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Value Addition
Notes
Indian Economy

INSOLVENCY & BANKRUPTCY

CODE (IBC) 2016
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INSOLVENCY & BANKRUPTCY CODE (IBC) 2016

Insolvency & Bankruptcy Code (IBC) 2016
In a growing economy like India, a healthy credit flow and generation of new capital are essential, and when a
company or business turns insolvent or “sick”, it begins to default on its loans. In order for credit to not get stuck
in the system or turn into bad loans, it is important that banks or creditors are able to recover as much as possible
from the defaulter and as quickly as they can.
The business can either get a chance, if still viable, to start afresh with new owners, or its assets can be liquidated
or sold off in a timely manner. This way fresh credit can be pumped into the system and the value degeneration of
assets can be minimised.
In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery
mechanisms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals were seen to be performing badly, the Insolvency
and Bankruptcy Code (IBC) code was introduced to overhaul the corporate distress resolution regime in India and
consolidate previously available laws to create a time-bound mechanism with a creditor-in-control model as
opposed to the debtor-in-possession system.
When insolvency is triggered under the IBC, there can be two outcomes: resolution or liquidation; all attempts are
made to resolve the insolvency by either coming up with a restructuring or new ownership plan and if resolution
attempts fail, the company’s assets are liquidated.

How it’s working?

The new law created a new class of Insolvency Professionals who will help sick companies and banks with a smooth
takeover of the insolvent company and manage the liquidation process.
The Code proposed setting up of an entity, the Insolvency and Bankruptcy Board of India (IBBI), which regulates
insolvency professionals and information companies — those which will store all the credit information of
corporates.
The Bankruptcy Code provided two authorities to deal with insolvency. The National Company Law Tribunal will
adjudicate cases for companies and limited liability partnerships, while the Debt Recovery Tribunal will do the
same for individual and partnership firms.

How Will a Company Be Liquidated?

When a corporate debtor (CD), or a company which has taken loans to run its business, defaults on its loan
repayment, either the creditor (a bank or an entity that has lent money for operational purposes) or the debtor can
apply for the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 6 of the IBC. Earlier,
the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh, but
considering the stress on companies amid the pandemic, the government increase the minimum amount to ₹1 crore.
To apply for insolvency, one has to approach a stipulated adjudicating authority (AA) under the IBC— the various
benches of the National Company Law Tribunal (NCLT) across India are the designated AAs.
The Tribunal has 14 days to admit or reject the application or has to provide a reason if the admission is delayed.
The CIRP or resolution process begins once an application is admitted by the AA. The amended mandatory deadline
for the completion of the resolution process is 330 days.
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Once the application is admitted, the AA appoints an interim resolution professional (IRP), registered with an
insolvency professional agency (IPA). IRPs could be experienced and registered chartered accountants, company
secretaries, lawyers and so on. Once appointed by the Tribunal, the IRP takes control of the defaulter’s assets and
operations, collects information about the state of the company from Information Utilities (repositories keeping
track of the debtor’s credit history), and finally coordinates the constitution of a Committee of Creditors or a CoC.
A CoC, comprising all (unrelated) financial creditors of a defaulting company, is the most important business
decision-making body in every CIRP, as it decides whether the defaulting company is viable enough to be
restructured and given a fresh start, or liquidated. It also appoints an insolvency professional (IP), who can either
be the same as the IRP or a new professional, who looks after the operations of the company during the CIRP.
The IP invites and examines proposals for a resolution plan for a company, which could include restructuring of
debt, merger or demerger of the company. It submits eligible plans to the CoC, which can approve a plan if it
receives 66% of the voting share of committee members. If the CoC fails to approve any resolution plan, the
company goes for liquidation.
If a plan is approved, the CoC submits it to the Tribunal (before the maximum 330-day deadline), which then
approves the plan which the debtor is bound to implement. The AA can also reject a plan.

How Much Time Will the Law Save?

The IBC was touted as a time-bound mechanism in the face of the often laggard states of older mechanisms.
Timeliness is key here so that the viability of the business or the value of its assets does not deteriorate further. The
IBC initially stipulated a 180-day deadline to complete the resolution process, with a permitted 90-day extension.
The IBC was subsequently amended to further make the total timeline for completion 330 days— almost a year.
While in 2018, when the timeline was 180+90 days, most cases (from companies that owed less than ₹50 crore to
those which owed more than ₹1000 core) were completed in under 300 days. However, in FY22, it took 772 days
to resolve cases involving companies that owed more than ₹1,000 crore. The average number of days it takes to
resolve such cases increased rapidly over the past five years.
Besides, when a resolution happens, it is envisaged that creditors can realise the maximum value of the outstanding
claims. On the other hand, when liquidation takes place, it is a piecemeal selling of the company’s assets. This
means the value realisable through resolution should be more than through the last resort of liquidation.
But the gap between these two values has been narrowing over the years, and in the last quarter of 2022, the amount
realised fell below what the assets would have fetched if they were liquidated.

