 "Supreme Court of India. Reuters")
The Indian banking system has undergone significant changes in recent years, largely due to the growing economy and increased consumer spending. As a result, there has been a rise in loan defaults and insolvencies. To tackle this, the government has introduced the Insolvency and Bankruptcy Code (IBC), which has been instrumental in helping businesses restructure and recover. Over time, the system has become more efficient, with a significant reduction in bad loans (Non-Performing Assets, or NPAs) in public sector banks. This year, several important legal decisions and new reforms have further strengthened the system, offering new opportunities to resolve distressed assets and improve business operations. This article takes a look at these developments and what they mean for the future of India’s banking and insolvency framework.
Distressed banking NPAs and claw back by IBC
The Indian banking system is rapidly evolving due to increased corporate growth pattern and lavish consumer spending habit resulting in higher lending costs and consequently, a rise in insolvencies. To effectively address these insolvencies, efficient business and operational restructuring is essential. Notably, the Gross Non-Performing Asset (GNPA) ratio of public sector banks improved significantly, falling to 3.12 per cent in September 2024 from a peak of 14.58 per cent in March 2018, highlighting the effectiveness of targeted interventions and presenting opportunities in the distressed asset space.
Recovery statistics and IBC
The enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 marked a transformative change in India’s banking and corporate law, providing a responsive framework for reorganising distressed corporate debtors and maximising their value. The Insolvency and Bankruptcy Board of India (IBBI) has effectively tackled challenges in stress resolution with judicial decisions clarifying legal ambiguities. Notably, 269 resolution plans were approved in FY24, a 42 per cent increase from FY23, and 3,409 companies have been rescued since the Code’s inception. Creditors have recovered approximately 161.1 per cent of liquidation value and 31 per cent of their claims underscoring the IBC’s growing efficacy and continuous improvements.
Bankruptcy and mediation
On January 31, 2024, an expert committee recommended introducing a mediation framework, as a complementary mechanism for dispute resolution within IBC ecosystem. Key recommendations include enabling provisions for establishment of mediation secretariat at the NCLT, specific timelines for mediation and enforcement of Mediated Settlement Agreements under IBC. This framework functions independently, ensuring the Code’s objectives are upheld without compromising its foundational structure. This integration signifies a significant shift towards amicable settlements moving away from the traditional focus on litigation strategies in resolving insolvency disputes.
Impact Shorts
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IBBI has implemented significant policy changes to enhance the insolvency framework and address emerging challenges. These reforms focus on streamlining procedural timelines, increasing transparency and strengthening the role of creditors in decision-making. IBBI also conducts periodic conferences, seminars and workshops to raise awareness about the IBC while actively soliciting stakeholder input through regular discussion papers on pressing issues including real estate insolvency, registration of MSMEs in insolvency and monitoring committees under the CIRP.
The judicial precedents of 2024 which marked a major shift in the insolvency domain are:
1. Benchmark for resolution plan value: On January 3, 2024, the Supreme Court’s judgment in the DBS Bank Limited Singapore vs Ruchi Soya Industries Limited case addressed a critical issue concerning the calculation of minimum payouts for dissenting secured financial creditors. The apex court ruled that such payouts should be based on the value of the creditor’s security interest rather than their voting share in the Committee of Creditors (CoC). This decision reinforces creditors’ confidence by ensuring fair compensation aligned with the value of their secured interests.
2. Creditor equity: By emphasising on procedural compliance and fairness, the SC judgment delivered on February 12, 2024 in the Greater Noida Industrial Development Authority(GNIDA) vs Prabhjit Singh Soni has upheld that the adjudicating authority can recall an approved resolution plan under section 31(1) of the IBC. This judgment emphasises the importance of equity, particularly when material irregularities, such as the wrongful exclusion of secured creditors like GNIDA from the CoC occur. The court affirmed that GNIDA was unjustly kept out of the CoC and had been ex-parte throughout the entire CIRP, highlighting the necessity of including all stakeholders in insolvency proceedings to uphold their integrity.
3. Collective nature of insolvency proceeding: On October 23, 2024, a three-judge bench of the Supreme Court remarked on a “grave deviation from procedure” while setting aside the NCLAT’s judgment that allowed a settlement between the ed-tech firm Byju’s and the Board of Control for Cricket in India (BCCI). BCCI had initiated insolvency proceedings as an operational creditor for unpaid sponsorship dues. An appeal was filed to withdraw from these proceedings based on the settlement. However, the Supreme Court highlighted that once admitted, insolvency proceedings affect all stakeholders, not just the parties involved. The apex court’s decision reinforced that insolvency should not allow preferential recoveries for individual creditors.
4. Creditor primacy: On November 7, 2024, a three-judge bench of the Supreme Court delivered a landmark judgment in State Bank of India vs Consortium of Murari Lal Jalan and Florian Fristch ordering the liquidation of Jet Airways, a once-prominent Indian airline. Emphasising the “time value of money,” the court exercised its plenary power under Article 142 of the Constitution to set aside the NCLAT’s directive to forfeit the Successful Resolution Applicant’s infused funds of Rs200 crore and encash the Performance Bank Guarantee of Rs150 crore. This decision shows that resolution plans are serious contractual commitments and must uphold the core objectives of the IBC.
Charting the future
For the past eight years, the IBC has successfully met its objectives through vigilant and constant adaptability. However, the rising stakeholder expectations now demand reduced haircuts and quicker resolutions. There is a need for substantial legislative and institutional reforms such as creditor led resolution framework, group insolvency and cross-border insolvency to meet the dynamic waters of the Indian economy. By constantly improvising the resolution of distressed assets, the IBC enhances investor confidence and contributes to the economic resilience.
Anjali Jain is Partner - Insolvency & Restructuring Practice and Venkateshwara Perumal is Assistant Manager (IBC) at Areness. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.