IBC faces challenges as lawyers, resolution professionals pivot to new avenues
Lawyers who had built up their practice on bankruptcy cases under the Insolvency and Bankruptcy Code are no longer finding it lucrative, with cases under the IBC slowing down. They have shifted their focus to other areas, such as cybercrime and digital fraud, or other avenues within the resolution framework.
Resolution professionals are also scarce, with financial creditors asserting their superior rights and relegating RPs to the position of custodians rather than decision-makers.
The legal ecosystem built around debt resolution through IBC is fraying as designated courts encourage claimants and complainants to seek resolution through other routes.
“Pre-IBC restructuring market has seen an uptick with private credit players funding special situations,” said Siddharth Srivastava, Partner at Khaitan & Co .
One time settlement
“Banks and financial institutions are also ensuring timely OTS (one time settlement) along with the restructuring market also emerging as a lucrative avenue. Considering the above and with the possibility of mediation being introduced by the IBBI as a pre-resolution mechanism, lawyers have multiple alternatives sub-practice areas to be explored with the overall insolvency framework,” he added.
Creditors have realised that debt resolution frameworks prevalent prior to IBC were at least certain, and timelines were not prolonged. “So there is credit enhancement for them in terms of recovery,” said Akshat Khetan, Founder, AU Corporate Advisory and Legal Services.
The core purpose for enacting IBC – maximisation of asset value and enhancing time value of money – was not being met. “This is counterproductive for the adjudicating authority because it shows the weakening spine of the institution that due to inefficiency, non-staffing, issues with regards to appointment and multiplicity of litigations within litigations, these cases are not coming up for the purposes of resolution but only liquidation,” Khetan said.
In November last year, rating agency ICRA flagged the lower number of cases admitted to IBC, attributing it to stressed assets being at multi-year lows and improving credit profile of companies. It also pointed to the steep haircuts lenders had to take due to the delays emerging from litigations.
The IBC has also brought about a behavioural change in debtors “with many of the debtors settling their dues before the start of insolvency proceedings,” said Srivastava. Till March 2024, over 28,800 applications for initiation of CIRPs of corporate debtors, having underlying default of ₹10.22 lakh crore, were withdrawn before their admission.
“This positive reinforcement has in turn led to reduction in IBC cases when compared to its initial year. Increase in restructuring market has also led to a reduction in insolvency cases . Further, we have also observed the promoters challenging the insolvency proceedings at the pre-commencement stages, which result in lower admissions.”
With respect to RPs Khetan said the financial creditors, being the dominant claimants, often impose their decisions on the RPs, who are relegated to the background.
