Strengthening IBC

Proposed changes will reduce delays

The implementation of the Insolvency and Bankruptcy Code is one of the biggest reforms in the financial sector in recent decades. The objective of the Code is to resolve insolvencies in a time-bound manner and maximise value for all stakeholders. Its implementation has undoubtedly improved the way in which insolvency issues are addressed in India, though the overall results are still below expectation. However, it is encouraging to see that the government is consistently working to strengthen the Code by addressing the emerging gaps. Last week, it proposed another set of changes that would help address insolvency issues more effectively by reducing delays. Time is of the essence in such cases as delays could not only erode value but also clog capital and affect the flow of credit in the economy.

Among the proposed changes, it has been suggested that the Code should provide a fixed time for approving or rejecting a resolution plan by the adjudicating authority (AA). If the resolution plan is not approved or rejected within 30 days, the AA will be expected to record reasons in writing. Often applications are filed by various stakeholders questioning the resolution plan, among other things. In this context, the Supreme Court has noted that the resolution plan approved by the committee of creditors should not be delayed. This proposal should reduce the time taken by the AA. Also, written reasons for delays will enable the government to make targeted interventions in the future. Further, the government has proposed that financial creditors may be required to submit records authenticated by information utilities (IUs) to establish default for admitting an application for insolvency resolution. According to the Code, the AA is expected to decide within 14 days whether it should accept or reject the application, but in practice the time taken is much longer. Thus, it is envisaged that considering IU-authenticated records will help make quick decisions.
 

The government has also proposed a change in the look-back period. The Code provides for a look-back period for avoidable transactions. Since the commencement of the insolvency process takes more time than the mandated 14 days, the government has proposed that the threshold for the look-back period be changed from the date of commencement of the insolvency process to the date of filing the application. This would reduce the incentive for debtors to delay the admission and also help protect value for creditors. Besides, the government has proposed to make voluntary liquidation easier.  

The changes proposed by the government are in the right direction and will help reduce the time taken to resolve insolvencies, which is critical to protect value. However, at a broader level, while strengthening the Code is important, the government should also consider augmenting capacity at the National Company Law Tribunal (NCLT). As suggested in these pages by C K G Nair and M S Sahoo, who were associated with designing and implementing the insolvency law, the NCLT would require about 360 members, given the caseload, and two-member Benches. At present, its strength is just 63 members. The government would be well advised to provide an adequate level of human resources to the NCLT. The need for quicker resolution of insolvencies cannot be overemphasised. It will make capital more efficient, improve credit culture, and help boost growth.