Money & Finance

Covid-19: Right opportunity to strengthen the Insolvency and Bankruptcy code

  • Blog Post Date 11 June, 2020
  • Perspectives
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K. Srinivasa Rao

Institute of Insurance and Risk Management

The government has recently exempted all Covid-related debts from the definition of default, and stalled the invocation of Insolvency and Bankruptcy Code (IBC), 2016 for one year, to allow ailing enterprises to cope with the crisis. While discussing the immense contribution of IBC to the economy, K. Srinivasa Rao argues that this window of opportunity should be used to overhaul the operational guidelines and upgrade skillsets of stakeholders in the IBC proceedings through a sustained capacity-building system.


As a larger part of the economic stimulus package – ‘Atmanirbhar Bharat Abhiyaan’ (self-reliant India mission) – to fight the unprecedented economic distress arising from the global Covid-19 pandemic, the government of India has exempted all the Covid-related debts from the definition of default. It has stalled the invocation of Insolvency and Bankruptcy Code (IBC), 2016 for one year to allow ailing enterprises to cope with the crisis. More importantly, it can provide relief, among others, to the worst-affected micro, small, and medium enterprises (MSMEs) to stand again from the rubble. A special insolvency framework for MSME sector is also in the offing by adding a new section to the IBC.

Moreover, the minimum threshold to initiate IBC proceedings against MSMEs has also been raised from Rs. 100,000 to Rs. 10 million to provide relief to micro and small units and prevent such small loan defaults choking the pathway to the (AAs) – the National Company law Tribunals (NCLTs). It will therefore enable bigger, distressed borrowers to get priority attention of AAs. Continuing to strengthen the MSME-centric policies, the government may soon allow for pre-packaged insolvency resolution plans, as popular in UK and US. Such a scheme involves an agreement of the stressed company and its creditors with a buyer, before initiating insolvency proceedings. It can be a plug-and-play model of insolvency resolution, saving more time and protecting assets of the distressed unit.

Looking to the magnitude and extent of disruption in production on account of Covid-19 lockdown in India, the postponement of invocation of IBC by creditors is a fair move to allow the borrowers to recoup the lost momentum of productivity and growth. Besides financial support, policy forbearance to insulate the borrowing community from such legal actions can enable them to focus completely on rejuvenation of industrial growth.

Performance of Insolvency and Bankruptcy Code

The promulgation of IBC, making it effective from 1 December 2016, opened the opportunity for failed enterprises to file a bankruptcy petition, and provided a tool for quick, time-bound debt resolution for lenders. A quick follow-up action by regulatory authorities and banks by prompt invocation in eligible loan accounts improved recovery performance. The three-year performance data from its inception until December 2019, on the progress of Corporate Insolvency Resolution Process (CIRP) will be able to reflect the depth of the achievement of its objectives. It measures the impact IBC could make while overcoming the teething troubles and initial hiccups.

A total of 3,312 CIRPs have commenced untill December 2019. Out of them, 246 have been closed on appeal/review, or settled; 135 have been withdrawn; 780 have ended up in liquidation; and 190 companies could be saved with approval of their resolution plans. The remaining 1,961 cases are under consideration at various stages of CIRP. The total amount of claims admitted worked out to Rs. 4.13 trillion, of which realisable amount is estimated at Rs. 1.84 trillion. Large-scale incidence of liquidation can be due to past delays and erosion in the value of distressed assets that made survival of many units unviable. Liquidation can thus be regarded as a near-term phenomenon and more resolutions could be targeted in the long run. The driving feature of IBC is to rescue distressed corporates; liquidation is the last resort. The larger impact of IBC comes from its enabling features that could change the ecosystem of the economy.

Larger impact of IBC

Besides the near-term quantitative impact, IBC has enabled India to substantially scale up its rank in the World Bank’s ‘Doing Business 2020’ report. It improved from 100 in 2018 to 77 in 2019, to 63 in 2020 among 190 countries. A driving feature is the contribution of IBC to the ‘resolving insolvency’ factor that went into assessing ease of doing business (EoDB), and in which, India’s ranking improved from 108 in 2019 to 52 in 2020. The strength of India’s insolvency framework stands at 7.5 points in the World Bank’s scale of 0-16-point metrics as against the average of 11.9 of OECD (Organisation for Economic Co-operation and Development) countries.

The distressed loan recovery rate of banks works out to 42.5% of the amount involved through IBC as compared to 14.5% under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 3.5% under Debt Recovery Tribunals (DRTs), and 5.3% under lok adalats. The average time taken in resolution works out to 364 days compared to the duration of 4.3 years by use of other laws/tools.

The efficacy of the Code can be further gauged from the fact that bank claims worth Rs. 5.01 trillion in 13,566 cases have been settled till February 2020 before admission of application or formation of Committee of Creditors (CoC), etc. The intimidating factor is the fear of losing control of the company once regular insolvency resolution professional (IRP) is appointed, which prompts delinqent borrowers to settle dues before the trigger point.

