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India’s Insolvency Code: The journey so far, and the way forward

India’s Insolvency Code: The journey so far, and the way forward

India’s Insolvency Code: The journey so far, and the way forward
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By Haigreve Khaitan  Jul 8, 2021 11:03:48 AM IST (Published)

Although we have come a long way from pre-IBC days, there are indeed many miles to go before we can rest. The most pressing need right now is to bring into force the pre-pack insolvency concept which allows players to decide a plan and zero in on a buyer ahead of the company going into insolvency.

The summer of 2016 seemed to have brought with it a gust of optimism for Indian lenders with the rollout of the new Insolvency and Bankruptcy Code (IBC). Too many banks, who had been struggling under the increasing weight of large non-performing loans, the IBC resembled a sliver of light peeking through the end of a dark tunnel. Lenders finally had a way to recover their claims, well, at least a significant part of it, while keeping the company afloat, they hoped.

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Five years later, however, the lenders are seemingly no better-off, lamenting low recovery rates, high liquidation percentages and lengthy delays in the process. A recent case that made headlines was the resolution of Videocon Industries group, where lenders reportedly took a haircut of over 95 percent, recovering a paltry four percent approx. of their total claims.
Moreover, recent data from the Insolvency and Bankruptcy Board of India shows that the overall recovery rate in 348 cases where the resolution plan was approved till March 2021 is just about 37 percent. Also, the data revealed that out of more than 2650 closed cases, 48 percent went into liquidation. Moreover, as of March 2021, 79 percent of the ongoing cases have been continuing for over 270 days, which goes beyond the timeline set for the process as per the IBC.
Does this mean that the IBC has been a failure?
Far from it, in my opinion. Many experts have asserted that five years is a short period, and the implementation of the IBC will be strengthened further with time. However, we must not forget the important milestones that we have touched in these five years over the course of the IBC evolution and how they have paved the way for the future.
Here are some of the watershed moments in the IBC’s journey so far.
  • Jaypee Infratech case
  • This was one of the first high-profile cases which brought into focus the need to protect to rights of homebuyers and recognise them as financial creditors. It pushed all stakeholders involved to place the interest of the homebuyers higher up in the list of priorities than before, treating them at par with the lenders and giving them a say on the resolution plan. This changed the landscape of the IBC going forward.
    • Sections 29A and 32A
    • The introduction of these sections were crucial milestones in the IBC journey. The former addressed an earlier gap in the process which could have allowed for the defaulting promoter to become a resolution applicant to regain control of the company, effectively making defaulting promoters ineligible from taking part in the resolution process.
      The latter insulated successful bidders from any investigations into wrongdoings by the corporate debtor before it went into insolvency. Therefore, high-quality bidders could then participate in the process freely, without the fear of being dragged into any investigation by agencies like the ED and SEBI, concerning the company they are looking to buy.
      • Videocon case—Group insolvency
      • The concept of a group of companies going into insolvency together was not provided for in the IBC law. However, through judicial activism, the court in this case consolidated multiple companies into one group—the Videocon group and appointed a common resolution professional. This laid down the path for a similar case in the future, simplifying the process for groups of companies, especially where the business of holding company and its subsidiary companies is interdependent for their survival.
        • IL&FS case
        • This case saw over 340 subsidiaries which had defaulted in various loans. The IL&FS group was in the doldrums. When the Uday Kotak-led board took over, a moratorium akin to a moratorium under IBC was imposed, subsidiaries were organised into categories depending on their ability to service debts, an administrator was appointed, and a structure was put in place to monetise assets. Although this case was not technically under the IBC, it was evident that many cues were taken from the IBC process to help resolve the matter and get the best possible outcome. This was an important moment in the insolvency landscape of India and showed how complex cases could be tackled.
          • DHFL case
          • The case of Dewan Housing and Finance Corporation Limited was unprecedented, with it becoming the first instance of resolution of a financial services provider. Earlier, the law did not specifically provide for an NBFC or financial service provider going into insolvency. However, the RBI and NCLT worked together to tackle this challenge and saw it through to the end with Piramal emerging as the successful bidder.
            • Jet Airways
            • Another case that made headlines, this was the first successful insolvency of an aviation company. This was also important as it provided an informal mechanism of cross-border insolvency protocol. As some assets were based in the Netherlands, A Dutch administrator worked closely with the resolution professional in India as per an informal set of key principles that were laid down in accordance with the NCLT. A few cases since then have resorted to using this framework as a precedent.
              This case was also one of the first whereafter the company went into insolvency, certain non-core assets were sold to a buyer post-approval from NCLT.
              The road ahead…
              Although we have come a long way from pre-IBC days, there are indeed many miles to go before we can rest. The most pressing need right now is to bring into force the pre-pack insolvency concept which allows players to decide a plan and zero in on a buyer ahead of the company going into insolvency. Although this approach can be used in India for MSMEs now, the need of the hour is to allow players to use it for all corporate debtors. This will allow lenders to improve their rates of recovery, which as we saw above, is a massive pain point as of now.
              The next major step that must be taken soon is the adoption of the United Nations Commission on International Trade Law (UNCITRAL) model for cross border insolvency protocol and signing of treaties with the likes of UAE and UK to set up formal processes to be followed when a debtor has assets located in foreign countries.
              Lastly, the bench strength for NCLT must be fortified further in order to address the many delays that are currently plaguing the IBC process.
              Overall, I am still firmly of the view that the IBC continues to inspire optimism in India’s corporate landscape, and I am sure that over the next 5 years, we will have more such pivotal milestones to discuss around its 10th anniversary.
              —Haigreve Khaitan is Senior Partner at Khaitan & Co, one of India’s largest and leading full-service law firms. He has advised top global businesses and business leaders on a variety of corporate matters and worked on some of the largest M&A deals in India. The views expressed in this article are personal.
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