Why Resolution Under Insolvency and Bankruptcy Law Is Difficult

In the year 2016, the Insolvency and bankruptcy Code came into full effect in India, which became the preferred form of debt default resolution route. With this code in full action, the legal needs of the lenders and even that of the insolvent firms changed completely. So, it surely gave a huge blow to the legal firms dealing with insolvency law in India.

The firms wasted no time in retaining, hiring and deploying people to run the show for them and even upgraded their working ethics to a new stage. These firms are currently representing debtors, lenders and even operate as resolution professional to some extent by taking charge of insolvent firm. Most of the law firms in India, mainly the accounting firms and larger audit ones and even the consultants and investment bankers will make similar such moves to work on with the latest insolvency regime.

Results of the last 9 quarters:

Right from January 2017 to March 2019, around 1860 companies are known to have been admitted to the field of corporate insolvency based resolution procedure. Of this lot, around 715 of them have exited the procedure. 378 of the groups have been liquidated and around 337 have accepted the resolution plans or just withdrawn from it.

• Most of the other groups have moved appellate authority, Supreme Court or even the National Company Law Appellate Tribunal.
• The number of present cases existing in this system per quarter has dropped quite a bit in the last two quarters.
• If you want, you can try checking out the 12000 odd insolvency patterns, most of which are waiting to be admitted by the current NCLT courts. If you want, you can easily gain estimate of hefty amount of the litigation that IBC has recently unleashed.

IBC and its promise:

The main promise of IBC under the insolvency and bankruptcy law was a time based debt resolution, which has gone bad. If such resolutions have been unresolved for longer time frame, then it will have a corrosive effect on investors, lenders sentiment and liquidity.

• The resolution of insolvent firms can always help lenders to recover some of their dues in a partly manner and also where it might be made possible. It can further salvage some parts of the business after matching up with debt obligations.
• The procedures can help company to come up with a fresh start, and working with some of the new sets of promoters. It helps in producing some healthier balance sheets for the firms over here.
• However, there is a change in this promise as it now appears to be much more like a threat. Here, the NCLT infrastructure will prove to be quite inadequate for quantum of cases, which are flooding the present system.
• With passing time, the current lack of established legal precedents will grow up and accumulate. It will make the litigation under IBC framework to grow and be time consuming at the same time.
• In the end, the resolution, mainly in some of the marquee cases, will add larger amounts associated with bad debts and will be taking way too long than envisage timeline of around 180 to 270 days.

Expected notes from courts:

The NCLT courts have already started working and resembling the metropolitan courts of the magistrate with little based infrastructure. It helps you to actually wonder if the government is actually serious about the present recovery of debt.

It has been found out that the RBI has flagged IBC as the major solution for covering bad bank debts, by just pushing around 12 flagships cases. Some of those are Bhushan Steel, Essar Steel and Bhushan Power and Steel into IBC process in the year 2017, June. It was later followed by a second set of list, which comprises of 26 defaulters in the same year, but in the month of October.

Then in February 2018, the Apex bank was the one to recommend a mandatory push to the IBC for any of the corporate defaulter. It is only after the financial institutions spent around 6 months and trying to find that one resolution.

The last bit as mentioned:

There has been a last bit from RBI circular of February 12th, which was later set aside by the Indian Supreme Court in 2019 April. In those intervening months, most of the Indian bankers have actually adopted the RBI stance of pushing every sort of debt default case right into the IBC process.

The main aim of this process was to serve as deterrent and incentivizing promoters for paying up or even reaching deal with lenders and not quite ending up in NCLT with risk of just losing the firms. The matters started well. By late 2018, the aspect of quicker resolution had spurred healthy market for the bad loans via IBC. By May 2019, Indian banks put up Rs 1.3 lakh crore bad loans on market for funding distressed companies to take over.