Effectiveness of the IBC Processes vis-à-vis Other Options for Resolution and Recovery

Written by: Rayna Vikram

Table of Contents

• Introduction
• IBC: A Paradigm Shift in Insolvency Resolution
• Comparison with Other Resolution and Recovery Mechanisms
  • 1. SARFAESI Act, 2002
  • 2. Recovery of Debts and Bankruptcy Act (RDB Act), 1993
  • 3. Lok Adalats and Asset Reconstruction Companies (ARCs)
  • 4. Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR)
• Quantitative Comparison
• Challenges in the IBC Process
• Recommendations to Enhance IBC Effectiveness
• Conclusion

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC), was enacted to address the long-standing problem of inefficient debt recovery and insolvency resolution in India. Prior to the IBC, India’s insolvency framework was fragmented across various laws such as the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI), and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). These systems were plagued by slow resolution processes, low recovery rates, and weak enforcement mechanisms.

The IBC aimed to provide a unified, time-bound, and creditor-driven process for resolving insolvency and maximizing asset value. More than seven years since its implementation, it is pertinent to evaluate the effectiveness of the IBC processes vis-à-vis other options for resolution and recovery, especially in terms of efficiency, recovery rates, creditor empowerment, and impact on economic health.

IBC: A Paradigm Shift in Insolvency Resolution

The IBC introduced a comprehensive, institutionalized mechanism with the following features:

• A time-bound process (180 days, extendable to 330 days)
• A structured role for Insolvency Professionals (IPs)
• Empowerment of the Committee of Creditors (CoC)
• Moratorium on litigation and enforcement actions during resolution
• Liquidation only as a last resort

The code consolidated existing insolvency laws and established the National Company Law Tribunal (NCLT) as the adjudicating authority, making the process centralized and efficient.

Comparison with Other Resolution and Recovery Mechanisms

1. SARFAESI Act, 2002

Overview:
The SARFAESI Act allows banks and financial institutions to enforce security interests without court intervention in cases of secured debt. It enables seizure and sale of assets of defaulters.

Strengths:

• Quicker enforcement for secured creditors
• No requirement for judicial approval for asset seizure

Limitations:

• Only applicable to secured creditors
• Cannot be used against unsecured assets or companies without substantial fixed assets
• Not effective in reviving companies or enabling restructuring

IBC Advantage:
The IBC allows a comprehensive resolution strategy that includes operational creditors and enables the restructuring or sale of the business as a going concern, offering a better recovery prospect than mere asset sale.

2. Recovery of Debts and Bankruptcy Act (RDB Act), 1993

Overview:
This Act established Debt Recovery Tribunals (DRTs) to help banks and financial institutions recover loans through adjudication.

Strengths:

• Legal backing for debt recovery
• Applicable to both secured and unsecured loans

Limitations:

• Delays due to overburdened DRTs
• Poor enforcement of orders
• Limited to recovery; does not promote resolution or revival

IBC Advantage:
IBC promotes a resolution-first approach, aiming to revive viable businesses and maximize asset value, whereas the RDB Act is limited to recovery through litigation, often with little success in reviving the debtor entity.

3. Lok Adalats and Asset Reconstruction Companies (ARCs)

Lok Adalats:

• Alternative Dispute Resolution mechanism for small loan settlements
• Lacks enforceability and is suitable only for small ticket NPAs

ARCs:

• Acquire bad loans from banks at a discount and try to recover through negotiations or restructuring

Limitations:

• Limited effectiveness due to capital constraints
• Poor recovery performance
• Not a legal mechanism with binding outcomes

IBC Advantage:
The legal force behind IBC, institutional framework, and time-bound procedures make it far more effective than informal methods or third-party recovery attempts.

4. Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR)

CDR:

• A non-statutory mechanism facilitated by the RBI to restructure corporate debt through consensus among lenders

SDR:

• Allowed banks to convert debt into equity and take control of the defaulting company

Limitations:

• Dependent on consensus among all creditors, often difficult to achieve
• No statutory backing; implementation issues
• Lacked enforcement powers

IBC Advantage:
The IBC provides statutory backing to the creditors’ committee, with a voting threshold (66%) sufficient to approve resolution plans, and the decisions are binding on all stakeholders.

Quantitative Comparison

Source: RBI Reports, Insolvency and Bankruptcy Board of India (IBBI), World Bank Doing Business Reports

Challenges in the IBC Process

Despite its comparative effectiveness, the IBC faces several challenges:

• Delays in Resolution: Many cases extend beyond the 330-day deadline due to litigation, complex claim verification, and lack of bidders.
• Haircuts: Creditors often accept significant haircuts, raising concerns about fair valuation.
• Capacity Issues: Overburdened NCLT benches, shortage of trained Resolution Professionals.
• Prolonged Liquidation Cases: Many firms end up in liquidation rather than resolution, fetching lower recoveries.
• MSME Participation: Low participation of MSMEs and operational creditors in resolution processes due to procedural complexity and cost.

Recommendations to Enhance IBC Effectiveness

1. Strengthening Institutional Capacity:
   • Increase the number of NCLT benches and judicial resources
   • Train insolvency professionals in technical and legal skills
2. Reducing Litigation Delays:
   • Limit frivolous appeals
   • Establish dedicated benches for insolvency matters
3. Promoting Pre-Packaged Insolvency:
   • Especially for MSMEs and time-sensitive restructuring cases
4. Improving Resolution Plan Evaluation:
   • Develop guidelines for realistic valuations and fair treatment of stakeholders
5. Creating a Market for Stressed Assets:
   • Encourage more investors and ARCs to participate in resolution and bidding processes

Conclusion

The Insolvency and Bankruptcy Code has significantly outperformed previous legal and institutional mechanisms for debt resolution in India. It has changed debtor behavior, empowered creditors, and promoted a culture of timely repayment and responsible lending. While challenges remain, especially in terms of timely resolution and recovery valuation, the IBC remains the most structured and effective framework for dealing with corporate distress in India.

Compared to legacy systems like SARFAESI, DRTs, and CDR, the IBC provides a comprehensive, time-bound, and legally enforceable mechanism for maximizing the value of assets and preserving the health of the credit system. With ongoing reforms, technological support, and institutional strengthening, the IBC will continue to evolve as a cornerstone of India’s economic and financial architecture.