Strengthen the Code

Source: Indian Express

Syllabus: GS 3

Synopsis: The IBC’s results have fallen short of expectations. The procedure must be simplified.

Introduction 

The Insolvency and Bankruptcy Code (IBC) was established by Parliament five years ago, bringing about a structural change in the framework that regulates India’s corporate insolvency resolution procedure.  The IBC establishes a time limit for the resolution of firms, addressing India’s vexing problem of firm departure. 

• It has given creditors a stronger hand in enforcing their legitimate claims against corporate borrowers. For irresponsible promoters who refuse to pay their financial obligations, the possibility of losing control of their organisation has emerged as a significant deterrent.
• It has also given operational creditors, primarily micro, small, and medium-sized businesses, a formidable instrument to negotiate payment of dues with bigger businesses.

How have the IBC’s outcomes fallen short of expectations?

Operational creditors have brought roughly half of the cases. However, despite a significant advance over the previous architecture on a variety of factors, the IBC’s outcomes have not been as favourable as hoped.

• Firstly, only 348 (7.9%) of the 4,376 cases admitted into insolvency procedures until March 2021 had resolution plans approved, while 1,277(29%) cases terminated in liquidation. When a resolution plan is accepted, the average time taken is 459 days, which is longer than the 330-day limit.
• Secondly, only 39.22% of financial creditors’ accepted claims have been realised in these circumstances.

Reasons for under-performing:

There are several reasons why the results did not match expectations. 

• Firstly, unclear future expectations in the face of a faltering economy may have limited the number of potential purchasers or lowered company bids.
• Secondly, it’s also likely that certain assets have been siphoned out, leaving the company with very little worth. The value of assets would have been considerably degraded in situations that continued under previous systems. 
• Thirdly, promoters have repeatedly attempted to mount legal hurdles causing significant delay in either initiating the bankruptcy proceedings or the resolution process itself, resulting in severe value destruction in many cases.

Way forward

• The IBC has established itself as a genuine deterrent to rogue promoters and a strict mechanism to bring credit discipline to the country. However, the Code’s operation must be streamlined and enhanced. Errant promoters should not be allowed to take advantage of the system.
• The deadlines for resolution must be closely adhered to, as one of the most compelling parts of IBC was the speed with which it could be completed. The system’s ability to handle cases must also be increased, as delays in the process detract from the company’s worth.