There is urgent need to address delays under IBC Process which is causing huge value erosion estimate at INR 37,621.62 crores

The Insolvency and Bankruptcy Board of India (IBBI) has initiated an exercise, as advised by the Financial Stability and Development Council (FSDC), to remove duplicity and redundancy in compliance requirements for Insolvency Professionals (IPs) and Insolvency Professional Agencies (IPAs). The key changes proposed include:

The key changes proposed include:

?Elimination and Merging of Forms: Forms such as IP-1 and CIPR-6 have been eliminated, and several forms have been merged or revamped to avoid duplication and improve efficiency. For instance, CIRP-1 and CIRP-2 will be combined into a single form to be filled after the constitution of the Committee of Creditors (CoC). Form CIRP-5 will be split into CP-3A (detailing the application filed with the Adjudicating Authority (AA) for resolution plan approval, liquidation, or closure) and CP-3B (capturing details of the AA's order).

?Monthly Compliance Reporting: A new monthly compliance reporting framework will require IPs to file the status and progress of CIRP on the last day of every month, instead of different dates prescribed for different forms as of now. This change aims to streamline reporting and reduce the administrative burden on IPs.

?Likely Impacts on Resolution Process under IBC

?The proposed changes are expected to streamline the compliance and reporting process for IPs, reducing redundancy and improving the efficiency of managing insolvency cases. ?

?There is no denial of the fact that at present IPs are overburdened with a multitude of compliance requirements, including the submission of periodical progress reports to IBBI and NCLTs, while managing the CIRP and liquidation processes. Therefore, there is a pressing need to shift to an automated data and information management system. While the consolidation and revamping of forms are steps in the right direction, the real issue lies in how this massive data is being utilized to bring about changes and identify the root causes of delays in the CIRP and liquidation processes. Finding a viable resolution plan is a challenge for IPs and the CoC, and the maximization of value requires significant time and effort. IPs and the CoC often need to approach NCLT for extensions of CIRP time, which must be addressed.

?While IBBI does not oversee Tribunals, which are under the Ministry of Corporate Affairs, and it is unclear what reports are sought from NCLTs or how their functioning is reviewed. The approval of resolution plans by NCLT is time-consuming, with an average CIRP duration of 683 days, leading to asset value erosion and negatively impacting stakeholders. Delays arise from procedural complexities, court backlogs, and inefficient adjudication, as well as unchecked interim applications from non-stakeholders. Addressing these issues is essential for timely resolutions.

There were close to 200 cases where the admitted claims were over INR 1,000 crores, involving an aggregate claim of INR 8.84 lakh crore as against the assets value of only about INR 0.44 lakh crore. Personal insolvency cases have been rising, with 2800 applications filed, involving an amount of INR 188155 crores. Out of these, 401 cases were initiated by guarantors themselves. A substantial amount of INR 370942 crores is involved in 1237 cases of avoidance transactions.

Against this backdrop, the financial impact of delays is also significant, with Financial Creditors recovering 32% of claims and Operational Creditors around 25%, while liquidation recovery is a mere 3%. Rapid value erosion due to delays, alongside fees collected by IBBI, highlights areas needing urgent attention. Allocating a portion of these fees to improve Tribunal systems and procedures could minimize delays. Additionally, banks could contribute part of the recoverable amount towards Tribunal system improvements if CIRP or Liquidation is completed within 12 months.

