👍Revamping the IBC | Business Standard Editorials

Clipped from: https://www.business-standard.com/article/opinion/revamping-the-ibc-123012200795_1.html

Faster insolvency resolution is crucial

The enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 was expected to fill an important gap in the Indian economy and was dubbed one of the biggest reforms in recent decades. The basic idea was to resolve corporate insolvencies in a time-bound manner and enable a quick reallocation of productive capital. All previous mechanisms of resolving such cases had proved inefficient. The government on its part also kept making changes to the Code to address shortcomings. A separate framework, for instance, was notified in 2019 for financial service providers. In addition to other changes, a framework was introduced in 2021 to address insolvencies in small and medium enterprises. However, the overall outcome has not been as desired. The resolution process is taking more time and recovery at aggregate level is not very different from legacy mechanisms.

The government has thus decided to revamp the Code and has invited suggestions on the proposed changes. The draft changes are at various levels, starting from the corporate insolvency resolution process (CIRP) applications. For instance, it proposes the use of technology to streamline the process and enable interaction among the various stakeholders involved. Further, the admission of applications takes a lot of time. It has been thus proposed that while filing the application, the data from information utilities (IUs) will need to be produced before the adjudicating authority (AA). This will save preparatory time, and financial creditors are expected to provide all the relevant information to IUs. The draft further says that where a default is established, the AA will have to mandatorily accept the application. This will help improve the timeline for accepting a case, which sometimes takes over a year.

The draft also suggests empowering the AAs to impose penalties on anyone failing to comply with the Code. In terms of the resolution of related parties, the draft proposes that a common insolvency professional and AA may be considered. The committee of creditors (CoC) may also apply for cooperation and coordination of two CIRPs of a debtor. It also proposes an amendment to include the assets of guarantors in the general pool for efficient resolution. It further suggests enabling provisions for the implementation of resolution plans and fair distribution of proceeds. To avoid delays because of stakeholders challenging the resolution plan after its approval, the draft says that the CoC may be mandated to transparently consider competing plans.

The government has proposed an interesting mechanism to resolve insolvency in the real estate sector. Since the interests of financial creditors and homeowners do not necessarily converge, there is a need for a different mechanism. It has, therefore, been proposed that particular projects that have defaulted may be considered distinct from the larger entity for the resolution purpose. The assumption is it will not affect other projects for the debtor and enable specific solutions. However, this may prompt developers to neglect projects of affordable housing and direct available resources to high-value projects. Nonetheless, overall, the proposals should help in speeding up the resolution process. While the government is working on strengthening the law, it should do so in a manner that the role of all stakeholders is clear. Judicial overreach and interpretations of the law are also causing delays. Finally, the government should also make sure that the National Company Law Tribunal is adequately staffed at all times.

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