The Insolvency and Bankruptcy Code (IBC) 2016 was enacted in May 2016. It was a milestone event in the financial sector reforms. In its five years of journey, five key takeaways of IBC are as follows:

1.    End of the promoter’s divine right to rule the company. In the earlier restructuring / rehabilitation schemes, the success was limited as the reins of the company still continued with promoters. With IBC moving to creditor-in- possession, the balance of power shifted and change of promoter/ management started having a deterrence effect on erring promoters with real fear of losing control of the company.

2.    Access of IBC, even to operational creditors, was a great move to inspire confidence in the sanctity of contractual obligations. Earlier, dedicated recovery tribunal/ empowerment was limited to financial creditors only.

3.    Intermediation of resolution process. Earlier the workout was generally confined to the creditor and the corporate debtor. In a few cases, investors were roped in. What IBC did was to introduce a set of intermediaries like the Resolution Professional (RP) to manage affairs of the company, until a resolution plan was approved. The concept of Resolution Applicants (RA) was brought in for providing financial/strategic investors and / or turnaround specialists to take over the defaulting company.

4.    A substantially reduced timeline and greater certainty about outcome. While the timeline in many cases undergoing resolution or completed resolution exceeds the IBC prescribed time limits, they are still way ahead compared to long and inordinate delays in other recovery mechanisms.

5.    The last, but not certainly the least, is a lot of disclosure and information dissemination in IBC cases. A periodic IBBI newsletter at quarterly intervals and regular updates on its website are key enablers for obtaining a fair picture of IBC cases in a transparent way and inspires confidence.
 
The greatest strength of IBC, in my view, is its ability to fix the bugs during its operations and install updated versions on an ongoing basis.

IBC has come under fire recently due to efforts by some errant promoter(s) by attempting backdoor entry and huge haircut taken by creditors in a few cases which have created uproar. The standing committee on finance recently also submitted a report, ‘Implementation of Insolvency and Bankruptcy Code – Pitfall and Solutions’. There has been a series of consultations by MCA & IBBI with various stakeholders and two discussion papers have been put up by IBBI with proposed changes in various aspects relating to resolution and liquidation, a few of which (these are representative broader aspects) are listed below:

1.    Code of conduct (CoC) for Committee of Creditors (CoC). It is the CoC which takes all decisions after an account is admitted under IBC. Even the Supreme Court has held the commercial wisdom of creditors as final, as far as vetting or rejection of resolution plans is concerned. However, there is no regulation around code of conduct of this powerful body. A draft code of conduct has now been put up for discussion, which covers conflict of interest, transparency in decision-making, authorisation to take on the spot decisions, judicious use of power to balance all stakeholders’ interest, maintaining confidentiality of documents and discussions etc. If CoC (committee of creditors) adhere to a strict enforceable CoC (code of conduct), this will strengthen integrity of the IBC process.

2.    Putting an end to N number of changes to the resolution plan and wild card entry, which resulted in prolonging the IBC process, the discussion paper proposes to restrict amendments to the resolution plan to maximum two and no unsolicited plan to be entertained.

3.    With reiteration of IBC’s core goal of reviving units, the code of conduct also urges CoC to protect the corporate debtor (CD) as a running business and its assets, and to extend interim finance to the extent required for completion of the process.
 
4.    Stakeholders Consultative Committee: An SCC is constituted to oversee the process once the company goes into liquidation. Earlier, the scope of engagement of liquidator with the SCC was discretionary. Now, it is proposed to provide that the liquidator shall consult the SCC for all significant matters related to liquidation process, including appointment of professionals (and their remuneration), and sale of assets (including major aspects such as fixation of reserve price, manner of sale, etc.).

5.    Movement towards the Swiss Challenge method in bidding both in resolution and liquidation. In alignment with the current RBI guidelines applicable to banks for sale of assets, the discussion paper suggests the Swiss Challenge method to be used in processing competitive bids.

Once the suggestions are evaluated and necessary changes made in IBC, it will address a large part of ills now plaguing IBC and debug it. The revised version will be more effective in IBC implementation. The strength of any system is its ability to respond to developing situations timely and effectively.

Mishra is a public policy analyst and columnist.