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FIXING THE BANKRUPTCY CODE

India Today

|

September 06, 2021

Despite the hope vested in the IBC, recoveries and resolution timelines remain far short of expectations

- SHWWETA PUNJ

FIXING THE BANKRUPTCY CODE

Five years after it was implemented, the efficacy of India’s Insolvency and Bankruptcy Code (IBC) has fallen short of expectations. Passed in 2016 after nearly a decade of deliberations, the IBC was touted as a solution for the country’s slow bankruptcy resolution processes and low recovery percentages. What lays bare its inadequacies is an observation by the NCLT (National Company Law Tribunal) in June this year. While approving the sale of Videocon Industries to Twin Star Technologies, owned by industrialist Anil Agarwal, it noted that Twin Star was paying ‘almost nothing’ for the purchase, and that the 99.28 per cent ‘haircut’ (loss, in banking parlance) that operational creditors were being forced to accept was closer to a ‘tonsure, or total shave’ than a haircut. The NCLT noted that against the total claims of Rs 64,838 crore, the resolution only provided Rs 2,962 crore, or 4.5 per cent. Many operational creditors—a large percentage of which are MSME (micro, small and medium enterprises)—will get as little as 0.72 per cent of their claimed amounts.

In 2016, the IBC replaced a host of previous recovery/ resolution acts in place to deal with bankrupt firms, including the Sick Industrial Companies Act, 1985, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. It had two stated objectives—first, to quickly process bankruptcy proceedings, allowing banks to clear up their balance sheets, free up credit and start lending again, and second, to close the legal loopholes being misused by the owners of failing businesses to wipe away their debt while retaining control of their companies.

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