IBC reforms: Let’s strengthen the Code as a key growth enabler

This paradigm shifted with the introduction of the IBC, which provided a much-needed mechanism to address insolvency issues in a time-bound and efficient manner. Passed in May 2016, it has played a transformative role in the Indian economy.

At the time of its enactment, we were grappling with a twin balance sheet crisis, where banks’ non-performing assets (NPAs) were hovering close to 12%. This resulted in the choking of fresh credit, the jet fuel for any economy, stalling economic growth.

The IBC emerged as the lighthouse of a new era, resulting in what J. Nariman eloquently paraphrased John Milton to call a “defaulter’s Paradise Lost."

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It engendered a culture of corporate accountability and credit discipline. Lan contracts regained their sanctity. A behavioural shift occurred for borrowers, who repaid their debt. NPAs are now at a historic low, bank balance sheets are robust, credit is growing at a healthy clip and growth is back on track.

The IBC succeeded because the entire ecosystem and institutional infrastructure, from regulators, including the new Insolvency and Bankruptcy Board of India (IBBI), and the legislature to the courts, banks and the market worked for it.

However, we must acknowledge some concerns over the present functioning of the IBC that indicate a need for a second generation of reforms.

Analysis of IBBI data shows that insolvency resolution at the National Company Law Tribunal (NCLT) averaged 716 days in 2023-24, up from 654 days in 2022-23. More concerning is the average time taken for the admission of cases, which stood at 468 days in 2020-21 and rose to 650 days in 2021-22.

Recovery from defaulters under the IBC fell in 2023-24 from the previous year, although 42% more cases saw resolution that financial year. The rate of recovery fell to 27% of creditors’ admitted claims in 2023-24 from 36% the previous year, pulling down the cumulative recovery since the IBC was introduced in 2016 to 32%.

However, recovery touched 85% of the fair value of stressed companies when admitted for resolution and 161.8% of the liquidation value. Creditors are applying for IBC admission more than two years after the account is labelled an NPA. Delays in filing applications are leading to asset-value drops.

IBBI studies show that about 50% of value is eroded before companies are admitted under the IBC. Given the inverse relationship between time and value, it is necessary that creditors apply as early as possible. Notably, the IBC allows for withdrawal in case of a settlement after admission.

The institutional infrastructure needs significant augmentation to improve admission and resolution timelines. Recent court rulings on the IBC have deviated from the established position on matters such as the supremacy of the commercial wisdom of the Committee of Creditors (CoC), the waterfall of dues with state dues subordinate, and the requirement for the NCLT to admit a petition without exercising discretion if a financial debt exists.

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Substantive changes to the IBC on issues of cross-border insolvency, creditor rights, sector-specific nuances and pre-packs are necessary. The finance minister is cognizant of this.

In her budget speech, Nirmala Sitharaman stated, “Appropriate changes to the IBC, reforms and strengthening of the tribunal and appellate tribunals will be initiated to speed up insolvency resolution."

This is a good to review the evolution of the IBC, which the International Monetary Fund had termed a “big bang" reform:

Phase I: 2016-2020: As a statute, the IBC combined international best practices with reforms specific to Indian ground realities. It adopted a creditor-in-control model, distinct from the US Chapter 11. The IBC sought a consensus forged among creditors, with a cross-class cram-down against hold-outs to ensure that once 66% of creditors agree, it’s binding on all.

This model was protected by offering liquidation value, reflecting a World Bank best-practice that has since been incorporated into the UK’s law. The IBC also set up a new regulator, the IBBI, which has been agile, adaptive and adept at responding to the challenges of this transformative new law, and created specialized courts and a class of professionals known as resolution professionals.

All regulators and arms of government worked together to ensure its success, with the judiciary upholding the Act’s constitutionality and architecture.

Phase II: 2020-2022: A moratorium on new cases was issued in March 2020 due to the covid pandemic, barring creditors from filing applications. Provisions were added to specify that no applications for initiation of a Corporate Insolvency Resolution Process (CIRP) for defaults during the covid period could ever be filed.

A modified version of the IBC was used to resolve non-bank finance company distress. One of the largest cases was the resolution of DHFL.

Phase III: 2022-present: Since the last resolution cases, there has been a significant slowdown.The NCLT’s capacity inadequacy impacts both speed and quality. Several proposed amendments, including those concerning cross-border insolvency and pre-packs, are on hold.

Here are second-generation IBC reforms that could be carried out:

One, re-engineer tribunal processes: Justice delayed is justice denied. We must minimize judicial bandwidth on administrative matters while opening non-core functions to innovative technology for improved court management.

We need to open our doors to cutting-edge tech solutions offered by the private sector, while carefully preserving the core of its sovereign judicial functions. Private involvement in passport Seva Kendras could serve as a model even for court processes.

Global examples, such as the autonomous His Majesty’s Courts and Tribunals Services in the UK, can guide us in transforming our judicial processes. Broader judicial process re-engineering could enhance the administration of justice in India.

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Two, clarify legal principles: We need clarity on government dues, following the Rainbow Papers case, which highlighted the statutory priority of value-added-tax dues over the IBC distribution waterfall, stating that CoC members cannot secure their own dues at the cost of statutory dues owed to any government.

This seems to contradict the IBC’s legislative intent, which aimed for a lower priority given to government dues compared to secured lenders and financial institutions. We need a statutory amendment on this.

Three, address legislative lacuna on cross-border insolvency: India has yet to adopt a cross-border insolvency framework, under the UNCITRAL Model Law on Cross-Border Insolvency Framework.

Sections 234 and 235 of the IBC provide only an enabling framework for cross-border insolvency, which is yet to be acted upon. We will need a model law on cross-border insolvency.

A comprehensive review of the IBC was undertaken last year, and the government is considering amendments. These are expected to reduce delays and increase recovery rates for creditors.

The progress we have made over the past eight years is commendable. However, as we step into the next phase, dialogue, collaboration and innovation can strengthen our insolvency framework.

An enhanced IBC would be a vital enabler of India’s economic growth, helping create a resilient and sustainable insolvency regime for a robust economy.

These are the authors' personal views.

The authors are, respectively, India’s G20 Sherpa and Ex-CEO, Niti Aayog; and a partner with Cyril Amarchand Mangaldas.