Is CIRP under IBC a recovery

mechanism
A corporate entity undertakes a plethora of liabilities while it’s functioning in
various ways. Sometimes, the corporate entity may become so debt ridden,
that it may raise questions on the existence and operations of the company and
also endanger the huge financial interest of its creditors. Thus, to strike a
balance between both, the government came up with reconstruction and
rehabilitation mechanisms with a view to wipe off the entity’s debt while
satisfying the creditor’s claim to its greatest interest, thus ultimately ensuring
the entity’s survival.

The pre-existing statute, The Sick Industrial Companies (Special provisions) Act,
1985 (SICA) aimed at revival and survival of debt-ridden industrial companies
was not doing much good. As of 2015, the Insolvency resolution in India took
4.3 years on an average. This is higher when compared to other countries such
as the United Kingdom (1 year) and the United States of America (1.5 years).
These delays are caused due to pendency of resolution cases in courts and
confusion due to lack of clarity in the then bankruptcy framework. [1] The
complications can be traced back to the lack of promising recovery mechanisms
and incompetence of the existing ones.

Even with existing recovery statutes such as the RDBI Act, 1993 and SARFAESI
Act, 2002, the recovery rates obtained in India are among the lowest in the
world. When default takes place, lenders seem to recover only 20% of the value
of debt, on an NPV basis.[2] Due to the low recovery rate, the creditors seemed
to have an adverse outlook towards lending, resulting in slow market growth
and industrial development. Thus, a Bankruptcy Legislative Reforms
Commission was formed in 2014, which came up with a quintessential code
aimed to overcome these drawbacks and deficiencies in the existing legal
framework.
Enactment of IBC
The Insolvency and Bankruptcy Code, 2016 (IBC or Code), was enacted on
28th May 2016, which seeks to consolidate all the existing legal framework and
fulfill the myriad of loopholes by forming one law for Insolvency and
Bankruptcy. IBC focuses on consolidating and amending the laws relating to
reorganization and insolvency resolution of corporate persons, partnership firms
and individuals in a time bound manner, to promote entrepreneurship and
availability of credit and to improve the ease of doing business and facilitate
more investments leading to higher economic development. [3] 

Misuse of IBC
The soul of IBC is resolution of insolvency of an entity by continuation of its
operations, maximizing its assets and balancing the interest of its stakeholders.
Debt recovery process in contrast, merely recover the dues of the creditors by
exhausting its assets, nothing may be left in due course. Thus, resolution keeps
the firm alive, while recovery bleeds it to death.[4] The Code strives for resolution
and discourages recovery in several ways. It encourages the creditor to wait
throughout the insolvency resolution procedure and recover its dues from the
future earnings of the entity, post-resolution.

Initiation of CIRP with malicious intent

In recent times, creditors have been observed to be maliciously initiating
Corporate Insolvency Resolution Process (CIRP) in order to merely taint the
reputation of the debtor and recover the debt owed to them. Applications filed
under the IBC show a disturbing tendency of the law being misused by small
creditors as a debt collection tool rather than for rehabilitation of non-
performing assets by banks, thereby undermining its objective. [5] 
There are many inducements for a creditor to initiate CIRP under IBC rather
than take recourse under other laws against the defaulters. The first being the
cheap application fee under IBC, i.e. INR 2000 (two thousand) for an
operational creditor as compared to massive litigation expenses for a civil suit.
Secondly, CIRP under IBC is a time bound process unlike a civil suit which can
not only stretch for an extensive period but is further delayed in its execution.
[6]
 In the matter of Prowess International Pvt. Ltd., the Hon’ble NCLT held: “It is
made clear that Insolvency Resolution Process is not a recovery proceeding to
recover dues of the creditors. IBC, 2016 is an Act relating to reorganization and
insolvency of corporate persons,…”[7]

Withdrawal of application
In accordance with the Rule 8 of The Insolvency and Bankruptcy (Adjudicating
Authority) Rules, 2016 (Relevant Rules), the Adjudicating Authority has the 
power to permit the corporate debtor to withdraw its application filed before it
prior to its acceptance.[8] In addition to this, with the insertion of Section 12A to
the IBC [9], an application against a Corporate Debtor can be withdrawn even
after its acceptance by the Adjudicating Authority, with the accent of 90%
(ninety percent) voting share of its Committee of Creditors (CoC).

In June 2019, out of the 2162 cases admitted, 101 have been withdrawn under
Section 12A, while just 120 reached resolution.[10] Such rapid surge in the
number of cases withdrawn implies that completing the CIRP was never the
intention of such creditors. Thus, with gates opening for withdrawal of
insolvency applications for initiating CIRP, the ordinary creditors are using the
insolvency applications merely as a threatening tool as in most cases the
corporate debtor steps in for settlement with creditors who then withdraw the
application, thereby defeating its objective.