Recovery of Debts via IBC
In the current era of budding and thriving competitive business environment to upscale the business and to meet the need of working capital the business entity requires immediate funds to meet the business requirements. Inorder to meet the fund requirement the business entity resorts to various sources to obtain the funds like borrowing from banks& financial institutions; issuing capital market instruments like shares.
In the series and process of meeting the funding requirements the business entities often exceed or cross their desired fund requirement capacity which leads to starting of debt burden. The uncontrolled and unmonitored debt burden ultimately reaches a stage where the business entity reaches the verge of being insolvent.
Mounting unrecovered debts are alarming signal for businesses that require the business to focus on pending recovering. Due to the pending debt recovery the business gets stuck up in focusing on the recovery zone thereby leaving the currently running business in stagnant state. Due to the pilling burden of debts to be recovered the business owners have to face numerous sleepless nights inorder to plan for the recovery mechanism to be devised for getting rid of this situation. The pending debts become a hurdle for smooth running of the business. Inspite of the constructive efforts the business gets stuck up because of the pending debts to be recovered thereby affecting the profitability of the business.
Recovery of debt is and has always been a cumbersome process. The mechanisms for recovering debts are quite time consuming and elongated. Although there had been and there are laws enabling recovery of debts but still people feel burdened to recover their pending debts. There were numerous laws that aided in recovering the pending debts but all had some or the other shortcoming which hindered in the smooth recovery of the debts.
Each political party in its phase came with numerous measures in this regard to ease the debt recovery. The Congress left behind the legacy of traditional systems for resolving commercial insolvency. The Companies Act had within its scope winding-up provisions which entitled a company to wind it up in the scenario where it was unable to pay its debts. Thereafter keeping into consideration the need of the hour the congress government had enacted the Sick Industrial Companies Act (SICA) in the early 1980s for revival and rehabilitation of sick companies. The SICA was mainly for companies whose net worth had become negative. The law was well implemented yet it proved to be utter failure. Something noteworthy about SICA was that several companies successfully managed to obtain protective shield against its creditors.
After short term success of the SICA then was enacted the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) which created a special authority known as Debt Recovery Tribunal (DRT) which enabled banks and financial institutions to recovery their dues crisply. Once again the DRT did not prove to be an efficient mechanism for recovery of debt.
Next in this domain the NDA government enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) .It is praise worthy to highlight that the SARFAESI act proved to be better off than the previous legislations in this domain.
As the economy began to enter into the 20th century the volume of non performing assets suddenly took a shoot up and entered into double digit figures. The banks and financial institutions began to lend recklessly which also added and contributed to non performing assets.
The NPA volume began to reach heights which required immediate monitoring. Focusing on the need of the hour an immediate action was required from the government. Keeping into purview the present scenario an expert committee was constituted to submit its recommendations on the Insolvency and Bankruptcy Code. Soon after the expert committee had submitted its recommendations the bill was introduced in the Lok Sabha and thereataer the same was referred to the joint committee of the Parliament. The joint committee of the parliament after reviewing the proposed bill highlighted few required amendments. Thereafter the Insolvency and the Bankruptcy Code was approved by both the houses of parliament in May 2016 and came into effect from December 2016. The IBC became among the quickest economic legislative change.
The Insolvency and Bankruptcy Code is about to complete its third anniversary in the domain of successfully enacted legislations. Since the implementation of the code we have witnessed the glaring results which are itself sufficient to explain that the code is a master piece and has managed to hit the bull’s eye in the right direction as was planned. The main intent with which the code was enacted were to align processes which seek to provide the requisite remedy in the time bound manner thereby maximizing the value of the assets of the persons convered under the code along with promoting entrepreneurship, credit availability and balancing the interest of the stakeholders falling under the ambit of the code.
The early harvests through the IBC were quite satisfactory. The Code since its implementation totally changed the relationship between the debtors and the creditors. After the implementation of the code the creditors no longer were mandated to chase the debtor for their pending payments. With the inception of the Code the NCLT was earmarked as the adjudicating authority for handing insolvency matters related to corporate persons. With this new role the NCLT began to pave way to deepen its roots and develop its own importance and identity in judicial hierarchy.
The NCLT soon started becoming trusted forum with high credibility. With the budding cases in the insolvency domain the NCLT began to become loaded with cases pilling up. The need of the hour was to curb the burden of pilling up cases before NCLT that demanded timely and speedy disposal. Diving into the alarming state of NCLT, the Supreme Court began pronouncing judgments expeditiously thereby providing hands of support to the newly enacted legislation. Now that the code has competed two years the current situation forth NCLT has improved and the cases are now being resolved within due time as are highlighted in the code.
The Insolvency and Bankruptcy Code holds very rich statistics when it comes to the actual execution of the code. The Code in a very short span of time became popular along with being widely applicable thereby emerging as a lucrative recovery legislation. The data as published by the Insolvency and Bankruptcy Board of India (IBBI) speaks loud and clear that the code indeed is rightly crated and capable of resolving the intent with which the code was drafted.
The recent statistics as published by the IBBI highlight that approx. 1858 corporate debtors have been admitted into the corporate insolvency resolution process till March 2019. Out of these 1858 around 152 have been closed on appeal or review or settled; 91 have been withdrawn; 378 have ended in liquidation and 94 have ended in approval of liquidation plan.
Under the Insolvency and Bankruptcy Code the cases were filed from all the sectors. The majority of the cases filed under Code were from the manufacturing sector. After the manufacturing sector was the real estate sector in the list of cases filed. The sector wise bifurcation of the cases filed under the Code speaks clearly that all the sectors have started resorting to the code for debt recovery.
Out of the total 1858 cases that have been filed till date under the Code 772 were from the manufacturing sector, 359 from the real estate, renting & business activities sector, 202 from the construction sector, 180 from wholesale& retail trade , 52 from hotels & restaurants, 47 from electricity & others , 50 from transport, storage & communications and approx.. 196 from other sectors.
Another significant fact to be highlighted is that the operational creditors are aware of the provisions enshrined in the code as a result of which out of the total 1858cases that have been filed under the code till date 920 have been filed by the operational creditors. The financial creditors occupy a significant position in the code and so out of the 1858 cases the numbers of cases filed by the financial creditors till date are 738. Apart from the creditors the total numbers of cases filed by the corporate debtors against themselves till date are 200.
Abhishek Jain at MUDS opinions that “There are no shortcuts of being debt free. The business entity needs to get out of debt the same way as one learned to walk – one step at a time.”
Initially when the Insolvency and Bankruptcy Code was implemented it was considered to be a revival law and not a recovery legislation. But later as the code came into execution domain it became clear that the code was used as a recovery mechanism for recovering pending dues. Through the Code the businesses are able to recover their pending dues successfully. Therefore “the Code is mainly a recovery law and not a revival law”.