Revamping India’s Insolvency Framework: Challenges, Trends, and Strategic Improvements

The Insolvency and Bankruptcy Code, 2016 (the Code), introduced in India, represents a significant reform aimed at streamlining the resolution of distressed assets and maximizing their value. This write-up provides a comprehensive analysis of the performance and challenges of various insolvency processes under the Code. Based on data from the Insolvency and Bankruptcy Board of India’s (IBBI) Quarterly Newsletter for March 2024, the analysis delves into the Corporate Insolvency Resolution Process (CIRP), the Liquidation Process, Personal Insolvency, Avoidance Transactions, and the Pre-Packaged Insolvency Resolution Process (PPIRP). By examining these areas, this write-up highlights the systemic inefficiencies, explores underlying causes, and offers practical suggestions for improving the existing processes.

Filing Trends

The number of cases filed for CIRP has seen considerable fluctuation. From a modest beginning with 37 cases in 2016-17, filings surged to 1989 in 2019-20. However, the pandemic-induced exemptions led to a drop to 536 cases in 2020-21. Filings picked up again, reaching 987 in 2022-23. This trend indicates an initial strong adoption of the CIRP process, followed by a significant slowdown in between due to external factors such as Covid and resolution of old chronic legacy cases.

Resolution Time

One of the primary challenges in CIRP is the extended duration for resolution. The average time taken for concluding a CIRP is 683 days, which means the process typically takes a minimum of two years. This extended duration can erode the value of assets and negatively impact stakeholders, including creditors and employees. Delays are often caused by procedural complexities, court backlogs and inefficiencies in the adjudication process and filing of unchecked and uncontrollable interim application (IAs) by non-stakeholders to derail the process. It is seen that such IAs consume significant judicial time which leaves very little time for critical requirements of approval and disposal of resolution plan and liquidation applications.

Notably, delays in the approval of resolution plans and decisions on liquidation applications negatively impact all stakeholders. Each day of delay reduces the chances of effectively and timely revival of CDs, diminishes the likelihood of retaining workers and increases costs and expenses (without achieving revival).Creditors are worst affected as a delay of every day deprives them of the legitimate value of their claim which gets frozen on the date of admission of the application. Delay in approval of resolution plans is thus destructive to the very idea of revival.

Recovery Rates

The recovery rates under CIRP show that Financial Creditors recover an average of 32% of their claims, while Operational Creditors (OCs) recover around 25%. Interestingly, Operational Creditors have filed more cases (3667) compared to Financial Creditors (3440), and a significant number of these cases (756) were settled and withdrawn under Section 12A  of the Code, compared to 306 cases for Financial Creditors which shows that OCs are more proactive in settling and recovering their dues before admission of the insolvency applications.

As per statistics, 40% of the CIRPs which yielded resolution plans, were earlier with Board of Industrial and Financial Reconstruction (BIFR)and or defunct. Understandably, the recovery in such cases was also limited to around 9% of the claim value of creditors. Similarly, more than 77% of liquidation cases were either with BIFR or defunct where the recovery was around 6%.

There were close to 200 cases where the admitted claims were over  INR 1,000 crores, involving an aggregate claim of INR 8.84 lakh crore as against the assets value of only about INR 0.44 lakh crore.

The above could majorly be a key reason for disparity in the number of claims and realization by creditors.

Section 12A Withdrawals

A noticeable trend is the large number of cases withdrawn under section 12A of the Code. Section 12A enables withdrawal of insolvency cases on account of settlements, both before and after admission. Approximately 14% of the cases filed were withdrawn under section 12A, presumably due to settlements reached with creditors. This indicates a significant preference amongst stakeholders to resolve insolvency issues outside the formal resolution process.

Sector Analysis

Another key trend under the insolvency process is the share of the manufacturing sector. It is seen that the manufacturing sector has the maximum share of insolvency cases (around 37%) followed by real estate (21%) and construction (12%). This trend is also evident in the resolution outcomes, where the manufacturing sector attracted 48% of the resolution plans, followed by real estate (15%) and construction (11%). Overall, the manufacturing sector has dominated filing, resolution and liquidation cases.

