Done, dented, damaged: The IBC edifice, even before it’s 10
– Sikha Bansal, Senior Partner | resolution@vinodkothari.com
What was ushered in as a new era of legal reforms in the country, with keen interest from all over the world, is now a bruised, battered structure, even before it cuts its cake for the 10th time.
The BLRC Vision
When the Bankruptcy Law Reforms Committee first put the Insolvency and Bankruptcy Code, 2016 (“IBC”) into its mould, they envisaged it as a tool in the hands of creditors who should decide on the fate of a defaulting firm. As they put it, “The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.” Needless to say, they also recognised that decision-making has to be quick – as delays lead to value destruction. Indeed, the design and structure of IBC was promising enough – a unique categorisation of creditors as financial and operational creditors (found no-where in the world) with financial creditors, a creditor-driven resolution process, strict hardbound timelines, an irreversible liquidation outcome, a well-thought of priority waterfall, and a court-appointed liquidator taking the corporate debtor to the death pyre.
Barring a few hiccups in initial implementation where the constitutional validity of certain provisions of IBC was challenged, IBC became an instant blockbuster. The onset of the IBC was a huge success – in business, bar and the benches. For the businesses, the “fear” of IBC set in a “good boy” culture, as the borrowers were keen to keep their accounts standard and protected from IBC action. As far as the bar is concerned – applications and appeals were decided quickly, and rulings also came fast enough. Landmark rulings such as Innoventive Industries, Mobilox Innovations, Arcelormittal India, Essar Steel, among others, followed in quick succession. Ratings and outcomes improved – India’s rank in ‘Resolving Insolvency’ indicator in World Bank’s Ease of Doing Business Report saw a meteoric rise from 136th rank in 2016 to the 52nd rank in 2019. Reports[1] suggest that IBC helped in recovering more than 40%-50% of the amounts involved in the cases referred to NCLTs, until the year 2019-20.
Doldrums take over
And then, the usual sloth and slackness of the system took over – blame it on infrastructure or the very functioning of the AAs, delays became the norm. None other than the Supreme Court acknowledged the inefficiencies in the judicial system:
“over a period of time that there is a serious lack of timely admission and disposal of the applications filed as regards the initiation of CIRP, approval of the resolution plan and liquidation. This only adds to the uncertainty of the process and prolongs the dispute thereby jeopardizing the interest of all the stakeholders involved. . .The Members often lack the domain knowledge required to appreciate the nuanced complexities involved in high-stake insolvency matters in order to properly adjudicate such matters . . the benches of NCLT(s) and NCLAT don’t have the practice of sitting for the full working hours. They are particularly lacking in the capacity to manage the growing number of cases and giving undivided attention required in such matters . . . another serious issue pertaining to the functioning of the NCLTs and NCLAT is that there is often a shortage of members in the Tribunals and inadequate infrastructure to support their functioning. These vacancies heavily impact the insolvency reform initiative undertaken by the government since they lead to operational inefficiencies. . . As a consequence, the strict timelines provided in Section 12 of the IBC, 2016 are not complied with.”
As per publicly available information, as on 30.06.2024, a total of 19,770 cases were pending, out of which a majority of 10,125 cases were pending for more than 1 year. Further, according to figures provided by NCLAT, as on 30.06.2024, a total of 3,019 cases were pending, out of which 1,654 cases were pending for less than 1 year; 1,365 cases were pending more than 1 year; 783 cases were pending for more than 2 years and 456 cases were pending for more than 3 years. Further, 1194 CIRPs, which have yielded resolution plans by the end of March, 2025 took on average 597 days (after excluding the time excluded by the NCLTs) for conclusion of process and the 2758 CIRPs, which ended up in orders for liquidation, took on average 508 days for conclusion.
Long live Bhushan, fit-to-live to fit-to-die to fit-to-live again?
However, the biggest shock was the reversal of the resolution of Bhushan Steel, ordered 6 years back, and then reversal of that reversal itself. In Bhushan Steel, Supreme Court set aside the resolution plan and directed liquidation, after almost 6 years since the resolution plan was approved by NCLT, citing significant gaps in the conduct of CIRP- like lapses in meeting statutory timelines, deficiencies in eligibility verification under section 29A, irregularities in plan implementation, judicial overreach by National Company Law Appellate Tribunal, among others. This order has now been recalled by the Supreme Court citing, inter alia, that the judgment does not correctly consider the legal position as laid down by a catena of earlier judgments. The review petitioners further argued that various incorrect factual aspects were taken into consideration, and that the arguments which were not advanced were nonetheless considered. The Court considered that there is/are error(s) apparent on the face of the record warranting exercise of review jurisdiction and that it as a fit case for recalling the judgment and reconsidering the matter afresh. It may be noted that there are established precedents which say that review cannot get into merits of the case and a judgment is open to review inter alia if there is a mistake or an error apparent on the face of the record.