Due to the faster pace of debt resolution when the velocity and recycling of loan funds and banking resources increase, the pace of economic growth can catch a higher growth trajectory. In a bank-driven economy, activation and effective stabilisation of IBC has the potential to better position India in the global economy, as is evident from the increasing EoDB ranking.

Going beyond legal enforcement, IBC is thus set to improve the credit and loan repayment culture. Such behavioural transformation will have the potential to improve the sanctity of debt contract between lender and borrower.

Moreover, the spate of amendments to improve the overall effectiveness of the IBC framework since its enactment, and based on the doctrine of precedence of landmark judicial verdicts, the insolvency and debt resolution process will become more robust and speedy. Though the new timelines are set at 330 days, it could be made faster, provided the skillsets of insolvency resolution professionals and members of CoC could be further fine-tuned to take faster and apt decisions.

Sustained professional rigour

The reason for the impressive performance of IBC is the regulatory glare and sustained operational control by Insolvency and Bankruptcy Board of India (IBBI). While institutionalising operating procedures and rules in terms of the Code, IBBI had begun to prescribe well-calibrated skillsets and knowledge for service providers forming the value chain in enforcing CIRP. An individual to be registered as insolvency professional (IP) with an Insolvency Professional Agency (IPA) should possess the prescribed qualification and experience, and must have passed the limited insolvency examination.

Key stakeholders such as the interim resolution professionals (IRPs), IPs, liquidators, and bankruptcy trustees are included in the panel approved by the IBBI every six months and the information is shared with the adjudicating authorities (AAs) – NCLT and DRTs. IBBI has introduced an annual compliance certificate by an Insolvency Professional Entity (IPE) to strengthen monitoring and control.

In the same way, the Registered Valuer Organisations (RVOs) are the frontline regulators for the registered valuers, who are authorised to undertake valuations required under the Companies Act, 2013 and the Code. A ‘fit and proper’ person, who is enrolled with an RVO as a valuer member should have the required qualification and experience and must have passed a valuation examination of the relevant asset class. Only such a qualified professional is registered as a valuer.

The other important set of stakeholders is the CoC, which is nominated by the lender. They are experienced banking professionals, but are not bound by any mandated need to clear any set of examinations prescribed by the IBBI. But an IRP has to work in close coordination with CoC after taking over the management of the distressed corporate admitted for resolution. It is desirable that a member of CoC and IRP are on similar footing in terms of competency and skillsets to quickly achieve the objectives of IBC.

Taking cue from IBBI, banks should eventually develop a strong team of professionally qualified asset management groups to function as part of CoC. Young banking professionals should be encouraged to clear limited insolvency professional examinations of IBBI, or banks can design own certification of competency to better lead IBC-related activities. Competency of human resources involved in the end-to-end activities involved in enforcing IBC can guide the outcome on a larger canvas.

A more inclusive IBC

IBC is evolving into a more inclusive tool with the recent inclusion of personal guarantors (PGs) to corporate debtors (CDs) under Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for PGs to CDs) Rules, 2019. The central government also brought systemically important Financial Service Providers (FSPs) within the scope of IBC by notifying the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of FSPs and Application to Adjudicating Authority) Rules, 2019 (Rules) on 15 November 2019 under section 227, to provide a generic framework for insolvency and liquidation proceedings of FSPs other than banks. Immediately afterwards, the Reserve Bank of India invoked IBC against Dewan Housing Finance Corporation Ltd. (DHFC). When such expanded scope is seen together with special dispensation for MSMEs in pipeline, IBC will have far more depth and penetration.

Way forward

There are rare incidents of suspension of laws amidst stretches of slowdown that are orchestrated by the government on purpose. But in the case of using IBC, it so happened now. The IBBI and banks should use this window of opportunity of one year provided in the aftermath of Covid-19 lockdown to overhaul operational guidelines and upgrade the skillsets of stakeholders through a sustained capacity-building system. When IBC is shaping up as a broad-based tool for insolvency and bankruptcy proceedings, involvement of more competent stakeholders will be imminent in the future.

Review and simplification of the standard operating manuals, and connecting the missing dots based on decided legal cases to strengthen the value chain, can make IBC sturdier and result - oriented. Banks should not only groom their asset management team themselves but can take the help of external training institutes for the purpose. Similarly, insolvency professionals and CoC members should introspect and spot the weak areas for improvement.

Thus, the stakeholders should work on turning this period of pause into an opportunity to enhance competency in more effectively dealing with the emerging challenges, once the insolvency and debt resolution process resumes. Normal practice would be to shift attention of human resources hitherto handling IBC to other areas as part of multi-tasking and to jump-start again when activity resumes.

But looking at the immense contribution of IBC to the banks in general and economy at large, strengthening competency during this one year will further improve efficiency that can catapult India in EoDB ranking, and can deliver better value to stakeholders. Such an opportunity should not be lost.

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