Insolvency and Bankruptcy Code, 2016 (“IBC”) has been primarily used for Corporate Debtors. 4,593 Corporate Debtors have undergone the Corporate Insolvency Resolution Process (“CIRP”) with initiation of 4,708 CIRPs, closure of 3,068 CIRPs, and ongoing 1,608 CIRPs as on 30.09.2021 as depicted as depicted adjacent.

 

Particularly worrying is the increase in ongoing cases which might soon run to unmanageable levels. This is also because that many cases for which IBC is not an ideal fit get dumped in the IBC process indiscriminately.

 

We see from the adjacent figure that most of the CIRPs discussed above end in liquidation which is not the end of the IBC process nor is it the end of the litigation process. In fact, many cases linger on without end in liquidation offering no exit since unlike CIRP liquidation is not a time-bound process. Only 14% of the closed CIRP cases have seen resolution.

 

Of all the CIRPs admitted, there is wide variation in the admission, settlement, resolution, and liquidation in terms of the sectoral distribution. This is well shown in the adjacent graph.

 

We see that while the manufacturing sector is most likely to get resolved, and the real estate sector is most likely to enter into settlement and withdrawal. The electricity sector is also highly likely to get resolved and undefined sectors are most likely to be liquidated, seeing no resolution. Most of the discussion of the IBC has been centered around big real estate and manufacturing units since they form the bulk of the cases. However, the efficacy of the IBC as a blanket solution for distressed assets is really tested in the face of other sectors. We see that even though the real estate sector is most likely to be settled, accounts which are not settled are highly likely to enter liquidation thus causing distress to many home buyers.

 

Of the 4,708 CIRPs admitted till September 2021, 1,419 have concluded in liquidation with 1,640 still ongoing. Of the 1,419 liquidations, only 164 have been concluded accounting for only 5% of the total CIRP closures. Hence, liquidation is a limbo process not beneficial for every kind of corporate debtor. However, the very kind of corporate debtor which is most likely to enter into liquidation is the same kind which should not have been admitted into CIRP in the first place.

 

The starkest difficulty of IBC is seen in the case of infrastructure companies. Generally these are large corporate houses building infrastructure projects for various government undertakings such as road, railways, bridges etc. The banking facility availed by such companies is a non-fund based facility viz. a “Bank Guarantee”. In case of default, this bank guarantee comes due as a liability providing no relief on the asset side of the corporate debtor. The assets are future receivables from the project which has failed. So the possibility of any receivables are remote. The government generally has a clause inherent to the contract of such companies that in case of insolvency or bankruptcy of such a company, the contract gets automatically terminated. The infrastructure asset being an immovable construction is seized by the government along with its roadways and waterways and the company is left without any recourse. In this scenario, the company enters the IBC with nothing but a myriad of litigation and a bank guarantee liability running at least hundreds of crores in rupees. This is an impossible situation to navigate through and the company inevitably falls into unsolvable litigation and liquidation, with some scrap value getting preserved. Certainly IBC is not the appropriate way to go about resolving such a company.

 

Contrast that with a real estate company without any liquidity to service its bankers. The bankers invoke the IBC which risks this real estate borrower to lose not only the project at hand, but also the control of all lands acquired in the company. The company has value and it has been seen that the management becomes surprisingly resourceful in finding the liquidity in view of incoming insolvency. Where even the threat of a “creditor in control” model results in the resolution of the corporate debtor.