Capital-Intensive Nature

Manufacturing businesses typically have high fixed costs due to significant investments in machinery, plants, and equipment. To fund these capital expenditures, manufacturing firms often rely heavily on debt financing. High levels of debt increase the risk of insolvency if the company faces cash flow issues or cannot meet its debt obligations. The manufacturing sector is also highly sensitive to economic cycles. During economic downturns, demand for manufactured goods often drops significantly, leading to reduced revenues and profitability.

Status of Cases under Liquidation

As of March 2024, the state of cases under liquidation highlights substantial inefficiencies and delays within the insolvency framework. Out of 2,476 insolvency cases that have ended in liquidation, 53% have been languishing for over  two years, with only 509 companies (around 20%) having been dissolved. Additionally, a meager number of cases have seen resolution through alternate means, with only 47 cases sold on a going concern basis and 12 cases resolved through compromises and arrangements.

The financial recovery through liquidation has been dismal, with INR 8,943 crores recovered against admitted claims amounting to INR 228,702.84 crores, yielding a recovery rate of around 3%. Secured creditors have fared slightly better but still only managed to recover approximately 4% of their claims. Alarmingly, a substantial number of cases (1,516) involving claim amounts totalling to INR 1,211,916 crores are still undergoing the liquidation process.

This bleak picture highlights the urgent need for reforms to expedite the liquidation process and improve recovery rates. Adjudicating authorities must fast-track applications for liquidation and focus on efficient dissolution of cases where resolution efforts have failed. The potential for resolution through going concern sales and compromises can still be pursued during the liquidation stage. Therefore, there is little justification for prolonging cases that offer minimal prospects for resolution. Prompt and decisive action is essential to prevent further erosion of value and ensure faster closure of insolvency cases.

Filing Trends and Recovery

Personal insolvency cases have been rising, with 2800 applications filed, involving an amount of INR 188155 crores. Out of these, 401 cases were initiated by guarantors themselves. However, the resolution rate has been poor, with only 4 cases concluding in a resolution plan within a  four year span and an overall recovery rate of around 2%.

Challenges in Recovery

Several factors contribute to the poor recovery in personal insolvency cases:

• Lack of Asset Information: A significant barrier is the difficulty in accessing accurate and comprehensive information on the guarantors’ assets. Many assets are protected and beyond the reach of creditors.
• Interim Moratorium: Section 96 of the Code provides for an interim moratorium, allowing guarantors to stall recovery actions by merely filing an application. This provision is being exploited by guarantors to delay the recovery process.
• Look-back Period: The look-back period for avoidance transactions in personal insolvency starts from the initiation of the bankruptcy process, unlike in CIRP where it starts from the application admission date. This discrepancy results in many transactions falling outside the scope due to delays in initiating the bankruptcy process.
• Creditors tend to prefer SARFAESI actions for secured debts and using the IBC primarily for unsecured debts where recovery prospects are inherently lower. This preference further complicates the landscape of personal insolvency resolution, as cases with the lowest chances of recovery typically end up before the National Company Law Tribunal (NCLT).
• This strategy is also being used to compel promoters to settle dues through One-Time Settlements (OTS). However, delays in the admission of applications and the negative impact on existing recovery actions, including those under the SARFAESI Act, allow promoters to find ways to evade and delay actions under the IBC.

Further, often Banks are found wanting in accepting the settlement amount due to lack of clear policy guidelines on the issue specially in cases involving high net worth guarantors.

Cases and Recovery

A substantial amount of INR 370942 crores is involved in 1237 cases of avoidance transactions. However, only 293 cases have been disposed of, with a meagre recovery of INR 6599 crores. Notably, INR 5500 crores of the recovered amount pertains to a single case involving Jaypee Infra, where a mortgage of land in favor of the banks was set aside. This indicates that outside of significant cases, recovery remains negligible, highlighting inefficiencies in handling avoidance transactions. Additionally, in cases  (947) which have been resolved through CIRP, around 233 applications for avoidance transactions involving amount of INR 1.24 lakh Crore are still pending.

