Corporate insolvency laws in India have historically been fragmented and sometimes, contradictory, due to the application of an amalgamation of insolvency laws. This has caused major delays in insolvency cases, with an average resolution taking four and a half years. In addition, insolvency cases generally resulted in liquidation of companies as opposed to a going concern sale.
In light of these issues, in May 2016, India enacted the Insolvency and Bankruptcy Code ("the Code"), which was aimed at improving India's insolvency laws and adding greater certainty and efficiency to the insolvency process. The Insolvency and Bankruptcy Board of India ("IBBI") was also established as the regulator to proactively response to changes.
According to the Insolvency and Bankruptcy Board of India, immediately after the introduction of the Code, the threat of its use prompted repayment of USD 14.2 billion in outstanding loans in just two years.
The Code provides for two main processes:
- Resolution of the insolvency of the corporate debtor (as a going concern, in contract to liquidation); and
- Liquidation of the corporate debtor.
The Code has some similarities to the UK's Insolvency Act 1986, for example, the Code empowers any creditor to trigger the corporate insolvency resolution process ("CIRP") by filing an application upon a payment default. The resolution process is time bound and limited to 330 days. Only after this process has been completed can a creditor file for liquidation. This is in contrast with the UK's system, which allows an application for liquidation where it can be shown that the company is unable to pay its debts as they fall due.
Whilst the resolution process if taking place, the powers of the directors of the debtor are suspended and a resolution professional with statutory duties manages the process. Notably, and in contrast to the UK, the ultimate control over the process is held by a committee of creditors, which comprises of all the financial creditors of the debtor. In the UK, although an office holder is also appointed, the same level of creditor control does not exist, even where a committee is established.
These changes to insolvency laws in India have been graciously welcomed by banks and creditors, and the Indian government has played a constructive role in facilitating the implementation of the Code and has reacted promptly where amendments would make implementation smoother.
On 12 August 2021, the government exacted the Insolvency and Bankruptcy Code (Amendment) Act 2021 to introduce the pre-packaged insolvency resolution process. This functions largely in the same way that pre-packaged administrations work in the UK, however pre-packaged insolvencies in India are available only for certain types of debtors. Like the CIRP, the PPIRP is also time-bound with a maximum duration of 120 days from the date of admission and although oversight of the process lies with the resolution professional, creditors have ultimate control.
Conclusion
With mechanisms required to solve the issue of bad debt in India in place, the obvious question is to what extent the IBC has achieved its goal of introducing certainty and efficiency?
According to a report from IBBI, the average time taken for a resolution process is still around 679 days, despite the time limits prescribed in the Act. This is said to be in part due to judicial intervention as the Supreme Court has held the 330-day timeline to be "advisory," as opposed to mandatory. Furthermore, litigation by multiple stakeholders with competing interests delays resolution and ultimately erodes the value of corporate debtors and in turn, recovery to creditors. This is especially problematic where the IBBI has found there to be a direct correlation between the length of the resolution process and the recovery rate.
However it is not all doom and gloom. According to the same report, "FY23-24 has witnessed an unprecedented surge in the approval of resolution plans under the IBC." 269 resolution plans were approved in 2024, in contrast with 189 in 2023. The average realisation in CIRP cases that have yielded resolutions has been 41%, and the average realisation of PPIRP cases has been 25%.
It appears that the trajectory of insolvency cases in India are headed in the direction intended, and it will be interesting to see how the Act continues to move insolvencies towards efficiency, preservation of businesses and higher recovery for creditors.