Dented Pillars
The edifice of IBC rests on some crucial pillars – first, the finality of creditors’ commercial wisdom; second, the trigger of insolvency based on failure to pay and not inability to pay; third, that the waterfall provided in the law will reign supreme and will not be subject to competing or overriding priorities; fourth, that resolution is the last chance for creditor control, and once liquidation commences, it is the court-appointed officer, that is, the liquidator who takes over. Over time, all these pillars have suffered numerous dents causing damage to the very edifice of IBC.
While finality of creditors’ wisdom received a jolt in Bhushan Steel; the fundamental design of IBC also suffered a massive setback in Vidarbha Industries, where the settled proposition – that it is mandatory for the adjudicating authority to admit the Section 7 application if it passes the debt-and-default test and complies with the procedure prescribed under IBC, was completely thrown off-track. Later, while the Supreme Court disposed of the review application, it indicated that judgments and observations in judgments are not to be read as provisions of statute, and that the judicial pronouncements are “in the setting of the facts of a particular case”.
The priority waterfall – that is section 53 which is one the core provisions of IBC has already several dents – while the priority and the primacy of creditors’ rights is the very essence of the law that starts with a non-obstante clause, courts and tribunals have found scope for many holes (provident fund, gratuity, pensions, etc.) that drain the (already) scare liquidation resources (as in Mosar Baer). Another instance is that of Rainbow Papers, in which the well established and unequivocally articulated priority of secured creditors over government dues, as under section 53, went for a toss when the tax authority was treated as a secured creditor. In contradiction, in Raman Ispat Pvt Limited, SC observed that the ruling in Rainbow Papers should be confined to its specific facts. Later, while the review petition against the Rainbow Papers ruling was dismissed on the ground that it was a well-considered judgment; a curative petition in the matter is still pending.
Talking about liquidation, it is an irreversible outcome arising out of a failed resolution. Where there are chances of revival, creditors are given free hand to arrive at a resolution – and even if such resolution fails, the entity should be taken to death bed with a court-appointed liquidator taking over the reins of the entity. As such, in the liquidation phase, the creditors should only play a consultative role. The BLRC design was thus clear – “Creditors have no direct interest in the realisation or distribution of liquidation. They can only charge the liquidator to carry out her statutory duties.” This has also been incorporated in section 35(2) of the IBC where the liquidator has the “power” to consult any of the stakeholders and that such consultation shall not be binding on the liquidator. However, the subordinate legislation, over the time, has diluted this design, such that the liquidator shall “mandatorily” seek consultation from a “stakeholders’ consultation committee” which he shall “mandatorily” constitute in accordance with the regulations. Of course, the regulations maintain that advice of the consultation committee shall not be binding on the liquidator, but then, in case the liquidator decides differently, he shall have to report the same to the AA and to the IBBI. Effectively and as obvious as it is, the narrative has moved from “consultation” to “direction”. In fact, the extent of creditor involvement is so much so that the process looks more like a “creditor-driven liquidation” similar to a “creditor-driven resolution”.
IBC – a tool to (mis)use?
There are several other issues – for instance, data suggests that till 31st March 2025, about 30,310 cases having underlying default worth Rs. 13.78 lakh crore have been settled pre-admission. Post admission, 2,430 cases have been closed through settlement, withdrawals and appeals out of 8308 CIRPs initiated, that is, in aggregate, close to 30% of the CIRP applications initiated. Although, one may see this as an overarching behavioral change effected by the Code (after all, every cloud has a silver lining!); however, the numbers clearly say that IBC has been rampantly misused as a tool for recovery (or “settlement”) rather than a mechanism for resolution of the defaulting companies.
A call for resolution?
All these issues, and judicial twists and turns, naturally, pile up the ever increasing delays and lags in the resolution and liquidation processes – which anyway exist because of incessant litigation, promoter-driven disruptions, infrastructural insufficiencies, inadequate sensitisation across governmental institutions, and similar. Needless to say, delays lead to damage – a data of 947 resolved cases as of March, 2024 makes it quite evident; it indicates a direct correlation between the length of the CIRP and the recovery rate. As per the data, the recovery rate for creditors stands at 49.2% if the CIRP is concluded within 330 days. It reduces to 36%, if the CIRP process concludes between 330-599 days; and beyond 600 days, the recovery rate stands at a mere 26.1%.
As a result, IBC, which was seen all over the world with tremendous interest as a new era of insolvency resolution in the country – is seeming like an aged soul on troubling and failing feet as it almost turns 10. The law which was meant to reshape the lending panorama in the country, now looks beaten and bruised, at several places – and might be, is in need of a “resolution” itself.
[1] Reports on Trends and Progress of Banking in India, by RBI
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