Despite the involvement of significant sums of money, these applications do not get proper attention both from the stakeholders and from the judicial authorities. Further, many of the applications are filed without proper backing and evidence. It is also seen that banks are reluctant to pursue cases in foreign jurisdictions. With focus on actions rather than results, the Banks find themselves deprived of recoveries which they would otherwise have recovered by pushing and pursuing cases in other jurisdictions where either promoters are located or assets are siphoned off.

It is also seen that while litigation financing has benefited in many jurisdictions, banks in India either lack understanding or initiative to explore such options.

Implementation and Challenges

Introduced in 2021 to provide a faster and more efficient insolvency resolution process, PPIRP has not gained significant traction, with only four cases filed in four years. Several factors contribute to its limited uptake:

• Additional Processes: PPIRP involves many additional processes compared to normal CIRP, making it less attractive to stakeholders. The process is perceived as time-consuming and costly.
• Preference for OTS: Corporate Debtors (CD) and lenders often prefer One-Time Settlements (OTS) over the cumbersome PPIRP, as OTS offers a quicker and more straightforward resolution.
• Restrictions on Haircuts: Restrictions on haircuts and the impact on promoter control under PPIRP make it less favorable compared to normal CIRP, where such restrictions are not present.
• Debtor vs. Creditor Control: While PPIRP is designed to keep the debtor in possession and creditors in control, provisions for vesting control with the resolution professional in certain events reduce its attractiveness.

The disposal of insolvency cases by the NCLTs faces significant delays, particularly in the approval of resolution plans and liquidation applications. Although there has been some improvement in the admission of applications under Section 7 of the Code,  subsequent stages experience considerable delays. Under Section 31 of the Code, the role of the NCLT in approving a resolution plan is explicitly defined and limited. The NCLT is mandated to approve a resolution plan if it meets the requirements of Section 30(2) and to reject it if it does not. These requirements include payment of insolvency resolution process costs, repayment to operational creditors, management of the corporate debtor’s affairs, implementation and supervision of the resolution plan, compliance with the law and conformity to any other requirements specified by the Board. The responsibilities for ensuring compliance of the above requirements need to be shifted to CoC and Resolution Professional by way of a compliance affidavit.

The Supreme Court of India has reinforced this limited scope of judicial intervention through the doctrine of the “Commercial Wisdom of the Committee of Creditors,” emphasizing that NCLTs should respect the commercial decisions made by the CoC. Despite these clear guidelines, delays occur due to several reasons, including repeated hearings, part-heard matters, and the filing of numerous interim applications, often instigated by promoters. This not only prolongs the resolution process but also undermines the efforts of Resolution Professionals (RPs) and the Committee of Creditors (CoC) in resolving insolvencies.

Several countries have implemented measures to address delays in their insolvency processes, offering valuable lessons for India:

• United States (Chapter 11 Bankruptcy): The U.S. system emphasizes pre-packaged bankruptcy plans where debtors and creditors negotiate terms before filing, significantly reducing court involvement and time taken for resolution. A strong emphasis on debtor-in-possession financing helps companies maintain operations during the insolvency process, facilitating faster resolutions.
• United Kingdom (Administration): The UK has a streamlined administration process where an administrator is quickly appointed to manage the company’s affairs, helping to expedite the resolution. The UK Insolvency Act allows for pre-pack administrations, enabling quicker sales of business and assets, thereby minimizing value erosion.
• Singapore (Insolvency, Restructuring, and Dissolution Act): Singapore’s framework includes mechanisms for expedited debt restructuring, such as the automatic 30-day moratorium on creditor actions once a restructuring application is filed. The Act encourages mediation and arbitration as alternative dispute resolution mechanisms to speed up the process.

