The Insolvency and Bankruptcy Code (IBC), 2016
The IBC was introduced as a framework to address corporate distress in a manner distinct from the traditional creditor-driven, enforcement-heavy approach. It aimed to rescue viable businesses, preserve enterprise value, and resolve financial distress collectively. However, over time, it has evolved into a potent debt recovery tool.
Current Narrative and Statistics
- The IBC is now seen more as a debt recovery mechanism than a business rescue tool.
- According to central bank reports for 2024-25, the IBC delivers the highest recovery rates among mechanisms:
- IBC: 37% recovery rate
- Sarfaesi: 32% recovery rate
- Debt Recovery Tribunals (DRTs): 10% recovery rate
- Lok Adalats: 2% recovery rate
- IBC accounted for 52% of total bank recoveries in the year cited.
Misleading Perceptions
The predominant focus on recoveries is misleading as it diverts from the IBC's primary objective of company rescue. Critical qualifiers are often ignored, and outcomes for financial creditors overshadow the poor recoveries for operational creditors.
Legislative Framework and Judicial Clarifications
- The IBC is not meant to serve as recovery legislation; it imposes a moratorium on recovery actions during insolvency proceedings.
- The Supreme Court reinforced this understanding, highlighting that recovery in insolvency proceedings is incidental to resolution.
Operational Reality vs. Legislative Intent
- The current operational reality diverges significantly from the intended statutory purpose due to factors such as Section 29A and creditor practices.
Factors Contributing to the Divergence
- Section 29A Deterrent: Renders promoters ineligible to submit resolution plans post-Cirp commencement, incentivizing settlements outside IBC.
- Creditor Approach: Financial creditors prefer upfront cash recoveries over patient value maximization, facilitating misuse of the IBC.
Consequences and Call for Change
- The use of the IBC as a negotiation tool rather than for genuine resolution risks entrenching a culture of extraction over rescue.
- There is a pressing need for creditors to shift their approach from recovery to resolution to honor the IBC's original intent and support long-term economic growth.
Conclusion
The trajectory of the IBC will have lasting impacts on India’s credit markets and economic development. It is crucial for the involved stakeholders to align with the Code's intended purpose of resolving, not just recovering, to foster a healthy financial ecosystem.
