IBC changes on agenda to speed up resolution

An amendment bill is likely to be introduced in the budget session after stakeholder consultations.

“The Insolvency Law Committee will meet next week to finalise the proposals, post which the formal consultation process will begin,” the official said.

According to government data, 12,871 bankruptcy resolution cases were pending on October 31, down from 13,211 as on December 31, 2021. The average number of days taken to resolve a case rose from 230 days in FY18 to 679 days in the first half of FY23.

Under the proposed changes, the insolvency process will be divided into two parts. The first leg will commence once the case is admitted by the National Company Law Tribunal (NCLT). This phase will focus on finding potential buyers for the company and then transferring management to the acquirer. The distribution of resolution proceeds among creditors begins in the second phase. Currently, both processes run simultaneously, complicating cases for the NCLT as creditors fight for resolution proceeds.

‘Delay Erodes Value of Asset’

Under the proposed process, the NCLT needn’t get stuck over inter-creditor disputes. “It is in the best interest of all stakeholders including creditors to hand over the company to the new management who will have better expertise in running the business,” said the official. “Also, delay in resolution often erodes the value of the asset, hence cutting it short is important.”

The amendment bill may also provide for an interim distribution of any undisputed proceeds among creditors. The remaining proceeds will be distributed once the NCLT decides on the inter-creditor disputes. This is to ensure lenders receive timely payments. The bill will also include provisions to reduce the complexity of cases that come to the NCLT, another contributing factor to delays. “Only tough cases are coming to the NCLT and the process is taking long. Meanwhile, the value of assets is taking a hit,” the official said.

One of the key reasons behind the increasing complexity of IBC cases is evolving jurisprudence, experts said. Courts and tribunals in the recent past have provided a wide array of rulings that sometimes conflict with each other. For instance, the role of the committee of creditors (CoC) has seen diverse interpretations. In some cases, it has been held that the CoC enjoys utmost discretion in the process and its commercial wisdom cannot be disputed. In a few others, it has been held that if a CoC’s decision is not in the best interests of stakeholders, it should be reviewed. The new bill will provide legal clarity on the processes and principles to be followed.

“The higher time taken for resolution is mainly on account of associated litigation as with time, the average number of interlocutory applications has increased, which is considered to impact realisable value of assets,” the government told Parliament in reply to a question earlier this week.