Our bankruptcy code deserves credit for what it has achieved

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.