October 21st, 2024 | by Sanjay H. Sethiya and Sumedha Srinath
Introduction
The Insolvency and Bankruptcy Code (IBC) introduced in 2016, marked a watershed moment for India’s economic and financial landscape. It represented the government’s bold initiative to tackle corporate distress and unlock value in ailing businesses, thereby breathing life into the nation’s economy. However, as with any ambitious legislation, the IBC’s initial phase was challenging. Eight years later, as India’s corporate environment continues to evolve, so too must its insolvency framework. Enter IBC 2.0, a second-generation reform aimed at addressing the shortcomings of the original code while enhancing its effectiveness in a more complex and interconnected business world.
The Success of IBC 1.0
Over eight years since its enactment, the IBC has largely fulfilled its intended objectives, given the circumstances and constraints of the ecosystem of its introduction in 2016. While it has proven successful in many respects yet, new challenges have emerged thus, raising the expectations of stakeholders. These expectations now focus on improving the percentage of asset recovery, shortening the time required for resolution, reducing the costs involved and minimizing the duration of prolonged litigation. The evolving landscape has heightened the demand for a more efficient and streamlined insolvency process to meet these growing demands.
The Insolvency and Bankruptcy Board of India has proactively in addressed the issues and difficulties arising during the corporate insolvency resolution process (CIRP). Judicial pronouncements, occasionally, have resolved many interpretational and legal hurdles. Insolvency Professional Agencies (IPAs) like Indian Institute of Insolvency Professionals of ICAI (IIIPI) have done considerable work in capacity building of Insolvency Professionals (IPs) and creating awareness in understanding different stakeholders about IBC and their respective roles. IPs have done very well in translating IBC into a reality at ground level, overcoming teething troubles. In substance, IBC has played an essential role in creating an ecosystem for resolving stress in the industry, reducing time in resolution thereof and salvaging the economic value of distressed assets. [i]
However, as with any first-generation reform, there were gaps that became more evident as stakeholders experienced the process firsthand.
The Emergence of New Challenges
While the IBC has been a game-changer, its implementation has revealed certain structural and procedural inefficiencies over the years. Stakeholders, including creditors, debtors, and investors, voiced their concerns regarding several key aspects of the insolvency process. The most pressing issues were the time taken for case admission, the percentage of realization for creditors, the overall cost of resolution, and the delays caused by prolonged litigation.
One of the central concerns was the time-bound admission process. Though the IBC prescribed a specific time frame for the resolution process, the reality was fundamentally different, as the cases often lingered in courts for much longer due to various procedural bottlenecks. For instance, Amitabh Kant, former CEO, NITI Aayog, GOI, noted that insolvency resolution at the NCLT averaged 716 days in the last financial years, up from 654 days in FY23. He highlighted that the average time taken for the admission of cases increased from 468 days in FY21 to 650 days in FY22. The recovery rate fell to 27% in FY24 from 36% in the previous year, pulling down the cumulative recovery since the IBC was introduced in 2016 to 32%. [ii] This delay in admission not only hampered the resolution process but also discouraged potential investors.
The Promise of IBC 2.0
IBC 2.0, the second-generation reform, seeks to address these challenges head-on. The proposed amendments aim to plug the gaps in the original framework while introducing new mechanisms that cater to the evolving needs of the business environment. At the heart of these reforms is the desire to make the insolvency process more efficient, transparent, and accessible to a broader range of stakeholders.
One of the key amendments in IBC 2.0 is the expansion of the pre- packaged insolvency resolution process, currently applicable only to Micro, Small, and Medium Enterprises (MSMEs). By extending this framework to larger companies, the government aims to create a quicker and more cost-effective resolution mechanism for stressed assets. This shift will allow larger corporations to take advantage of a pre-arranged resolution plan without requiring lengthy judicial intervention, making the process more streamlined.
Another major reform under IBC 2.0 is the introduction of group insolvency. In today’s corporate world, businesses are often part of larger corporate groups, with assets and liabilities spread across multiple entities. Group insolvency seeks to address this by allowing for the consolidated resolution of insolvency proceedings for corporate groups. This simplifies the process and ensures a more holistic resolution, improving outcomes for all stakeholders.
Fast-Tracking Corporate Insolvency
The government is also focusing on redesigning the fast-track corporate insolvency resolution process to permit financial creditors to drive the insolvency process outside of the traditional judicial framework. This would allow financial creditors to resolve distressed assets more quickly while still retaining some level of judicial oversight to ensure legal certainty.
Strengthening the Insolvency Ecosystem
IBC 2.0 also aims to strengthen the framework for individual insolvency, particularly in the case of guarantors of corporate debtors. By focusing on individual insolvency, the reform ensures a comprehensive approach to resolving financial distress, protecting the interests of both creditors and debtors alike.
Cross-border insolvency is another area of focus in the second-generation reforms. As businesses increasingly operate across borders, there is a growing need for a framework that addresses insolvency cases involving assets and liabilities spread across multiple countries. The inclusion of cross-border insolvency in IBC 2.0 is a crucial step toward creating a more globally relevant insolvency regime that can handle complex, multi- jurisdictional cases.
Conclusion
IBC 2.0 is a natural progression of India’s insolvency framework, born out of the lessons learned from the original code and the evolving demand of stakeholders. By addressing key gaps in the system and introducing new and innovative mechanisms, IBC 2.0 promises to enhance the efficiency, transparency, and accessibility of the insolvency process.
References:
i. i. Haldia, A. (2022). IBC – PREPARING FOR VERSION 2.
Retrieved from https://www.iiipicai.in/wp-content/uploads/2023/10/Article-by-Dr.-
Ashok-Haldia.pdf
ii. Mittal, M. (2024, July 19). Amendments for IBC 2.0 to be a part of Union Budget 2024?
Retrieved from MoneyControl:
https://www.moneycontrol.com/news/business/budget/amendment s-to-ibc-2-0-may-be-a-part-of-union-budget-2024-12762731.html
Additional References:
iii. REPORT OF CBIRC-II ON GROUP INSOLVENCY. (2021).
Retrieved from ibbi.gov.in:
https://ibbi.gov.in/uploads/resources/9ff4f639c0d2a29ea188fd0cba 332273.pdf
iv. Chabbra, P. (2024, March 19). Navigating Cross-Border Insolvency: A Critical Analysis of India’s Framework and Its Impact on Foreign Investment.
Retrieved from legalserviceindia:
https://www.legalservicesindia.com/law/article/39646/40/Navigatin g-Cross-Border-Insolvency-A-Critical-Analysis-of-India-s-Framework-and-Its-Impact-on-Foreign-Investment
~ Sanjay Sethiya is the Managing Partner at Law Square, Advocates & Solicitors.
~ Sumedha Srinath is an Associate at Law Square, Advocates & Solicitors.