 per cent. While the net margins remained negative but they did break even by the third year. Similarly, on the other factor of average employee expenses; the same had gone up by about 50 per cent and therefore providing significant employment in industry which is a very positive sign and also has a host of positive socio-economic consequences.
The average value of assets of these companies had gone up by 50 per cent and there was about 130 per cent increase in the capital expenditure leading to their balance sheets becoming stronger and having more tangible assets.
Another interesting revelation was that the market capitalisation of the listed companies which underwent CIRP went up from Rs 2 lakh crores to Rs 6 lakh crores. This clearly indicates that the markets did reward the companies once they came out of the resolution process under a more efficient and strong management.
What was the average time taken for resolution?
The IBC endeavours to close the various processes at the earliest. The 891 CIRPs, which have yielded resolution plans by the end of December, 2023 took on average 558 days (after excluding the time excluded by the AA) for conclusion of the process. One has to take into account here that a lot of pending resolution plans which are either affected by the spillover effects of the pandemic or were at legal crossroads due to certain judicial pronouncements from the Supreme Court such as the cases of Rainbow Papers (State Tax Officer v. Rainbow Papers Ltd., Civil Appeal Nos. 1661 and 2568 of 2020) and Vidarbha Industries (Axis Bank Ltd. v. Vidarbha Industries Power Ltd., Civil Appeal No. 4633 of 2021) did give scope to the litigating stakeholders to put forth a different interpretation of the law which led to some delays. However, from April to December 2023; approximately over 220 resolution plans have been approved indicating the progress being made at the NCLT level.
How many resolutions were stalled due to the legal process?
Based on the data provided, one could interpret that there's a relatively efficient handling of cases under the IBC, 2016. With a total of 31,203 cases filed, the number of cases pending (both pre-admission and post-admission) is 10,544 (7,175 pre-admission and 3,369 post-admission). Meanwhile, 22,443 cases have been disposed of, and 25,812 cases have been adjudicated, resulting in an adjudication percentage of 85.84 per cent.
The IBC endeavours to close the various processes at the earliest. The 891 CIRPs, which have yielded resolution plans by the end of December, 2023 took on average 558 days (after excluding the time excluded by the AA) for conclusion of the process. One has to take into account here that a lot of pending resolution plans which are either affected by the spillover effects of the pandemic or were at legal crossroads due to certain judicial pronouncements from the Supreme Court such as the cases of Rainbow Papers (State Tax Officer v. Rainbow Papers Ltd., Civil Appeal Nos. 1661 and 2568 of 2020) and Vidarbha Industries (Axis Bank Ltd. v. Vidarbha Industries Power Ltd., Civil Appeal No. 4633 of 2021) did give scope to the litigating stakeholders to put forth a different interpretation of the law which led to some delays. However, from April to December 2023; approximately over 220 resolution plans have been approved indicating the progress being made at the NCLT level.
How many resolutions were stalled due to the legal process?
Based on the data provided, one could interpret that there's a relatively efficient handling of cases under the IBC, 2016. With a total of 31,203 cases filed, the number of cases pending (both pre-admission and post-admission) is 10,544 (7,175 pre-admission and 3,369 post-admission). Meanwhile, 22,443 cases have been disposed of, and 25,812 cases have been adjudicated, resulting in an adjudication percentage of 85.84 per cent.
How many companies (both as percentage and in absolute numbers) went into liquidation?
Until FY 2022-23, a total of 2,030 CIRPs concluded with orders for liquidation, and final reports were submitted in 520 of these cases. Till September 2023, 2,252 CIRPs had received orders for liquidation, with final reports submitted in 798 cases. During the quarter spanning October-December 2023, 124 CIRPs were reported as having received orders for liquidation. Four CDs which had earlier yielded order of liquidation have since either been ordered to be restarted or have been withdrawn, taking the total CIRPs ending in liquidation to 2,376. Out of these 2,249 cases, final reports have been submitted in 830 instances.
On a percentage basis, out of the 7,325 companies admitted under CIRP as on December 31, 2023; the fact that 2,376 companies have gone into liquidation would indicate an approximate of 31 per cent companies going the liquidation route. Out of the 2,376 companies undergoing the liquidation process; as on December 31, 2023, 461 were closed by dissolution, and 43 were closed by a going concern sale basis.
Until FY 2022-23, a total of 2,030 CIRPs concluded with orders for liquidation, and final reports were submitted in 520 of these cases. Till September 2023, 2,252 CIRPs had received orders for liquidation, with final reports submitted in 798 cases. During the quarter spanning October-December 2023, 124 CIRPs were reported as having received orders for liquidation. Four CDs which had earlier yielded order of liquidation have since either been ordered to be restarted or have been withdrawn, taking the total CIRPs ending in liquidation to 2,376. Out of these 2,249 cases, final reports have been submitted in 830 instances.
On a percentage basis, out of the 7,325 companies admitted under CIRP as on December 31, 2023; the fact that 2,376 companies have gone into liquidation would indicate an approximate of 31 per cent companies going the liquidation route. Out of the 2,376 companies undergoing the liquidation process; as on December 31, 2023, 461 were closed by dissolution, and 43 were closed by a going concern sale basis.
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