Effectiveness of IBC’s institutional structures – IBBI, IPs, AA, and IUs

As per IBBI Newsletter of June, 2021, IBC had enabled recovery of Rs. 2.5 lakh crore, against admitted financial claims of Rs. 7 lakh crore – translating to a recovery rate of 36% – for the 396 cases resolved out of the total 4,541 admitted. Of the remaining cases, 1,349 were under liquidation; 1,114 were closed under appeal/ review/ settled or withdrawn, and 1,682 were outstanding. A closer look at the data shows, however, the recovery rate and resolution timelines have a lot more room for improvement. This makes a continuous strengthening of the Code and stabilisation of the overall ecosystem imperative. In respect of 396 resolved cases, actual recovery rate was 36%.

Firstly, out of these 396 cases, the recovery rate, excluding the top 15 of the 396 resolved cases, estimated actual recovery rate was 18% in respect of remaining 381 cases. Estimated actual recovery rate for 1349 liquidation cases was 5%. Secondly, average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days.

Notwithstanding these challenges, the IBC has played a key role in resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets² in the Indian financial system. In this milieu, the government has been proactive in addressing issues being faced by various stakeholders. In August this year, the Standing Committee on Finance made recommendations to reinforce the IBC and the associated ecosystem. The critical recommendations include: 1) developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters; 2) establishing professional code of conduct for committee of creditors (CoC); 3) strengthening the role of resolution professionals; and 4) digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

 

However, after all said and done, there seems to be a lot to be done at the Code enforcing agencies, which are IBBI, IPA, CoC, IPs, IU and AA.

Firstly, some words about AA may be stated. IBBI has been a silent spectator of the AA encroaching into its jurisdiction. While IBBI has been stressing the need of observing timeline of the IBC processes, the AA never seems to be bothered about the timeline when it comes to their obligation in the adherence to timeline. AA liberally allows adjournments on flimsy grounds or blank requests by the parties or on its own accord without any reasons. AA liberally allows time for filing pleadings in spite of the non-compliance by delinquent parties to the case. AA entertains arguments by senior counsels for hours together on a particular law point when the IBC is all about the necessity of the business-like attitude of all concerned in resolving the cases. AA frequently takes views beyond the IBC on the pretext of natural justice and even dares to remove the RP on the application of the Suspended BOD, ignoring that RP had filed application under section 66 of the IBC for several hundred crores of rupees  and also ignoring the specific direction of the Supreme Court. It seems that the AA acts more on the wisdom of the judge than on the letter and spirit of the statute. AA even delays the cases where CoC files application for replacement of RP and also when the RP files application for liquidation. Even after the completion of timeline, the AA does not pass the order of liquidation even when the case is fixed for the same for hearing and adjourns abruptly.

Secondly, IBBI, itself adds to agony to effective management of the IBC. IPs are being supervised by IPAs and also by IBBI. For same information, multiple information is to be filed by IP separately to IPA and also to IBBI in different time based and event based forms. IBBI, liberally, amends regulations without any value addition to the IBC system. One such example was the introduction of Form CIRP-8 by inserting Regulation 40A in the CIRP Regulations. The RP, who complied with the requirement of intimation of determination to the IBBI as per CIRP Regulation 35A long back, was also required to file the Form. Instead of requiring to file additional information over the earlier or requiring the updation of earlier information, a whole new Form is asked to be filed by both IPAs and IBBI. IP is forced to keep the IBBI informed every 30 days about the delays in the any event of the IBC, even when the delay had nothing to do with the RP’s action, in Form-8 and is made liable for penalty on lapses. IBBI makes a panel of IPs for providing the same to AAs. These empanelled IPs are rendered eligible for allotment for assignment by the AA for a period of 6 months. Most recent such panel has been released on 31.12.2021 for validity from 01.01.2022 to 30.06.2022. Such panel suffers from some inherent discrepancies since it allows only those IPs to apply for empanelment, who hold the valid AFA for the full period of the stated period. Out of 3500 and odd IPs, only about 900 IPs were empanelled. Similarly for the immediately preceding 6 month period, only 500 IPs were empanelled. Such stipulation for AFA holding was illogical and impractical as it denied the opportunity to even an IP, whose AFA was subject to renewal at the far end of the period and the IP could renew the AFA only within 45 days prior to the expiry date. Further, the guidelines for empanelment stated that the IPs with existing assignments were less eligible for assignment than the IPs with no existing assignments, but such information was not forwarded to the AA by IBBI. The CPE hours earned by IPs, have to be claimed by them in the IBBI website within a week. Such information on the IBBI website has to be approved by the IPA. IPA takes 3-4 months’ time in approval and sometimes rejects the claim without any communication to the IP.

Thirdly, the IPA also contributes its own role in the frustration of the IBC system. The IPA enrols the IPs. IBBI registers the IPs. Thereafter, IPA allows the AFA. IPA requires IPs to file monthly returns and half yearly returns. The IPA requires the IPs to file the disclosures of the relationships with the professionals; CoC members etc. even if there are no related parties or connected parties and require that NIL statement has to be filed. At the time of AFA renewals, it requires the IPs to file Forms with IBBI even if those are not required to be filed. These specific requirements are made by the IPAs when renewal of AFA is being applied, delaying the AFA approval, sometimes, leading to missing the important timelines, like IBBI empanelment etc. Such requirements could be asked by the IPAs in more frequent manner and not to delay on such reasons. CPE hours should be approved more regularly as it expects from the IPs.

Fourthly, the CoC is more concerned on recovery and not resolution. In most of the cases, the CoC consciously drives the CIRP to liquidation. CoC is L1 driven and non-committal of reasonable professional fees for the IPs, forensic audit for quality work, interim finance and extending further credit line to prospective resolution applicants. In many cases, the CoC constituents act through their senior employee officers, who delay the CIRP process by not deciding on the matters in the CoC meetings. In some strange cases, it has been found that such senior officers seem to be more on the sides of the Suspended BOD, who bled the CD in the past. 

Fifthly, IP, who acts as IRP or RP, is not less responsible for the effectiveness of the IBC system. A chain is as strong as its weakest link. The RP is required to interact with the Suspended BOD (SBOD), who was primarily responsible for the stressful condition of the CD. The SBOD was not, prima facie, desired that there should be any CIRP or at least the IP, who was in the driving seat, should be rendered helpless by not providing information, records and encumbering the assets etc. aided by the senior lawyers, who represent them forcefully before AA and prove that the IP was not doing his duty properly and unnecessary harassing the SBOD. If the IP was not strong enough to sustain the pressure of the less supporting CoC and over pressurising SBOD, would not be able to prove the fraud and avoidable transactions conclusively, leading to the delinquent SBOD getting scot free.

Last but not the least, the IU, has been moving at snail’s pace in providing the much needed support system to the IBC system. The IU has not been pro-active in spreading the services, which it could extend at economical cost competing with market forces providing similar services.