The popular discourse on the Insolvency and Bankruptcy Code has, since its enactment, largely focused on the evolving jurisprudence in the not-so-regular cases, legislative interventions by the Parliament, regulatory interventions by the Reserve Bank of India and the Insolvency and Bankruptcy Board of India, and the first set of 12 large cases identified by the RBI.
While such discourse helps in tracking the evolution of the IBC as a law, it gives us limited visibility on how the IBC is working out for the average case. Ignoring the average case and limiting our focus to individual developments is dangerous, as we may end up missing the woods for the trees. Understanding the overall impact of the IBC requires us to depart from an individual case based approach and move towards an empirical analysis of the cases being tried under the IBC.
Such analysis will help us objectively see how the IBC is panning out for an average creditor and an average debtor. It will help us see how the institutions are performing on average. Finally, it will help us ground future bankruptcy policy in sound analysis backed by systematically collected empirical evidence, and reduce the scope for relying on anecdotal evidence. At the least, it will help us ground intuitive propositions in data.
In a modest attempt at empirically understanding the impact of the IBC, we seek to answer two broad questions relating to the IBC: (a) its economic impact; and (b) the performance of one of the judicial institutions under the IBC.
To understand the economic impact of the IBC, we ask questions regarding the characteristics of persons invoking the IBC and the frequency with which cases are being admitted or dismissed. Answering these questions facilitates an understanding of the economic actors using or attempting to use the law. Intelligent extrapolation of this data may also potentially throw light on the impact of the law on the credit culture in India.
In the context of (b), we focus on the performance of the National Company Law Tribunal under the IBC. The reason for this is two-fold. First, the NCLT plays the most significant role in the active cases under the IBC. Second, the judicial orders that are transparently available in the public domain provide the perfect opportunity to empirically analyse the performance of the NCLT as an institution.
We answer these questions by analysing the orders passed by the NCLT since the operationalisation of the IBC. We hand-collect data on certain pre-identified fields of information from these orders to build a data-set of 830 NCLT orders disposing of insolvency petitions from December 1, 2016, up to November 30, 2017. We capture information such as who triggered the IBC, the kind of creditors involved, the amount of debt in default, the date of filing, the date of first hearing, the date of final disposal, outcome of the petition and where the petition is dismissed, the reason for dismissal, etc. We limit our data to fresh filings under the IBC (including petitions transferred from the erstwhile Board for Industrial and Financial Reconstruction), and omit the winding-up petitions that are transferred from High Courts. A detailed description of the data-set, the fields captured and the reason for capturing some fields of information over others can be found here.
Observing the NCLT orders passed in one year allows us to build a time-series and see the relative developments across four quarters. For the purpose of our analysis, we define the quarters as under:
- Q1 = December 1, 2016 to February 28, 2017
- Q2 = March 1, 2017 to May 31, 2017
- Q3 = June 1, 2017 to August 31, 2017
- Q4 = September 1, 2017 to November 30, 2017
In this article, we summarise some important preliminary findings from our analysis.
Who Has Been Using The IBC?
The chart below gives an overview of the persons who have been triggering the IBC across four quarters.
This chart shows that creditors have sought to use the IBC much more than the corporate debtor.
However, across the four quarters, while the number of petitions filed by creditors has steadily increased, the number of petitions by debtors dropped after the third quarter. The reason for an initially high number of petitions by corporate debtors could be attributed to the transition of the petitions pending before the erstwhile BIFR, as the IBC allows a period of six months within which such petitions may be transitioned into the IBC framework.
However, the number of corporate debtor filings started falling after August 2017. While these are very early indications, it does not augur well for an insolvency regime that must ideally incentivise the promoter or the debtor itself to seek resolution at its own instance. This is because a promoter or the debtor itself is best placed to know about an impending default, and a timely trigger by the debtor may save value for all the stakeholders.
What Kinds Of Creditors Are Using The IBC?
The chart below gives an overview of the kinds of creditors that have been seeking resolution under the IBC.
With 65 percent of the creditor-petitions having been filed by operational creditors, they dominate the number of filings made under the IBC across the four quarters.
However, while the petitions by operational creditors increased exponentially by 137 percent between Quarter 2 and Quarter 3, they increased by only 16 percent between Quarter 3 and Quarter 4.
