PYQ Relevance:

[UPSC 2018] How far do you agree with the view that tribunals curtail the jurisdiction of ordinary courts? In view of the above, discuss the constitutional validity and competency of the tribunals in India.

Linkage: The Insolvency and Bankruptcy Code (IBC), India’s first comprehensive bankruptcy law enacted in 2016, fundamentally relies on a specialized tribunal system for its implementation. This system includes the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). The effectiveness of the IBC as a resolution tool is intrinsically linked to the efficiency, competency, and operational challenges faced by these tribunals.

Mentor’s Comment: India’s Insolvency and Bankruptcy Code (IBC), started in 2016, has been running for over eight years now. It has helped recover ₹3.89 lakh crore with a recovery rate of 32.8%, changing how companies deal with unpaid debts. But delays in courts, problems after settlements, and a recent Supreme Court decision on Bhushan Steel have created new worries.

Today’s editorial will talk about the effectiveness of the Insolvency and Bankruptcy Code (IBC) in India. It will help with GS Paper II (Policy Making) and GS Paper III (Banking).

Let’s learn!

Why in the News?

As India works towards becoming a $5 trillion economy, there is growing discussion about whether the IBC is ready for the future, whether its decisions are respected, and how efficient the courts are in handling cases.

Why was the Insolvency and Bankruptcy Code (IBC) enacted in India in 2016?

To Establish a Time-bound Resolution Mechanism: The IBC aimed to replace India’s slow and fragmented insolvency system with a fast-track process for resolving distressed assets within a maximum of 330 days. Eg: Earlier, recovery through legal channels often took years; under IBC, cases like Essar Steel were resolved with clear timelines.
To Shift Control from Debtors to Creditors: It empowered creditors by giving them control over the insolvency process and discouraging willful default. Eg: In the case of Bhushan Steel, creditors approved Tata Steel’s resolution plan, overriding promoter control.
To Improve Recovery Rates and Credit Culture: IBC sought to improve debt recovery rates and create a culture of responsible borrowing and repayment. Eg: As per IBBI data, creditors have recovered over ₹3.89 lakh crore with an average recovery rate of 32.8%, much higher than earlier systems.

What makes IBC the preferred route for debt recovery according to the RBI and IBBI data?

Highest Share in Total Recoveries: According to the RBI’s 2024 report, the IBC accounted for 48% of all recoveries made by banks in FY 2023-24, making it the dominant recovery mechanism. Eg: Compared to other channels like DRTs and SARFAESI, IBC recovered nearly half of total dues in just one financial year.
Better Realisation Than Liquidation: As per IBBI, resolution plans under IBC are yielding 93.41% of the fair value and 170.1% of liquidation value, showing greater efficiency. Eg: In the case of Electrosteel Steels, creditors recovered more than they would have in a liquidation scenario.
Timely Resolution and Settlement: The IBC’s time-bound process has led to early settlements, with 30,310 cases settled before admission, involving defaults worth ₹13.78 lakh crore. Eg: Companies facing insolvency threats often clear dues or settle quickly, improving the overall credit discipline.

How has the IBC impacted the credit culture and corporate governance in India?

Improved Credit Discipline: The IBC has fostered a repayment-oriented credit culture by creating a credible threat of insolvency, discouraging willful defaults. Eg: The Supreme Court observed that “the defaulter’s paradise is lost,” reflecting a clear shift in borrower behavior post-IBC.
Reduction in NPAs: The IBC has contributed to a sharp fall in Gross Non-Performing Assets (NPAs), which declined from 11.2% in 2018 to 2.8% in 2024 for scheduled commercial banks. Eg: Many firms have restructured or repaid loans early to avoid IBC proceedings, improving asset quality in the banking sector.
Boosted Corporate Governance Standards: Firms resolved under IBC show better board practices, including a rise in the number of independent directors, enhancing transparency and accountability. Eg: A study by IIM Bangalore showed firms post-resolution had more professionalised management and stronger compliance norms.

What are the key challenges currently affecting the effectiveness of the IBC framework?

Judicial Delays and Backlogs: Delays in approvals by the National Company Law Tribunal (NCLT) and prolonged litigation undermine the IBC’s goal of time-bound resolution. Eg: Even after creditor approval, resolution plans like that of Jaypee Infratech have been stuck for years due to legal battles, leading to erosion in asset value.
Post-resolution Uncertainty: Lack of legal finality and frequent challenges after plan approval create investor hesitation and risk derailment of settled cases. Eg: In the Bhushan Power and Steel case, a previously approved resolution plan was reopened, shaking confidence in the system.
Inadequate Framework for Emerging Assets: The IBC lacks clear mechanisms to deal with issues like intellectual property valuation, employee dues, and tech continuity, making it unfit for resolving non-traditional businesses. Eg: Tech start-ups and IP-heavy firms may not be efficiently resolved under current provisions, leading to value destruction.

Why is the Bhushan verdict seen as a setback?

Erodes Commercial Certainty: The verdict questioned a resolution plan that had already been approved and operational for years, undermining the finality of the IBC process. Eg: The reopening of the Bhushan Power and Steel Ltd. case raised fears that even completed transactions are not immune from future legal scrutiny.
Deters Investor Confidence: If resolution applicants fear judicial reversal after making large investments, they may hesitate to participate, weakening the IBC’s appeal. Eg: A successful bidder may now think twice before committing to a resolution plan if legal sanctity isn’t guaranteed.
Delays in Execution and Recovery: Continuous litigation post-approval increases the risk of liquidation for otherwise viable firms due to delayed implementation. Eg: In the Bhushan case, years of uncertainty stalled asset utilisation, resulting in a loss of economic value.

Way forward:

Strengthen Tribunal Infrastructure and Capacity: Expand the capacity of NCLT and NCLAT by appointing more judges, improving case management systems, and digitising proceedings to reduce delays and ensure time-bound resolutions.
Ensure Legal Finality and Commercial Certainty: Introduce clear jurisprudential safeguards to prevent post-resolution litigations and uphold the sanctity of approved resolution plans, thereby boosting investor confidence and preserving the IBC’s credibility

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