Haircuts under IBC

A haircut is the debt foregone by the lender as a share of the outstanding claim. The Parliamentary Standing
Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on an average had to bear an
80% haircut in more than 70% of the cases.
What recommendations have been made by experts and judicial authorities?
In order to address the delays, the Parliamentary Standing Committee suggested that the NCLT should not take
more than 30 days after filing, to admit the insolvency application and transfer control of the company to a resolution
process. Citing the more than 50% vacancy in the Tribunal compared to the sanctioned strength, it suggested
recruitment in advance based on the projected number of cases.
It also recommended the setting up of dedicated benches of the NCLT for IBC cases. To reduce case-loads, the
Committee suggested that the pre-packs option be extended to all corporates after review. This is because, under
PIRP, unlike CIRP, the debtor continues to manage company operations during the resolution process.
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The IBBI has also called for a new yardstick to measure haircuts. It suggested that haircuts not be looked at as the
difference between the creditor’s claims and the actual amount realised but as the difference between what the
company brings along when it enters IBC and the value realised. It asserts that a company may have already
deteriorated significantly in value by the time it comes under the Code’s process, so the value realised should pertain
to the company’s existing assets and not previous assets.

Some Important Terms related to IBC 2016 (Economic Survey 2018-19)

Inter-Creditor Agreement- ICA Framework is part of project ‘Sashak’. Under it, lead lender (having highest
exposure) will be authorized to formulate resolution plan for operation turnaround of assets which will be presented
to lenders for their approval. It will be applicable to all corporate borrowers who have availed loans and financial
assistance for amount of Rs. 50 crore or more under consortium lending or multiple banking arrangements. Each
resolution plan will be submitted by lead lender to Overseeing Committee.
Prudential Framework for Resolution of Stressed Assets- The new guideline on resolution of stressed asset is
called Prudential Framework for Resolution of Stressed Assets Directions 2019. It is a set of guidelines to banks
for tackling their stressed assets. Significance of the Prudential Framework is that it replaces the previous
controversial/stringent and Supreme Court squashed stressed asset resolution guidelines published in February
2018.
Corporate insolvency resolution process (CIRP)- Corporate Insolvency Resolution Process is a recovery
mechanism for creditors. If a corporate becomes insolvent, a financial creditor, an operational creditor, or the
corporate itself may initiate CIRP.
After making an application then CIRP is initiated. CIRP is the process through which it is determined whether the
person who has defaulted is capable of repayment or not.
Corporate Debtors- A corporate debtor under Insolvency and Bankruptcy Code, 2016 (IBC) is the Corporate Person
who owes a debt to any person. Corporate person is defined u/s 3(7) of IBC which include
❖ Companies defined Companies Act
❖ LLP defined under LLP Act
❖ Any other person incorporated with limited liability
But does not include financial services provider i.e. banks or NBFCs.
Operational Creditors - Operational creditor refers to a person to whom an operational debt is owed and includes
any person to whom such amount has been legally assigned or transferred for goods or services done by them.
Vendors and suppliers, employees, government etc. are examples of operational creditors.
Financial Creditors - Financial creditor refers to any person to whom a business debt is owned or a person to whom
such amount is legally assigned or transmitted. Banks or other financial institutions are examples of financial
creditors.
National e-Governance Services Limited (NeSL)- NeSL is India’s first Information Utility and is registered with
the Insolvency and Bankruptcy Board of India (IBBI) under the aegis of the Insolvency and Bankruptcy Code, 2016
(IBC). The company has been set up by leading banks and public institutions and is incorporated as a union
government company. The primary role of NeSL is to serve as a repository of legal evidence holding the information
pertaining to any debt/claim, as submitted by the financial or operational creditor and verified and authenticated by
the other parties to the debt.
NeSL’s role is to facilitate time-bound resolution by providing verified information to adjudicating authorities that
do not require further authentication.
Global Restructuring Review (GRR)- GRR is a daily information service providing cross-border insolvency and
restructuring news, features and events.
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Their mission is to keep the subscribers of GRR at the forefront of the international marketplace, and to provide
clear reports and analysis covering all the developments that matter.

BAD BANK
What is National Asset Reconstruction Company Limited (NARCL)? Who has set it up?
NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as
an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed
assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
What is India Debt Resolution Company Ltd. (IDRCL)? Who has set it up?
IDRCL is a service company/operational entity which will manage the asset and engage market professionals and
turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will
be with private sector lenders.
Why is NARCL-IDRCL type structure needed when there are 28 existing ARCs?
Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans. Various
available resolution mechanisms, including IBC have proved to be useful. However, considering the large stock of
legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union
Budget is this initiative.
Why is a Government Guarantee needed?
Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from
Government. This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs
30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The
condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the
shortfall between the face value of the SR and the actual realization. GoI’s guarantee will also enhance liquidity of
SRs as such SRs are tradable.
How will NARCL and IDRCL work?
The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL
will be engaged for management and value addition.
What benefit do banks get from this new structure?
It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. This
approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As
the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement
in bank’s valuation and enhance their ability to raise market capital.

Why is it being set up now?

Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of
dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought
sharper focus on recovery. In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks
primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented
across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique
opportunity for faster resolution.
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Is the guarantee likely to be invoked?

Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying
assets and the face value of SRs issued for that asset, subject to overall ceiling of ₹30,600 crore, valid for 5 years.
Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than
the acquisition cost.
How will Government ensure faster and timely resolution?
The GoI guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution
or liquidation. Further, to disincentivize delay in resolution, NARCL has to pay a Guarantee fee which increase
with passage of time.
What will be the capital structure of NARCL and how much will Government contribute?
Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs).
it will also raise debt as required. The GoI guarantee will reduce upfront capitalization requirements.
What will be NARCL’s strategy for resolution of stressed assets?
NARCL is intended to resolve stressed loan assets above ₹500 crore each amounting to about ₹ 2 lakh crore. In
phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the
remaining assets with lower provisions would be transferred in phase II.
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