Corporate Matters

IBC AND CORPORATE RESTRUCTURING

By /

IBC AND CORPORATE RESTRUCTURING

INTRODUCTION

For over 20 years, The Law Codes has been at the forefront of guiding businesses through the intricacies of insolvency and bankruptcy law in India. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, has emerged as a crucial instrument in resolving corporate distress. It aims to balance the interests of all stakeholders—creditors, debtors, and the economy at large—while promoting the revival of distressed businesses through a structured corporate restructuring process. As India’s business environment has evolved, the IBC’s role in corporate restructuring has gained increasing importance. 

THE CONCEPT OF CORPORATE RESTRUCTURING

Corporate restructuring is a process that involves making significant changes to a company’s operational or financial structure to improve its efficiency, profitability, and overall value. This could include debt restructuring, mergers, acquisitions, demergers, or even operational realignment. In the context of insolvency, corporate restructuring aims to avoid liquidation by rescuing a financially distressed business through reorganizing its finances or operations.

Before the enactment of the IBC, the tools available for corporate restructuring in India were often inefficient and slow, with the process fraught with delays, legal complexities, and limited involvement of creditors. The introduction of the IBC has provided a more comprehensive and time-bound framework for addressing these challenges.

IBC AND ITS IMPACT ON CORPORATE RESTRUCTURING

The IBC fundamentally changed the approach to corporate restructuring in India, by establishing a clear and systematic procedure for the resolution of stressed businesses, which has brought several key benefits, including:

  • Timely and Efficient Resolution: The IBC mandates that insolvency resolution be completed within 180 days, extendable by a maximum of 90 days. This fixed timeline is a critical factor in improving the speed and efficiency of corporate restructuring. In comparison to the previous legal framework, where restructuring could take several years, the IBC’s time-bound approach provides businesses with a structured path to address their financial distress.
  • Creditor-driven Process: One of the most significant departures from earlier laws is the creditor-driven nature of the IBC. The Code empowers financial creditors to play a decisive role in the resolution process through the formation of the Committee of Creditors (CoC). This shift ensures that the interests of creditors are prioritized, promoting a fair and transparent restructuring process.
  • Focus on Business Continuity: The IBC encourages restructuring over liquidation, with the Resolution Professional (RP) appointed under the Code working with stakeholders to draft a resolution plan that maximizes the value of the company. By prioritizing revival and restructuring, the IBC aligns with the broader economic goal of preserving businesses and jobs, ensuring minimal disruption to the economy.
  • Professional Management: Under the IBC, the appointment of an independent Insolvency Professional (IP) to oversee the restructuring process ensures a neutral and expert approach to resolving the company’s issues. The RP has the authority to implement the resolution plan and ensure that the interests of all stakeholders are balanced and protected.
  • Increased Investor Confidence: The IBC has made the corporate restructuring process more predictable and transparent, which has, in turn, increased investor confidence in the Indian market. By providing a clear mechanism for the resolution of distressed assets, it has attracted more foreign investment and improved the ease of doing business in India.

CHALLENGES IN CORPORATE RESTRUCTURING UNDER THE IBC

While the IBC has brought about significant improvements in corporate restructuring, it is not without its challenges. Several issues remain, that need to be addressed for the Code to reach its full potential:

  • Delays in Resolution: While the IBC mandates a time-bound resolution process, delays remain a significant issue. The resolution process is sometimes extended due to litigation, particularly when a resolution plan is challenged or when there are disputes among creditors. These delays can undermine the goal of fast-tracking restructuring and prolong the distress faced by businesses.
  • Complexity in Decision-Making: The Committee of Creditors (CoC) plays a central role in the decision-making process. However, the CoC’s decisions may not always reflect the optimal solution for the business, especially when there is a lack of consensus. This can result in suboptimal restructuring plans or even the rejection of viable plans, which could have saved businesses and jobs.
  • Issues of Fraudulent and Malicious Defaults: The IBC aims to penalize errant promoters and business owners who deliberately default on loans. However, there have been instances where promoters attempt to misuse the system by filing for insolvency while retaining control over distressed assets. Fraudulent defaults and issues related to the concealment of assets continue to be a challenge, hampering the Code’s effectiveness.
  • Lack of Adequate Resolution Plans: While the IBC encourages the development of resolution plans to revive distressed companies, the quality of these plans is sometimes inadequate. Creditors may prioritize recovering their loans over the long-term viability of the business, leading to plans that focus more on debt repayment than on the company’s recovery and growth. Additionally, the limited number of viable buyers or investors for distressed assets can be an obstacle to effective restructuring.
  • Challenges in Valuation: One of the contentious aspects of corporate restructuring is the valuation of distressed assets. The lack of a uniform approach to asset valuation often leads to disagreements between stakeholders. Disputes over the value of assets can delay the approval of resolution plans and complicate the restructuring process.

THE WAY FORWARD: IMPROVING IBC AND CORPORATE RESTRUCTURING

The IBC has undoubtedly made significant strides in improving corporate restructuring in India. However, to fully realize its potential, several reforms can be considered:

  • Streamlining the Resolution Process: To reduce delays, efforts should be made to streamline the resolution process, such as enhancing the capacity of the NCLT and reducing the backlog of cases. Increasing the number of qualified insolvency professionals and supporting their role in the resolution process could also help expedite decision-making.
  • Incentivizing Creditor Cooperation: While the CoC plays a crucial role, there is a need for more cooperative decision-making to ensure that resolution plans are in the best interests of the company and its stakeholders. Encouraging creditors to work together rather than pursuing individual agendas could improve the quality of the resolution process.
  • Strengthening Fraud Prevention Mechanisms: The introduction of stronger safeguards against fraudulent and malicious defaults will help ensure that the IBC serves its intended purpose. Strengthening the role of regulators and the enforcement of penalties for fraudulent activities would make the system more transparent and effective.
  • Enhanced Focus on Business Viability: The IBC should place a greater emphasis on business viability when evaluating resolution plans. More emphasis should be placed on keeping businesses operational and maintaining jobs, rather than focusing solely on debt repayment.
  • Better Asset Valuation Practices: Standardizing asset valuation techniques would reduce disputes and ensure a more consistent approach to evaluating distressed assets. This would improve the resolution process by making it more transparent and reliable.

CONCLUSION

The IBC has proven to be a game-changer in India’s corporate restructuring landscape. Providing a structured, transparent, and time-bound mechanism for resolving distressed assets has fostered a more efficient and creditor-friendly approach to corporate distress. While challenges remain, with further refinements, the IBC can continue to evolve into a more robust tool for corporate restructuring, driving economic growth and stability in the long term. At The Law Codes, we remain committed to guiding our clients through this complex yet crucial process, ensuring that the spirit of the IBC is upheld and the best outcomes are achieved for all stakeholders involved.

Disclaimer:
The Bar Council of India does not permit the solicitation of work and advertising by legal practitioners and advocates. By accessing The Law Codes website, the user acknowledges that:The user wishes to gain more information about us for his or her information and use.He/She also acknowledges that there has been no attempt by us to advertise or solicit work. Any information obtained or downloaded by the user from our website does not lead to the creation of the client-attorney relationship between our office and the user. None of the information contained on our website amounts to any form of legal opinion or legal advice. All information contained on our website is the intellectual property of the office.