Bankrupting reform: Vacancies in NCLT are undermining IBC. GoI needs to fill them soon

Clipped from: https://timesofindia.indiatimes.com/blogs/toi-editorials/bankrupting-reform-vacancies-in-nclt-are-undermining-ibc-goi-needs-to-fill-them-soon/TOI Edit

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The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016. It was rightly hailed as a landmark economic reform that would simultaneously lower exit barriers for firms and lending risks for financial intermediaries. IBC’s efficacy relies on a set of institutions that combine seamlessly to deliver. This aspect was foregrounded recently when the Supreme Court made its displeasure known in a hearing on the Tribunal Reform Act and vacancies across tribunals. Specifically, it brought the state of two key IBC institutions, National Company Law Tribunal (NCLT) and its appellate body, NCLAT, into focus.

NCLT plays a central role at two stages of an insolvency process. At the very beginning it decides within a statutory deadline on whether a complaint can be admitted. Subsequently, it has to judge if a resolution package of a firm submitted by creditors satisfies the law. This body is underperforming as it’s short-staffed. Consequently, there’s a growing pile of unresolved cases, undermining IBC’s efficacy. A parliamentary standing committee report tabled last month said that of the sanctioned strength of 63 members across 16 NCLT benches, there are 34 vacancies, including that of the president.

The low point was in June. NCLT had four different acting presidents in the first 10 days of the month. In the case of NCLAT, the full time chairperson’s post has been vacant for almost 18 months. Consequently, there are 13,170 IBC cases involving approximately Rs 9 lakh crore pending before NCLT. Of these, around 71% have been pending for more than six months. Time is of the essence in resolution. IBC has been designed to prioritise resolution over liquidation. This aim can be achieved only if the resolution process sticks to timelines because it limits erosion of a company’s value.

A sense of the scale of the problem showed up in last year’s pile-up. The pandemic resulted in IBC being suspended for defaults arising on or after March 25, 2020. Even with this slack, of the 2,278 IBC cases filed between April-December 2020, only 176 cases had been disposed of by early February. Without NCLT and NCLAT functioning at full strength, IBC runs the risk of going the way of some other reforms. Off to a good start, but underperforming later because GoI dropped the ball on nurturing the relevant ecosystem. IBC is too important for this story to play out again.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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