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IBC Section 227, failed experience in the light of DHFL case

The Insolvency and Bankruptcy Code, 2016 (IBC) was intended to be a mechanism for resolving the borrower's insolvency as a continuing concern while maximising the extractable value of its remaining assets. Such outcomes would boost entrepreneurship, increase credit availability, and balance the interests of all stakeholders. It was never meant for these to end up as a sale, auction, or recovery, as has happened in the past with administrative processes.

The Reserve Bank of India (RBI) assumed control of Dewan Housing Finance Corporation Ltd. (DHFL) by appointing an administrator and submitting the business to the Insolvency and Bankruptcy Code (IBC) process. Despite all of the IBC's flaws, this was maybe a first for a non-banking financing company (NBFC). The process has been beset by flaws that must be resolved or alternatives investigated in order to safeguard the interests of all stakeholders and the economy as a whole. Experts claim, however, that it has been a value-destroying proposition for all stakeholders, as proven by the instance of DHFL.

Processes under the Insolvency and Bankruptcy Code (IBC) have not been as quick as promised, nor have the recovery rates, which are expected to be as low as 20%, been encouraging. The procedure, which was designed to help resuscitate enterprises, preserve assets and money, be fair to all stakeholders, and make doing business in India much easier, has instead resulted in a tangle of outcomes that frequently result in protracted litigation. Since its founding, the Supreme Court has been called upon to intervene in practically every significant case.

Looking at the data, 2,653 of the 4,376 cases referred to the CIRP (Corporate Insolvency Resolution Process) have been closed, with the other cases still in the works. Only 348 of the 2,653 cases that were closed had resolution plans approved, whereas 1277 enterprises were liquidated. The remaining cases were either withdrawn by mutual agreement or are still being reviewed on appeal. While specific data for employment losses (or recoveries) are difficult to come by, several estimates place the net job loss due to insolvency processes at about one million.

In terms of time spent, it has been determined that over 79 percent of active resolution processes have already beyond the 270-day deadline set forth in the act, with no indication of the additional time required to complete the process. The fact that 70% of them have been under liquidation for more than a year is an indication of the uncertainty surrounding this. At the end of it all, stakeholders collected just Rs. 600 crore in liquidation against total claims of Rs. 17,523 crore, or just 3.4 percent of all claims, with delays ranging from two to three years.

As witnessed in the case of DHFL and several other situations, secured creditors – particularly institutional lenders – completely hijack the process, leaving the remaining stakeholders, such as unsecured creditors, operational creditors, shareholders, and employees, with little or no influence. As the instance of Jignesh Shah's 63 Moons in the DHFL case demonstrates, many stakeholders can obstruct the completion of proceedings. Experts suggest that, as proven by DHFL, the process has a number of flaws that must be rectified either directly or through alternatives that must be investigated in the best interests of all stakeholders and the economy as a whole. These include:

  • Various stakeholder groups perceive it as a value-destructive offer.

  • Low recovery rates - Only Rs 37,500 crore was recovered out of admitted claims of close to Rs. 91,000 crore (about 41% realisation), which decreases to 24% when the top 9 accounts are eliminated.

  • A total loss of 100% of accrued interest of over Rs. 10,000 crore was not incorporated into any resolution – including in the overall claims.

  • Unsecured Creditors — Only Rs. 189 crore against Rs. 3778 crore, implying a 5% principal realisation and 0% interest recoveries.

Due to constraints such as a lack of hard assets, NLCT processes have a limited chance of success in the financial sector. Furthermore, the vast reach of retail presence can, in most situations, result in the filing of many lawsuits across the country.

The government should explore creating a framework for such businesses, particularly in the financial services industry, where the underlying business model's primary characteristics may be used to protect stakeholders, including retail partners. Alternative dispute resolution solutions that involve all stakeholders are urgently needed.


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