IMPACT OF THE INSOLVENCY AND BANKRUPTCY CODE ON CREDITORS’ RIGHTS AND RECOVERY
The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 was a transformative step in reforming India’s financial ecosystem. Designed to resolve corporate insolvencies efficiently and within a fixed timeframe, the IBC aims to balance the interests of debtors, creditors, and other stakeholders. Over the past two decades, The Law Codes, a leading law firm with extensive experience in insolvency and bankruptcy law, has guided clients through the complexities of the IBC. This article explores the impact of the IBC on creditors’ rights and the recovery process, highlighting both the advantages and challenges presented by this new legal framework.
CREDITORS’ RIGHTS UNDER THE INSOLVENCY AND BANKRUPTCY CODE
The primary objective of the IBC is to provide a fair and transparent framework for resolving insolvency while ensuring equitable treatment for all stakeholders, particularly creditors. The Code significantly enhances creditors’ rights, granting them greater authority and control in the resolution process, compared to previous laws.
ENHANCED CONTROL THROUGH THE COMMITTEE OF CREDITORS (CoC)
One of the landmark features of the IBC is the establishment of the Committee of Creditors (CoC). Composed of financial creditors, the CoC is given the power to make critical decisions throughout the insolvency resolution process, including approving or rejecting resolution plans. The CoC is empowered to ensure that the best possible outcome is achieved for the creditors, and the insolvency professional is accountable to them.
This creditor-driven mechanism represents a significant shift from the previous insolvency laws, which were often bogged down by inefficiencies and delays. By placing the creditors at the center of the resolution process, the IBC ensures that their interests are prioritized, while also offering a structured approach to finding viable solutions for distressed companies.
- Timely Recovery and Resolution
The IBC mandates a time-bound resolution process, with a maximum period of 330 days for the entire insolvency resolution process, including extensions. This fixed timeline reduces uncertainty for creditors and ensures that they can recover their dues within a defined period. The time-bound approach helps expedite the resolution process, ensuring that creditors do not have to wait for years to get their payments.
By limiting the period for resolution, the IBC also reduces the risks associated with prolonged insolvency proceedings, such as asset devaluation and business deterioration, which ultimately benefit creditors by enhancing the potential for better recovery.
- Priority in Distribution of Assets
The IBC prescribes a clear order of priority for the distribution of assets during liquidation, often referred to as the “waterfall mechanism”. Secured creditors are given the highest priority, followed by unsecured creditors, employees, and other stakeholders. This distribution framework aims to ensure that creditors receive a fair share of the proceeds from the liquidation of the debtor’s assets.
However, one of the major impacts of the IBC has been the recognition that creditors’ claims must be honored in a transparent and equitable manner, reducing the possibility of biased or unfair settlements. This prioritization ensures that creditors’ rights are upheld, even in liquidation scenarios.
- Improvements in Debt Recovery Processes
The IBC has streamlined the debt recovery process, providing creditors with a clearer, more predictable pathway for recovering dues. Before the enactment of the IBC, creditors faced lengthy and convoluted recovery procedures under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) or under civil courts. The IBC replaces these fragmented and inefficient mechanisms, offering creditors a unified and more effective framework for debt recovery.
Additionally, the IBC encourages resolution over liquidation, offering creditors a chance to recover more by restructuring the distressed company instead of opting for asset sales. This emphasis on resolution, as opposed to liquidation, has created more opportunities for creditors to recover their debts while preserving businesses.
CHALLENGES FACED BY CREDITORS UNDER THE IBC
While the IBC offers significant advantages to creditors, it is not without its challenges. The framework, though designed to benefit creditors, sometimes presents obstacles that can complicate the recovery process.
- Delay in Resolution Process
One of the biggest challenges creditors face is delays in the resolution process. Although the IBC mandates a 180-day resolution period, with a possible extension of 90 days, the process often gets extended further due to various factors such as legal disputes, challenges to resolution plans, or difficulties in obtaining necessary approvals. Delays can result in a prolonged period of uncertainty for creditors, reducing their chances of recovering the full amount of their claims.
In some cases, creditors may be forced to accept a resolution plan that offers less than what they are owed, simply to ensure that the process moves forward. Extended timelines also lead to the erosion of the value of the distressed business, ultimately reducing the assets available for creditors.
- Risk of Haircuts
While creditors are given greater control over the resolution process, there is a risk that they may have to accept a “haircut” or a reduced settlement amount. This often happens when the value of the distressed company’s assets is insufficient to cover its debts fully, or when a resolution plan is deemed necessary to revive the company rather than opting for liquidation. In some cases, creditors may have to agree to a compromise on the debt recovery to ensure that the company can be restructured and revived.
- Conflict Among Creditors
The IBC’s emphasis on creditor-driven processes sometimes leads to conflict among creditors, especially when financial creditors and operational creditors have different priorities. Financial creditors typically have more leverage in the CoC, while operational creditors, despite being owed significant amounts, have less say in the decision-making process.
This imbalance can sometimes result in disagreements over the resolution plan, making it difficult to achieve consensus and impeding the timely resolution of insolvency cases. Operational creditors, in particular, may feel that their claims are under-prioritized or ignored during the process.
- Legal and Procedural Challenges
The IBC process is often challenged in courts, leading to delays and complications. Creditors may find themselves caught up in long-drawn legal battles over the validity of resolution plans, claims, or decisions made by the CoC. These legal challenges can further complicate the recovery process and add layers of uncertainty to the timeline for resolution.
CONCLUSION
The introduction of the Insolvency and Bankruptcy Code has fundamentally transformed the insolvency landscape in India, providing a robust and efficient mechanism for creditors to recover their dues. The IBC has strengthened creditors’ rights, introduced a more streamlined and transparent recovery process, and prioritized timely resolution over liquidation. However, challenges remain, including delays in the resolution process, the risk of haircuts, and conflicts among creditors.
For creditors, understanding the nuances of the IBC and how to navigate the process effectively is essential. The Law Codes, with its 20 years of expertise in insolvency and bankruptcy law, is committed to helping creditors maximize their recovery while ensuring that the resolution process is fair, transparent, and in compliance with the law. As India continues to evolve under the IBC framework, it remains imperative that creditors remain vigilant and proactive to safeguard their rights and interests in an increasingly complex legal environment.