Streamline Hearing Processes

• Single Continuous Hearing: Encourage continuous hearings to ensure that cases are heard at a single stretch rather than multiple adjournments, which can expedite the decision-making process.
• Clear Hearing Schedules: Establish and adhere to strict timelines for hearings, reducing the frequency of adjournments and ensuring timely progression of cases.

Limit Interim Applications

• Screening Mechanism: Implement a preliminary screening mechanism to filter out frivolous and non-essential interim applications, preventing unnecessary delays.
• Penalty for Frivolous Applications: Introduce penalties for parties that file frivolous or vexatious applications to discourage such practices and streamline the process.
• Limit Inherent Powers: Reassess the scope of NCLT’s inherent powers under Rule 11 and Section 60(5) to ensure they are not used to unduly interfere with or delay the insolvency process.
• Guidelines for Intervention: Develop clear guidelines for the use of inherent powers to prevent unnecessary judicial intervention and ensure timely resolution of cases.

Fast-Track Liquidation Approvals

• Streamlined Procedures: The NCLT should implement streamlined procedures for approving liquidation applications. This review assists the decision-making process to minimize delays.
• Priority Handling: Cases that have already exhausted all resolution efforts should be given priority for liquidation approval. This will prevent further value erosion and reduce the backlog of prolonged cases.

Simplify Routine Matters

• Expedited Procedures for Routine Applications: Implement fast-track procedures for routine matters such as extensions of time, replacement of resolution professionals, and applications under Section 19 of the Code etc, ensuring these do not cause unnecessary delays.
• Simplify the procedural requirements under CIRP and PPIRP to reduce complexities and enhance efficiency. Implement standardized templates and processes for common filings and actions to reduce variability and procedural delays. Minimize process and regulations and frequency of amendments which adds to complexities rather than resolving issues.
• Enhance Judicial Capacity: Increase the capacity of the National Company Law Tribunal (NCLT) by appointing more judges with proper experience in handling commercial matters.

Adopt Pre-Packaged Solutions

• Promote genuine pre-packaged insolvency plans where debtors and creditors agree on a resolution plan before approaching the NCLT, minimizing court involvement.
• Ensure that PPIRP offers clear advantages over CIRP, such as reduced timelines and lower costs, to make it an attractive option for stakeholders.

Encourage Alternative Dispute Resolution (ADR)

• Integrate mediation and arbitration as part of the insolvency resolution process to resolve disputes quickly and reduce the burden on courts. Make ADR compulsory for IAs by non-stakeholders.
• Establish dedicated ADR centres for insolvency cases to facilitate quicker resolutions.
• Implement Technology Solutions: Utilize technology to streamline case management and reduce administrative delays. Introduce electronic case management systems to enable real-time updates and efficient handling of cases.
• Set Strict Timelines: Enforce strict timelines for each stage of the insolvency process and penalize unnecessary delays. Regularly monitor and review case progress to ensure adherence to timelines and identify bottlenecks early.

Other Measures

• Address Interim Moratorium Exploitation: Amend Section 96 to prevent misuse of the interim moratorium by guarantors to delay recovery actions.
• Reconsider Look-back Period: Align the look-back period for avoidance transactions in personal insolvency with CIRP to ensure transactions do not fall outside the reach due to delays.
• Enhance Asset Information Access: Improve mechanisms for obtaining and verifying information about guarantors’ assets to aid in better recovery.
• Focus on Faster Approval of Resolution Plans: Encourage the formulation and approval of resolution plans within shorter timeframes to maximize asset value and recoveries. Similarly, application for liquidation should be decided in 30 days’ time as there is little scope for judicial scrutiny at this stage.
• Revise PPIRP Framework: Simplify PPIRP by reducing additional processes and restrictions. Ensure it offers tangible benefits over normal CIRP, such as faster resolution and lower costs.
• Promote true pre-packaged resolutions with minimal involvement of RPs and NCLTs, focusing on pre-agreed plans with the consent of financial creditors.
• Stakeholder Engagement: Engage with real stakeholders to understand their concerns and needs and work out practical solutions rather than adding new processes.
• Committee to review impact of meaningless IAs: Form a committee to look into the issue of filing of meaningless interim applications and judicial time taken in disposal of such applications and to suggest system to reduce such IAs.

