IBC: Striking a balance between corporate revival and challenges

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The Insolvency and Bankruptcy Code (IBC), introduced to address deficiencies in earlier laws, has achieved significant milestones in corporate restructuring and debt resolution. However, as the code completes eight years, it faces challenges that require attention to ensure it remains a tool for equitable resolution rather than exploitation.

A Mixed Record of Success and Challenges

The IBC has demonstrated its potential in cases such as Bhushan Steel and Essar Steel, where creditors recovered 63% and 92% of their claims, respectively. These outcomes underscore the framework’s ability to rescue distressed assets and restore financial stability.

Conversely, cases like Jet Airways and Videocon Industries highlight challenges. Jet Airways' prolonged insolvency led to the erosion of asset value and widespread job losses. Similarly, creditors in Videocon Industries recovered less than 5% of their claims, raising questions about valuation inefficiencies and resolution processes.

Challenges in Implementation

The IBC aims to balance stakeholder interests while fostering entrepreneurship. However, judicial delays, regulatory ambiguities, and significant haircuts have hindered its success. Moreover, creditors have at times exploited the code as a weapon for corporate vengeance.

The Binani Cement case exemplifies such challenges. In this instance, creditors’ preference for maximizing their own recovery led to disputes over the resolution plan. The matter highlighted the need for transparent, fair processes that consider the interests of all stakeholders. Similarly, the Mobilox Innovations vs. Kirusa Software case illustrated the misuse of insolvency petitions for operational disputes rather than genuine financial distress. These instances tarnish the code's objective of promoting corporate revival and stakeholder confidence.

Role of Resolution Professionals

Resolution Professionals (RPs) play a pivotal role in insolvency cases. Despite legislative safeguards, concerns about bias and accountability persist. For example, in the Metenere Limited case, the RP’s prior employment with a financial creditor raised questions about impartiality. Likewise, the Essar Steel insolvency process faced allegations of favoritism, casting doubts on the neutrality of the resolution framework.

The Shree Ram Urban Infrastructure Limited case further highlighted gaps in oversight, as the RP’s failure to meet timelines and convene CoC meetings led to their removal. Strengthened regulatory frameworks are essential to address these lapses.

Corporate Challenges and Stakeholder Impact

The Srei Infrastructure Finance Limited and Srei Equipment Finance Limited cases spotlight the IBC's shortcomings. Despite SEFL servicing its debt and SIFL being debt-free, the Reserve Bank of India (RBI) superseded their boards, citing governance concerns. Structured repayment plans backed by stakeholders, including international investors, were dismissed in favor of insolvency proceedings, raising concerns about fairness and due process. The speed with which SREI was admitted to insolvency—the same day the application was filed—raises serious questions about fairness, due process, and the treatment of stakeholders under the IBC.

In the Odisha Slurry Pipeline Infrastructure Limited (OSPIL) case, creditors allegedly colluded to initiate insolvency against a financially sound company. Such instances erode trust in the IBC as a fair and transparent mechanism for resolution.

Restoring Confidence in the IBC Framework

To strengthen the IBC, the following measures are critical:

Judicial Capacity Building: Expanding tribunal capacity to expedite resolutions and reduce delays.

Enhanced RP Accountability: Strengthening oversight mechanisms to ensure impartiality and adherence to timelines.

Fair and Transparent Processes: Enforcing due process and preventing misuse of insolvency provisions for corporate conflicts or operational disputes.

The IBC has proven its value in cases like Bhushan Steel and Essar Steel, rescuing distressed assets and ensuring creditor recoveries. However, cases like Binani Cement, Jet Airways, and Videocon Industries highlight the need for reforms to address inefficiencies and misuse.

Finance Minister Nirmala Sitharaman’s commitment to strengthening the code, as emphasized in the 2023 Union Budget, offers hope for improvements in the upcoming Budget 2025. By addressing its challenges, the IBC can evolve into a robust framework for corporate revival, balancing creditor interests with economic resilience and entrepreneurship.