IBC is a boon for lawyers, but what about banks, NBFCs and other financial creditors?

The Insolvency and Bankruptcy Code (IBC) has been a game-changer indeed, but not without its share of challenges. Its seven-year track record reveals several shortcomings, raising concerns about its effectiveness and implementation. Let’s delve into the key areas.

The IBC initially promised a resolution within 180 days or six months, with a possible extension of 90 days for taking care of litigations. However, these timelines have often not been met. Four companies took more than 1,400 days for resolution. Soni Realtors took 1,500 days, while Value Infracon India, Ind-Barath Energy, and Mangal Iron took 1,400 days each.

Consider Ind-Barath, with Rs 5,500 crore in dues. It should have taken less than six months or a year at the most, factoring in litigation. A four-year-long process has proven frustrating for financial creditors, with a disappointing recovery of Rs 970 crore, less than one-fifth of the total dues. Noida-based Jaypee Infratech's resolution took almost six years. In fact, over half the cases have languished for more than nine months across the sixteen benches of the National Company Law Tribunal (NCLT).

If the delays in resolution are concerning, the decision to liquidate a defaulted company is equally troubling. Chennai-based Diamond Engineering took five years to secure a liquidation order. Infonet Asia took 1,700 days, and Summer India Weaving, Frontline Printers, and BSE Diagnostics each took 1,600 days to receive liquidation orders from the NCLT courts.

Some companies have yielded no value in the liquidation process, including All Best Offshore, Baadl Technologies, and Gujarat State Construction. There are also instances of financial creditors recovering single-digit percentages. Videocon Industries and Jet Airways are notable examples. Overall, the average recovery of 34 per cent of the claims since the IBC’s inception shows the extent of haircuts taken by the banks and financial institutions.

Experts suggest that seven years should be sufficient for a new law to stabilise, but the IBC, despite its initial promise, seems to have become entangled in a web of litigation, new interpretations, numerous amendments (as many as 84), challenges, and new precedents set by the Supreme Court. Once hailed as a game-changer, the IBC appears to be faltering.

The IBC’s intent was clear: to provide companies an opportunity to recover from financial distress. However, stakeholders, ranging from promoters to operational creditors, financial creditors to prospective buyers, seem to be using the law to their advantage. "It appears that the IBC is being used more as a recovery mode, and not just by operational creditors; financial creditors, including banks, are also employing this tactic," observes Daizy Chawla, Senior Partner, S&A Law Offices.

The only ones seemingly benefiting are the lawyers. "It is beneficial legislation for us," one lawyer quips. Yet, the IBC did have initial successes, with larger cases like Essar Steel, Bhushan Steel, and Cement achieving good realisation. “There is certainly a change in the credit behaviour of the borrowers,” asserts R.K. Bansal, MD&CEO, Edelweiss ARC.

Technically, the IBC operates on strict deadlines, such as appointing valuers within 7 days or submitting claims within 90 days, reflecting a rigid time structure. “Incorporating the IBC process within this framework is a challenge,” admits Rajesh Narain Gupta, Managing Partner, SNG & Partners.

“We are so focused on changing the law. The law itself is mature; it’s the participants who are not mature enough to implement it. We need initiatives on skills development before we improve the law,” argues Abizer Diwanji, Head (Financial Services) at EY India.

Clearly, more than amendments, the IBC requires intent, additional benches, judges with subject expertise, adherence to timelines, a supportive ecosystem for distressed funds, and resolution certainty for investors.