One of the critical challenges in improving recovery rates under personal insolvency is the difficulty in obtaining and verifying comprehensive information about the guarantors’ assets. This issue is compounded by the lack of mandatory registration for the transfer of movable and liquid assets, and the risk of such assets being siphoned off or stashed in foreign jurisdictions. To address these challenges, the Insolvency and Bankruptcy Board of India (IBBI) and other stakeholders can consider the following measures:

Strengthen Regulatory Requirements

Mandatory Asset Disclosure

• Enhanced Disclosure Norms: Mandate more stringent asset disclosure requirements for guarantors when applying for credit. This should include a comprehensive declaration of both movable and immovable assets, along with details of any assets held abroad. The net worth needs to be supported by reliable and verifiable documents.
• Periodic Updates: Require guarantors to provide periodic updates on their asset status to lenders.

Leverage Technology and Data Analytics

• Interconnected Systems: Create an interconnected system linking databases from financial institutions, tax authorities, and other relevant agencies to cross-verify asset declarations made by guarantors.
• Advanced Analytics: Use data analytics tools to identify patterns and discrepancies in asset declarations, helping to detect potential fraudulent transfers or hidden assets. Immutable Records: Utilize blockchain technology to create tamper-proof records of asset ownership and transactions. This can provide a transparent and verifiable trail of asset movements, making it harder to hide or transfer assets without detection.

International Cooperation and Legal Frameworks

• International Treaties: Strengthen international cooperation by entering into treaties and agreements with other countries to facilitate the identification, freezingand repatriation of assets located abroad.
• Mutual Legal Assistance: Enhance mechanisms for mutual legal assistance in cross-border insolvency cases, allowing for the seamless sharing of information and execution of recovery actions across jurisdictions.
• Global Asset Tracking
• Collaborative Platforms: Participate in global platforms and networks dedicated to tracking and recovering assets. Collaboration with international agencies like Interpol and the Financial Action Task Force (FATF) can provide access to crucial information and resources.

Legal and Institutional Reforms

Asset Freezing and Forfeiture

• Pre-emptive Measures: Implement interim moratorium under section 96 for pre-emptive freezing of assets once insolvency proceedings are initiated, preventing the guarantor from transferring or concealing assets.
• Increased Authority for RPs: Grant more authority to Resolution Professionals (RPs) to investigate and track guarantor assets. This could include access to confidential financial records and the power to conduct forensic audits.

Stakeholder Collaboration and Education

• Awareness: As of now, all the efforts are concentrated on CIRP and Liquidation process it is now time to shift the gear to make the system more effective and efficient. It is seen that Banks especially Public Sector Banks, are slow in adopting new practices that have proven effective in other jurisdictions therefore, there is need to:
• Stakeholder Workshops: Conduct regular workshops and training programs for banks, financial institutions, and RPs to educate them on best practices for asset tracking and recovery.
• Joint Task Forces: To form joint task forces comprising representatives from banks, financial institutions, and regulatory bodies to develop and implement strategies for effective asset recovery.
• Information Sharing Protocols: Establish protocols for real-time information sharing between banks and regulatory authorities to promptly identify and act on suspicious asset movements.

The Insolvency and Bankruptcy Code, 2016, has brought significant improvements to India’s insolvency landscape. However, several areas require urgent attention to enhance its effectiveness. Drawing from international best practices and implementing targeted measures to reduce delays can help streamline the process, improve recovery rates, and ensure the overall success of insolvency processes under the Code. Implementing these  measures can significantly enhance the effectiveness of the IBC framework, leading to quicker resolutions, better recovery rates and a more robust insolvency ecosystem. The focus should be on improving the existing mechanism through practical, stakeholder-driven solutions.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com