Reinforcing IBC

More insolvency courts is a good starting point

The Ministry of Corporate Affairs’ decision to set up eight special courts under the National Company Law Tribunal (NCLT) to deal specifically with insolvency cases should be welcomed. The Insolvency and Bankruptcy Code (IBC), which came into force in 2016, remains the best bet for resolving the humongous bad debt problem, which has thrown Indian banking and business into a state of limbo. The NCLT is the backbone of this insolvency resolution process but, in the manner of similar judicial dispensations, has chronically overworked. To date, according to the data furnished by the Insolvency and Bankruptcy Board of India (IBBI), the NCLT has admitted 907 cases, of which 32 cases have been approved, resulting in the realisation of Rs 498 billion. Many more cases have been filed for liquidation — the number was 87 till March 2018. Considering the process is new and the bankruptcy rules required tweaks as new issues came up — such as the eligibility for promoters to bid for their own companies — this would appear to be encouraging progress.

But two facts underline the decidedly modest nature of this record. For one, the mainstay of the IBC process was that it was time-barred, with an allowance of a maximum of 270 days. So far, however, some 390 companies admitted for resolution have breached that deadline. For another, the realisation is but a drop in the Rs 8.3 trillion ocean of non-performing assets (NPAs) in the banking system. Litigation — in terms of appeal and review — has slowed the process, but this factor accounts for less than 10 per cent of the cases admitted. In addition to bankruptcy cases, the tribunal also handles mergers and acquisitions and other cases under the Companies Act. The latest data suggests that over 9,000 cases are under consideration by its 11 benches. This is insupportable. In addition, the distribution of the benches is skewed with little relation to the proportion of cases in each jurisdiction. Thus, Delhi has two benches, and the remaining regions, including Mumbai and Kolkata, one each. The decision to set up eight courts dedicated to bankruptcy cases, therefore, plugs a major infrastructure gap, especially when the court system will be expanded in busy jurisdictions such as Mumbai.

More courts, however, only go so far towards tackling the dimensions of the problem. No less pressing is the need for capacity building, principally by augmenting the number and quality of judges and resolution professionals (RPs). Care should be taken, for instance, to ensure that the shortage of judicial personnel, which has brought the Securities Appellate Tribunal to a standstill, does not afflict the IBC-exclusive NCLT benches. With RPs, the problem is less the minimum qualification — which is a chartered accountancy degree — than experience. Many RPs have no experience of running or evaluating businesses, factors that have created controversies in several cases, including signature ones referred to by the Reserve Bank of India. Some of these issues may be resolved with the passage of time, but it is vital for the government to ensure that the momentum of the bankruptcy process accelerates steadily. In that sense, setting up more courts is a good starting point.