It is often seen that any discussion around the success or failure of the Insolvency and Bankruptcy Code, 2016 (IBC) at a macro level either largely hinges on the rate of recovery for the financial institutions and the banks or eventually boils down to that. Various relevant aspects and parameters seem to be entirely overlooked.

IBC, 2016 is one legislation for which the data is readily available and accessible for everyone to pass their respective verdicts. In effect, what happens is that the regulator established under this law, namely the Insolvency and Bankruptcy Board of India (IBBI), systematically publishes quarterly newsletters from time to time where all relevant data in terms of the number of companies for which resolution plans have been approved, liquidations ordered, initiation of the corporate insolvency resolution processes (CIRP), recovery percentages, timelines to complete the process of resolution and liquidation and a lot more such data points are transparently made available.

Now, to begin with, one has to, in all fairness, first check if such detailed data points were even available for previous legislation such as SARFAESI Act, 2002, RDDB Act 1993, SICA 1985, the winding up regime under the Companies Act, 1956, or for that matter, even for a brief while under the Companies Act, 2013 and more. If one were to actually scratch down to the ground level, finding data in such a structured format for any of these laws would be next to impossible.

Before criticising that IBC seems to have failed because the targeted timelines of resolution of 330 days and liquidation of one year don’t seem to be met, one also needs to see the timelines taken in the legal proceedings under the above-mentioned laws. From whatever little data is available, research reports indicate timelines ranging between 2.5 years on average under the SARFAESI Act to about 20 years under the winding-up regime and cases before the civil courts. It was only the failure of all these legislation that ultimately led the present government to come up with a gritty law which has shown results.

The notorious 1980s

It is imperative for the critics of today and the generation at large to know the gaps that were misused during the period when the Board of Financial Reconstruction (BIFR) was set up with the noble intention of rehabilitating sick companies under SICA. The standard operating procedure of promoters in the early 1980s was to first obtain exorbitant loans, thanks to indiscriminate lending practices by financial institutions lacking corporate governance and accountability norms, indulge in ambitious expansions and use funds for purposes other than what they were sanctioned for, try evergreening of loans and, finally, when financial distress starts showing up, just register with the BIFR to enjoy the moratorium against all recovery proceedings under Section 22 of SICA.

While it is true that the average time taken today, as per IBC data of September 30, 2023, wherein 808 CIRPs have yielded resolution plans, is about 541 days (after excluding the time which the NCLTs itself have excluded) for the conclusion of the process. Similarly, out of 2,249 CIRPs that ended up in liquidation, it took an average of about 472 days to conclude from the liquidation commencement date (LCD).

Further, about 597 liquidation procedures were closed by submission of final reports, and these took an average of about 536 days from the very LCD. On another note, voluntary liquidation procedures were completed and closed by submission of final reports within 408 days from the LCD.

While theoretically these timelines don’t seem to match what the legislature has intended for the implementation of the resolution or liquidation procedures, it would be unfair to criticise the law without even having a base comparison of what was the time taken in any similar procedures under earlier regimes.

The Recovery Percentage

While data indicates that, on an average, creditors have realised about 32 per cent of the admitted claims of ₹9.92-lakh crore under this law, if one were to compare it against the liquidation value of the assets involved in the companies that have run the process, they seem to have recovered about 168 per cent of the liquidation value from resolved cases.

To be more specific, as of September 30, creditors have successfully recovered ₹3.16-lakh crore through resolution plans passed on about 808 companies against a fair value of ₹2.92-lakh crore and against the liquidation value of these companies being ₹1.87-lakh crore — which takes us back to the origin of the problem discussed earlier.

Have we ever assessed or asked ourselves a fair question: What led to the situation? Why are the liquidation values so low and the total creditor claims so high? Is the judicial system responsible for this mismatch, or should there be some soul-searching in the banking system under the previous regime? Is it fair to expect the National Company Law Tribunal (NCLT) to clean up the mess, which is not just deep but also extremely convoluted in many ways, that too in record time-frames without ever questioning as to how did we land up in this situation?

Unfortunately, we are in a situation where we seem to be criticising the team of doctors who are doing their best to salvage a set of patients who have landed up in dire health situations as a result of multiple factors. Of course, quite a few of them are genuinely sick corporate patients; but at the same time, many are a result of indiscriminate lending, overvaluation of assets, lack of due diligence. Isn’t it easiest to just blame the team of doctors?

The writer is a practising Advocate in the Madras High Court