Failed experience: IBC Section 227 in the light of DHFL case

Reserve Bank of India (RBI) took control of DHFL by appointing an administrator and took the company to Insolvency and Bankruptcy Code (IBC) process, perhaps the first for a non-banking finance company (NBFC), despite all the drawbacks in the IBC process. 

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Experts say as evidenced in DHFL, the process is plagued by drawbacks that need to be addressed or alternatives need to be explored in the interest of all stakeholders and the economy at large and it has been a value destructive proposition to all stakeholders 

Insolvency and Bankruptcy Code (IBC) process has neither been swift, as promised, nor the level of recoveries, projected at a very low 20% levels, were encouraging. 

Resolution under the Insolvency and Bankruptcy Code, 2016 (IBC) was envisaged to be a plan for insolvency resolution of the borrower as a going concern while maximizing the value of its assets and promoting entrepreneurship, availability of credit, and balancing of interests of all stakeholders - not a sale or an auction or a recovery as the process eventually turned out to be under an administrator. 

The IBC process was meant to revive businesses, ensure preservation of assets and capital, and be fair to all the stakeholders and was supposed to make doing business in India much easier. 

On the contrary, IBC has been a fraught process quite caught up in litigation all the way since its inception and almost every issue needed the Supreme Court to intervene. 

Experts say IBC has neither been swift, as promised, nor the level of recoveries, projected at a very low 20% levels, were encouraging. The numbers are disappointing – Very low success rate of around 13%. 

In terms of reviving and saving businesses, up to March 2021, of the 4,376 cases referred for the CIRP (Corporate Insolvency Resolution Process), 2,653 cases are closed, while the rest are work-in progress. 

Of the 2,653 cases closed, only 348 have ended with approval of resolution plans, while a whopping 1277 firms were liquidated. Balance cases are either withdrawn by mutual consent or under appeal/ review. 

In terms of jobs lost and recovered, the figures are difficult to arrive at, estimates are that about 1 million jobs have been lost due to the closure of companies. 

In terms of time taken, more than 79% of ongoing Resolution processes have already exceeded 270 days timeline with no clear further timeline on closure. 

On liquidation – till March 2021, a total of 1277 cases had yielded orders for liquidation. Of this a whopping 70% have been undergoing liquidation process for over 1 year. Also, till 31 March 2021, the stakeholders received only Rs 600 crore by way of liquidation against total claims of Rs 17523 crore i.e. only 3.4% of total claims with a further delay of more than 2-3 years. 

Reserve Bank of India (RBI) took control of DHFL by appointing an administrator and took the company to Insolvency and Bankruptcy Code (IBC) process, perhaps the first for a non-banking finance company (NBFC), despite all the drawbacks in the IBC process. 

As seen in the case of DHFL as well as various other case studies, the process was entirely highjacked by the Secured Lenders esp. institutional creditors –, with hardly any or no say at all to other stakeholders - unsecured creditors, operational creditors, shareholders and employees. 

Experts said as evidenced in DHFL, the process is plagued by the following drawbacks that need to be addressed or alternatives need to be explored in the interest of all stakeholders and the economy at large: 

Value Destructive Proposition to all Stakeholders 
i. Very Low Recovery – Only Rs 37,500 crore against admitted claims of close to Rs 91,000 crore (about 41% realization) 
ii. Loss of 100% of Interest Accrued of over Rs 10,000 crore was not factored in the resolution at all – including in the overall claims. 
iii. Unsecured Creditors – Only Rs 189 crore against Rs 3778 crore i.e 5% realization on Principal while there is Nil recovery against accrued interest

Parliamentary standing committee on finance has suggested various measures to make IBC better, hope the Ministry of Corporate Affairs and the regulator will look into the aspects raised by the experts.