180 Days for Resolution process under IBC: Too long or Too short?

IBC is short for Insolvency and Bankruptcy Code, a revolutionary law implemented by the government in 2016 for the resolution of corporate insolvency and bankruptcy. Insolvency is a situation that arises due to the inability to pay off debts. Under IBC, there is a shift of power from debtors to creditors who drive the resolution process. Now before we decide whether 180 days is too long or too short for insolvency resolution, let me tell you a story.

Let us Imagine that in the coming years, you become an entrepreneur and you set up your own firm. You have a big team, your own cabin and a wonderful office.  Wonderful isn’t it? Everything was going good until you found out that your biggest client has kept the payment of your invoice pending for more than 6 months. Not just you, many other creditors too. Then you get a shock, as you come to know that the company has filed for insolvency. This company owes you 1 crore rupees, you are worried, will I get this money back, or will this promoter run away like Vijay Mallaya. You find out that the banks to whom the company owes over 10,000 crores are also fighting for recovery. 

So you being enterprising as always, start reading the insolvency and bankruptcy code for your rights. You find that the procedure is that when a company defaults on its payments, the creditors or the company itself can file an application to NCLT. Now the NCLT has to accept or reject the application within 14 days. After acceptance, there is a period of 180 to complete the corporate insolvency resolution process. In this period of 180, first, the management is told to pack its bags and go home. You are like, good riddance after all these are the same people who got the company is this state.  Then an Insolvency professional is appointed who takes over the management of the company. A committee of creditors is formed which you will be a part of, all the claims against the company are collected and the bids by buyers are accepted. With the help of the Insolvency resolution professional the creditors chart out a resolution plan. Now this plan has to be approved by the committee of creditors with 75% majority vote.  And all this has to be done within 180 days, however, in case of exigencies, an extension of 90 days is allowed by the NCLT.  So, what happens if a resolution is not reached even in 270 days? Well then, the company has to pack its bags. The company is liquidated and the proceeds are used to pay off the creditors.

You feel a huge sense of relief,  and think to yourself, “At least there is some certainty that within 1 year I will be able to recover my money, I only will have to arrange working capital for a short period of time form somewhere else.”

And from here came the concept of 180 days for resolution under IBC. The shorter the time frame the better or else it will not be just the company going bankrupt, but its creditors too. Banks will be fearful of lending, which will hamper entrepreneurship. Moreover, the Insolvency process needs to be completed fast to capture the value and promote growth in the economy.

So, 180 Days for Resolution process under IBC: Too long or too short? I just have one question for you, do you want your 1 crore ASAP or not?  Yes, you all agree with me? After all who has seen the future? The whole ideology behind the law is to protect the creditors and recover their dues in a timebound manner.

But why the stress on 180 days? Well, every year the World Bank publishes an “Ease of Doing business report” which ranks the countries with respect to their business policies. And the dismal performance of India compared to other countries w. r. t. to Insolvency steered the government of India to act on it.

As per the “Ease of doing business report 2015” India’s ranking with respect to insolvency was 137 out of 189. China ranked at 53, US at 4, UK at 13.

It was stated that the time taken for Insolvency proceedings in India 4.3 years while in China it was 1.7, US and UK it was 1. And it also estimated that in India a creditor could recover only 25.7 cents per dollar, while in China it was 36, US it was 82.3 and UK it was 88.6 cents per dollar.  

As one can identify, the longer the time for resolution, the lesser the recovery per dollar. The report of the Bankruptcy Law Reforms Committee accurately states that, "The liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay”.

When a company defaults there are 2 options, go for resolution or go for liquidation. Liquidation causes job loss, disruption, losses to the economy. Resolution is the better option. But, the longer the delay the greater the erosion in the asset value and reputation of the company. Quick resolution promotes entrepreneurship and increases the availability of credit in the system.

Justice delayed is justice denied and with our culture for tareek pe tareek, tareek pe tareek, a very stringent step had to be taken to ensure that Creditors get paid their dues.

The Supreme Court under the insolvency and Bankruptcy Code, 2016 in M/s Surendra Trading Co. vs. JK Jute Mills Co. Limited gave a significant judgment wherein it was held that ‘Time is the essence of Insolvency and Bankruptcy Code’

A practical example is that of Bhushan steel which became insolvent and was taken over by Tata Steel. Bhushan Steel had the highest realization of 63.50 percent as the recovery was of Rs 35,571 crore against the creditors claim of Rs 56,022 crore and the insolvency process was completed within a year.

See, the failure of some business plans is an unavoidable part of the economy. The report of the Bankruptcy Law Reforms Committee precisely captures this point by stating the following,  

When a business failure takes place, the best outcome for society is to have a rapid renegotiation between the financiers, to finance the going concern using a new arrangement of liabilities and with a new management team. If this cannot be done, the best outcome for society is a rapid liquidation. When such arrangements can be put into place, the market process of creative destruction will work smoothly, with greater competitive vigour and greater competition.  

To conclude, as it is said in love, the faster you move on, the lesser the heartbreak. In the same way, a quick IBC process of 180 days allows a company to make a fresh start, with a new set of promoters and a healthier balance sheet.