Our bankruptcy code deserves credit for what it has achieved

Livemint     2nd August 2021     Save    
QEP Pocket Notes

Context: An examination of the Insolvency and Bankruptcy Code’s (IBC’s) record on resolving cases of business insolvency reveals greater success than critics acknowledge.

Major objectives of IBC, 2016: Unique business-rescue mechanism: Providing resolution options for financially viable companies.

  • To facilitate the liquidation of financially unviable companies.
  • To protect the rights of and provide equal treatment to similarly-situated creditors and other stakeholders.

Criticisms against IBC

  • High liquidation rate.
  • Large haircuts.

Critical review of the criticisms against IBC

  • A good insolvency system cannot be judged by number of companies liquidated: The purpose of insolvency law is to swiftly liquidate firms that have had value erosion and stand a low chance of survival.
    • Germany, UK and the US have an efficient insolvency system despite a high liquidation ratio.
    • Excluding legacy cases from the Board for Industrial and Financial Reconstruction (BIFR), only 26% of the IBC-referred firms have gone for liquidation.
  • Sound reasons for liquidation: Most of the companies liquidated under IBC were defunct - Of 1,270 liquidations ordered under IBC, 944 were already defunct or BIFR cases (74%) till 31 March 2021.
  • Upholding commercial wisdom of committee of creditors (CoC): It was confidence in the IBC process that led defunct companies such as LML Ltd and Lanco Infratech Ltd to receive more than four resolution applications.
  • Realization of higher liquidation value: Examining details of companies yielding resolution under the IBC until 31 March 2021, the total realizable amount by financial creditors was 34% of their admitted claims. The financial creditors actually realized 160% of the liquidation value.

Conclusion: IBC is a market mechanism, and market-driven outcomes should be acceptable to all. Any new economic law takes time to settle and for all stakeholders to accept it and outcomes to be reflected properly.
QEP Pocket Notes