Synopsis: The Insolvency and Bankruptcy Code (IBC), 2016, was a landmark reform aimed at creating a time-bound mechanism for resolving corporate distress. However, as highlighted in the Business Standard article “IBC reset needed,” the Code’s foundational principle of timely resolution is being severely undermined by procedural delays. These delays not only erode asset value but also threaten the credibility of the entire framework, necessitating a comprehensive reset to restore its original spirit and effectiveness
Context: The Insolvency and Bankruptcy Code (IBC), 2016, was introduced to overhaul India’s archaic and fragmented insolvency regime. Its primary objectives were to maximise the value of assets, promote entrepreneurship, ensure the availability of credit, and balance the interests of all stakeholders in a time-bound manner. While the IBC has successfully shifted the power dynamic from debtor-in-possession to creditor-in-control and instilled a sense of credit discipline among promoters, its core promise of speed is now under severe strain.
- Average Resolution Time: The average time taken for resolving cases has reportedly crossed 650 days, more than double the statutory maximum.
- Value Erosion: Such prolonged delays lead to significant erosion in the value of the stressed asset. A company under CIRP is in a state of suspended animation, and delays in its revival or liquidation directly diminish the recovery prospects for creditors.
- Overburdened NCLT: The National Company Law Tribunal (NCLT) and its appellate body (NCLAT) are grappling with a massive caseload, which is disproportionate to the number of available benches and members.
- Admission Delays: Significant time is often lost at the very first stage—the admission of an insolvency plea—due to litigation and procedural hurdles.
- Vacancy and Appointments: Delays in the appointment and training of NCLT/NCLAT members further cripple the system’s capacity.
- Endless Litigation: The process is frequently stalled by litigation from various parties. Aggrieved promoters, operational creditors, and even dissenting financial creditors often challenge every step, from the appointment of the Resolution Professional to the approval of the resolution plan by the Committee of Creditors (CoC).
- Valuation Disputes: Disagreements over the valuation of assets and the distribution mechanism within the resolution plan have become common grounds for legal challenges.
- Promoter Resistance: Erstwhile promoters often engage in tactical litigation to delay the process, hoping to regain control or obstruct the transfer of assets.
- CoC Indecisiveness: The Committee of Creditors, despite being in charge, sometimes struggles with delays in decision-making, especially in cases involving a large and diverse group of lenders with conflicting interests.
- Lower Recoveries: The primary goal of value maximisation is defeated, leading to lower recovery rates for financial creditors and often a complete wipeout for operational creditors.
- Deterrent for Investors: Uncertainty and delays make stressed assets less attractive to potential resolution applicants, shrinking the pool of viable bidders.
- Erosion of Confidence: Most importantly, the delays erode the confidence of stakeholders in the IBC framework, risking a return to the pre-IBC era of endless legal battles and value destruction.
- Strengthening Adjudicating Infrastructure: Urgently increase the number of NCLT benches and ensure timely, merit-based appointments of members. Specialised training can enhance the efficiency of the tribunals.
- Streamlining Processes: Introduce stricter timelines for the admission of petitions and discourage frivolous litigation through exemplary costs. Amendments could be explored to limit the grounds on which a resolution plan can be challenged.
- Introducing Pre-Packaged Insolvency: Expanding the successful pre-packaged insolvency resolution process, currently limited to MSMEs, to larger corporations could significantly cut down resolution time by enabling prior consensus between debtors and creditors.
- Leveraging Technology and Mediation: Employing technology for case management and encouraging out-of-court mediation for smaller disputes can unclog the NCLT system.
- Code of Conduct for CoC: A formal code of conduct for the CoC could be introduced to ensure faster and more transparent decision-making.