The fact that operational creditors triggered the IBC much more than the financial creditors led to criticism that the law was being used as a recovery tool, as opposed to an effective mechanism for collective action by the creditors and restructuring. However, the subsequent drop in the number of petitions by operational creditors may be indicative of two possibilities. First, that the law has been internalised by debtors, who see dispossession from management as a credible threat.
Second, that operational creditors see lesser value in using the IBC, due to the costs involved and the fact that they are not part of the decision making process in resolution under the IBC. If we see a consistent decline in the number of petitions filed by operational creditors over time, the data on settlements may shed light on which of these two possibilities is more likely.
Among the operational creditors, we see that vendors or suppliers are using the IBC much more than the other type of operational creditors. Vendors refer to suppliers of goods and services to the debtor. The table below presents the types of operational creditors, who have been using the IBC across the four quarters during the sample period.
Outcomes Of Insolvency Petitions
The chart below shows the admission and dismissal rates across operational and financial creditors.
An interesting story that emerges is that the admission rate for petitions filed by financial creditors – close to 65 percent – is just a little less than the dismissal rate for operational creditors – close to 72 percent. The vice-versa holds true as well.
While about 27 percent of the petitions filed by operational creditors are admitted, 31 percent of those filed by financial creditors are dismissed.
We find that while about 33 percent of the petitions filed by operational creditors are dismissed on the grounds of settlement or withdrawal at the instance of the creditor, this accounts for the single largest reason for dismissal of operational creditors’ petitions. We find that other reasons such as defective or incomplete petition and existing dispute account for 12 percent and 14 percent of petitions filed by operational creditors that are dismissed. We also notice an increasing number of petitions being dismissed due to reasons such as the debtor is already undergoing resolution. The last possibility can be mitigated at the stage of filing itself by appropriate case management and information systems within and across benches.
How Much Time Does It Take To Dispose Of An Insolvency Petition?
To answer this question, we divide the life-cycle of an insolvency petition into three stages, as under:
- T0 = Date on which the petition is filed.
- T1 = Date on which the petition is first heard by the bench before which it is filed.
- T2 = Date on which the petition is admitted or dismissed.
We find that while each order has information on T2, very few orders have information on T0 and T1. Further, while some orders have information on all - T0, T1, and T2 - others have information only on T2 and either of T0 and T1. Subject to these constraints, we have estimated the time taken for disposal of the insolvency petitions by the different benches of the NCLT.
The table below shows the median time for each stage of the life cycle of an insolvency petition. The second column of this table shows the number of cases in which each date of the relevant phase was reflected.
The IBC prescribes a timeline of 14 days for the disposal of insolvency petitions by the NCLT. Subsequently, the Supreme Court, in its judgement in Surendra Trading Company v. J. K. Jute Mills Company Ltd. and others stated that certain timelines in the IBC are directory and not mandatory. However, tracking the time taken by the different benches for disposal of the cases, will give us insights into the efficiency of the admission process, and allow us to plan capacity for the benches themselves. We find that the median duration from the date of filing up to the date of the first hearing itself is 14 days, and the entire process of disposal of an insolvency petition takes a little more than a month.
What Kind Of Insolvency Petitions Are Being Dismissed?
The IBC sets out the specific grounds on which an insolvency petition may be dismissed. While petitions filed by financial creditors must be allowed if the debt and default are proved by the petitioner, an insolvency petition filed by an operational creditor may be dismissed if the debtor shows evidence of an existing dispute with the petitioning creditor. In either case, a petition must be dismissed if it is incomplete.
Thus, a strict interpretation of the law would specifically restrict the grounds on which insolvency petitions may be dismissed.
The major chunk of the reason for dismissal continues to be settlements and withdrawals. Nearly 28 percent of the petitions were dismissed as settled and nearly 23 percent were withdrawn and hence dismissed. Roughly 10 percent of the petitions were dismissed for being defective and another 10 percent due to an existing dispute. There are also reasons which do not squarely fall within the fields specified and account for nearly 22 percent of the dismissals.
A law passed within 20 months from the inception of its idea has now completed more than a year of operationalisation. While the ‘big’ and ‘highly litigated’ cases stole the limelight and led to legislative changes, trends continued to build up. From the first six months of analysis till now, trends have largely remained the same. While these trends provide a glimpse of the first phase of the law, the absence of information about the entire life cycle of a case hinders a holistic analysis of the same. As we wait for these gaps to be filled, we will continue to keep our watchful eye on the IBC, through our empirical lens.
The authors are researchers at the Finance Research Group at the Indira Gandhi Institute of Development Research.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.