The robust Insolvency and Bankruptcy Code, 2016 received the assent of the President on 28th May 2016. Presently, it has completed five years and it has earned criticism as well. Most of the critics focus on whether the IBC is a good recovery mechanism or whether the Debt Recovery Tribunal or the SARFAESI Act, 2002 is more quick and good when it comes to insolvency mechanisms. Prior to the enactment of the Insolvency and Bankruptcy Code, 2016, there were multiple laws that dealt with insolvency and bankruptcy. There were multiple overlapping laws and adjudicating forums to deal with the insolvency of companies, individuals and partnership firms in India. Further, the framework of the Insolvency and Bankruptcy was weak and ineffective which caused unnecessary delays in the resolution. The framework which was present at that time did not aid lenders in effective and timely recovery or restructuring of defaulted assets and caused strain on the banking and credit system in India. Therefore, after the enactment of IBC in 2016, there is a single comprehensive law to deal with insolvency and bankruptcy of companies, individuals and partnerships.
We must always remember that the role of the IBC, 2016 begins with the admission of a corporate debtor. The efficiency of any debt recovery procedure should be measured by the value recovered post the insolvency resolution procedure as a part of the enterprise or the liquidation value of the corporate debtor at the time of admission into the Insolvency and Bankruptcy Code. The real value of the debt is most often, less in value than the book value by the time insolvency and bankruptcy procedure begins.
Referring to statistical data gives us a good picture of the efficiency of the IBC, 2016. As per the RBI’s Report on Trend and Progress of Banking in India 2019-20 as a percentage of claims, scheduled commercial banks have recovered about 45.5% of the money through IBC for the financial year 2019-20. This figure is much higher than that of other mechanisms such as Debt Recovery Tribunals, Lok Adalats and SARFAESI Act, 2002.
In March 2021, the Insolvency and Bankruptcy Board of India too gave a report. The final realization by the claimants, as a part of the liquidation value at the time of admission into the Insolvency process, ranged from 115% to 387% for 9 out of the Big Dozen in the first set of insolvent corporate debtors. It can be inferred that the recoveries under the Insolvency and Bankruptcy Code are high.
Hence any argument that the Insolvency and Bankruptcy Code is not efficient is not supported by proper facts. Also, the process followed under IBC is market-driven and quicker than other mechanisms (the IBC sets a time limit of 270 days). To sum up, the Insolvency and Bankruptcy Code has provided a framework that allows a market-determined process for the distribution of the firm value between the creditors and the shareholders. The market process must be understood first. The Insolvency and Bankruptcy Code has further provided a waterfall mechanism for distribution between the creditors and the shareholders.