The erstwhile regulatory system for liquidation or resolution or reconstruction of sick companies operated under fragmented laws. The Insolvency and Bankruptcy Code can be regarded as a path-breaking legislation which consolidates and amends the laws relating to insolvency of incorporated entities, partnership firms and individuals, in a time-bound manner.
In the initial phase the Insolvency and Bankruptcy Code has only enforced the provision for initiating insolvency proceedings against incorporated entities. The provisions relating to insolvency for individuals and partnership firms are yet to be enforced. The Insolvency and Bankruptcy Board of India (IBBI) had planned to implement the regime for individual insolvency in a phased manner starting from the financial year 2018.
The enactment and implementation of the Insolvency and Bankruptcy Code has been smooth so far. However, the number of pending insolvency applications with the National Company Law Tribunal (NCLT), a special tribunal constituted to handle insolvency applications, came as a surprise for the government. With rising number of cases under the Code, the government had constituted a 14-member committee to identify and suggest ways to address issues faced in implementing the law. The Insolvency Law Committee had submitted its report on March 26, 2018. This contains suggestions on various spheres of the code. However, the report was silent on enforcement of provisions relating to individual insolvency.
The relevant provisions of the Code, though not yet enforced, provide for a meagre threshold limit of default of Rs 1,000 for initiating insolvency proceedings in cases of individuals and partnership firms.
The adjudicating authority in cases of individual insolvency lies with the Debt Recovery Tribunals (DRTs) constituted under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. With this current threshold limit of Rs 1,000, the DRTs will be flooded with a large number of insolvency applications against individuals or partnership firms.
At present, there are only 38 DRTs in India, mainly in state capitals. The DRTs already have huge numbers of pending cases, and unless more tribunals are constituted it would be difficult for the tribunals to handle more applications that would emerge given the existing threshold limit of Rs 1,000.
As on January 31, 2018, there were 9,073 cases under consideration in the NCLT, including 1,630 cases of merger and amalgamation, 2,511 cases of insolvency and 4,932 cases under other sections of the Companies Act. This shows that judges of the NCLT are already overburdened and there is an acute shortage of judges.
Further, at present there are approximately 1,700 insolvency professionals registered with the IBBI. This figure is too small in comparison with the number of litigations that may arise when provisions for individual insolvency are enforced.
Considering the number of pending cases in the tribunal, the government should shift the enforcement of provisions for individual insolvency to the next financial year.
In order to provide a congenial environment for smooth enactment and implementation of the individual insolvency provisions, the IBBI must focus on building capacity of insolvency professionals and keep a close watch on their conduct. It must facilitate operationalisation of information utilities so that authentic information can be made available to the adjudicating authority and insolvency professionals to complete transactions expeditiously.
The government also needs to create a basic infrastructure by adding more benches in DRTs and must revisit the provisions relating to individual insolvency, so as to make the Insolvency and Bankruptcy Code effective. Otherwise it will merely become another law that will fail to achieve the objective for which it was created.
The writers are directors of Taxmann.com
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