A rough estimate the Potential Improvement in Recovery if Processes are Timely Completed

The prescribed timeline under IBC for CIRP is 180 days, with a possible extension up to 330 days. However, the average time taken is 683 days (approximately two years). Assuming timely completion within the prescribed period, there could be increase in recovery rates by 50% due to timely resolution. Possible up in recovery could be as follows:

• Financial Creditors: 32% + 16% = 48% of their claims
• Operational Creditors: 25% + 12.5% = 37.5% of their claim value
• Liquidation: 3% + 1.5% = 4.5% (overall recovery)

Estimates of the Improved recovery to Financial Creditors and OC due to timely conclusion of process:

• Assuming Financial Creditors' claims are 70% of total claims, i.e 0.70×228,702.84 =INR 160,092?crores. As per this the current recovery for FC is .32×160,092=51,229.44?crores. As against this the hypothetical timely recovery could be INR 76,844.16?crores (0.48×160,092=76,844.16?crores) if the process are concluded in as per the timeline.
• As regards the Operational Creditors: Assuming Operational Creditors' claims are 30% of total claims i.e. 0.30×228,702.84 = INR 68,610.85?crores as against this the current recovery is INR 17,152.71?crores (0.25×68,610.85 =17,152.71?crores) as against this the timely recovery could be .375×68,610.85=INR 25,729.06?crores.
• Under Liquidation: the current recovery is around 3% of total admitted claims which is 0.03×228,702.84= INR 6,861.08?crores. This could be improve if processes are concluded on time in such an event the timely recovery could be INR 10,291.63 crore (0.045×228,702.84=10,291.63?crores).

Estimate of the Value Erosion Due to Delays

• Total Current Recovery: 51,229.44+17,152.71+6,861.08= INR 75,243.23?crores. As against this the recovery could be improved to INR 112,864.85?( 76,844.16+25,729.06+10,291.63=112,864.85?crores).
• As per this estimates, the and assessment of value erosion due to delays could be estimated at : Value Erosion: 112,864.85?75,243.23=INR 37,621.62?crores

Conclusion

To reduce delays in CIRP and at the Tribunal level, several steps need to be taken:

1. Automation and Digitization: Implement an automated data and information management system to streamline compliance and reporting processes. This would reduce the administrative burden on IPs and allow for more efficient data analysis and decision-making.
2. Capacity Building and Training: Enhance the capacity and training of the staff manning tribunals to handle insolvency cases more efficiently.
3. Dedicated Insolvency Courts: Establish dedicated benches within existing courts to expedite the resolution process. This would help in reducing the backlog and ensuring focused attention on insolvency cases.
4. Strict Adherence to Timelines: Enforce strict adherence to timelines for various stages of the CIRP and liquidation processes.
5. Alternative Dispute Resolution (ADR) Mechanisms: Encourage the use of ADR mechanisms such as mediation and arbitration to resolve disputes during the insolvency process. This can help in reducing the time taken for adjudication and reaching consensus among stakeholders.
6. Leveraging Technology: Use technology to monitor and analyze the progress of CIRP and liquidation cases. Data analytics can provide insights into common causes of delays and help in formulating targeted interventions.

Comparative Insights from Other Jurisdictions

1. United States (Chapter 11): The U.S. has dedicated bankruptcy courts with judges specialized in insolvency matters. The use of pre-packaged bankruptcy plans and debtor-in-possession financing are mechanisms that help in faster resolution of insolvency cases.
2. United Kingdom (Administration Process): The UK employs an administration process where an appointed administrator takes control of the company to achieve a better outcome for creditors. The process is overseen by the Insolvency Service, which ensures compliance and efficiency.
3. Singapore: Singapore has established the Insolvency, Restructuring and Dissolution Act (IRDA) which provides a modernized framework for insolvency and restructuring. The establishment of the Insolvency Practitioners Association of Singapore (IPAS) ensures high standards and continuous professional development for insolvency practitioners.
4. Australia: The Australian insolvency regime emphasizes early intervention and turnaround. The voluntary administration process allows companies to restructure their debts with the help of a voluntary administrator. The Australian Restructuring Insolvency and Turnaround Association (ARITA) plays a key role in maintaining professional standards.

The above unique challenges faced by the Indian insolvency system can be addressed by implementing an automated system, enhancing judicial capacity, and enforcing strict timelines are critical steps towards achieving a more efficient and effective insolvency resolution process

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