The Insolvency Bankruptcy Code consolidates and amends the laws relating to re organisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. Corporate Insolvency Resolution Process ( CIRP ) is the process of resolving the corporate insolvency of a corporate debtor under the provisions of the Code.
Before the IBC, India’s insolvency resolution process involved various legislation which includes the Sick Industrial Companies Act (1985), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002), the Recovery of Debt Due to Banks and Financial Institutions Act (1993), and the Companies Act (2013).
A financial creditor may initiate a CIRP under section 7, an operational creditor under section 9 and a corporate applicant of a corporate debtor under section 10 of the Code. As per section 12(1) of the Code, the CIRP shall be completed within 180 days from the date of admission of the application to initiate such process. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum time within which CIRP has to be mandatorily completed, including any extension or litigation period, is 330 days.
From the recent reports and their analysis, it was evident that the solution for most of the stressed assets under the insolvency law missed their timelines amid a shortage of staff at the National Company Law Tribunal (NCLT). As the Insolvency and Bankruptcy Code (IBC) timelines stretched well beyond their specified limits, the companies undergoing the resolution process saw an erosion in the value of their assets.
Reason for Delay
Creditors suffer the most financially if or when a company is liquidated, it is because creditors don’t receive the entire sum that was lent as debt because the value of the company’s assets depreciates the longer it is stuck in the resolution process, creditors are put in a situation where they will have to take huge haircuts.
A Delayed resolution further deteriorates the ability of the corporate debtor to negotiate, reduces the valuation of the corporate debtor, causes commercial uncertainty, and leads to an expensive liquidation process.
Amendments to India’s Bankruptcy laws
In November 2019, the Indian Government announced new rules involving section 227 of the IBC. Section 227 grants India’s federal government the power to notify financial service providers of their insolvency and liquidation proceedings, which may now be conducted under the IBC. These rules provide that the Government may refer cases of shadow banks with assets of at least five billion rupees to an insolvency court under the IBC.
The most notable modification of the IBC (Amendment) Act, 2019, included (a) increasing the timeline for the corporate insolvency resolution process from 270 days to 330 days, (b) mandating that operational and dissenting creditors not receive less in a resolution than they would in a liquidation (akin to the best interests of creditors rule in the US and other jurisdictions), and (c) making the resolution plan binding on all stakeholders. These changes include aspects designed to both protect creditors and enable restructurings to succeed.
Remedies
How we can tackle the issue of delayed proceedings?
It was important to tackle the issue of the delayed CIRP proceedings as it would be a greater relief to the distressed companies. To overcome the issue, it is better to take strict adherence to timelines prescribed in the code. The bench strength of adjudicating authorities must be increased adequately. By increasing the strength of the bench, the issues can be decided faster than before.
Another remedial action that can be brought is to fill out the vacancies, if any, in NCLT/NCLAT without any delay. A well-qualified Insolvency Professional is the core of the CIRP proceedings. Therefore it is essential to build a force of skilled and qualified Insolvency professionals.
Conclusion
The Insolvency Bankruptcy Code has brought about a revolutionary change in borrowers’ behaviour and corporate borrowing. The CIRP process provides a transparent and efficient mechanism for the resolution of corporate insolvency in India, which benefits all stakeholders, including creditors, shareholders, and employees.
delays in resolution continue to be a major cause for concern in solving insolvency and bankruptcy disputes. Delay in resolution of cases is a drawback in the implementation of the code. The timely resolution will restructure the impact of the code.
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