INTRODUCTION
In order to alleviate financial hardship in the Indian economy, the Insolvency and Bankruptcy Code, 2016 (the Code) was a groundbreaking reform. To revitalize, resolve, and reorganise the sick or troubled debtors, it signalled a break from previous healing mechanisms. The “timebound” resolution of the corporate debtor’s debts is one of the main characteristics of the IBC that sets it apart from its predecessors.
According to the Code, the Corporate Insolvency Resolution Procedure (CIRP) process must be finished in 180 days or the extended 90-day term, and it must be finished in 330 days, including any extensions and the time needed for court actions. In summary, the Adjudicating Authority may start a liquidation procedure under Chapter III of the Code if the settlement process is not finished within 330 days.
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time bound manner for maximization of the value of such persons’ assets, to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto,” is how the Code’s preamble describes its scope.
In the last seven years, India’s insolvency law has assisted in the resolution of over 800 cases, requiring an average of more than 850 days each case. Approximately 2000 cases are undergoing CIRP at different phases at the moment. Seventy-six percent of these 2000 ongoing CIRPs have gone beyond the one-year timeframe. Furthermore, it is concerning that 56% of these cases have been open for longer than three years. The average resolution duration is far longer than the 330-day limit, which makes it difficult to deal with challenged enterprises in a timely way. Regulation 40A of the IBBI (CIRP) Regulations specifies the model timelines for different processes. The one-year timeframe allotted for the liquidation procedure is merely a guideline and could be extended with AA’s consent. But up until September 2023, CIRPs typically take 652 days (867 days for CIRPs in the current year, FY 2023-24), while liquidations take 472 days to produce a liquidation order. Additionally, it takes 536 days to complete a liquidation process. Delays cause the value of the assets to decrease, whether they occur during the admission of a case or during the settlement phase. Experts believe that the planned time-bound resolution procedure has been negatively impacted, leading to delays, by litigation, a lack of personnel at the National Company Law Tribunal (NCLT) benches, infrastructure problems, and disruptions caused by the epidemic.
According to the code, the IP profession is a vital component of the ecosystem and a major force behind managing the debtor as a going concern, facilitating the resolution or liquidation process, and maximising value for all parties involved in the process within a set timeframe. IPs collaborate with numerous verticals within the ecosystem and share in their success—or lack thereof.
The speedy closure and value recoveries resulting from an insolvency resolution or liquidation procedure are the main indicators of its effectiveness. Even though there are obstacles, such as promoters’ lack of cooperation, adjudication delays, etc., the value recovery in any resolution or liquidation process is substantial; for example, as of December 23, the creditors have realized Rs. 3.21 lakh crore under the resolution plans. 86.58% of the fair value and 168.64% of the liquidation value have been realized by the creditors.
Value recoveries and prompt closures are important metrics, but it may also be important to consider how the Code affects the broader Indian ecosystem, including how it can improve the nation’s financial governance systems now and in the future. It is important to emphasize the IPs’ role in these areas since they are thought of as the main forces behind the processes.
There is little doubt that the law has revolutionized corporate borrowing and borrower behavior. However, one of the main issues with resolving bankruptcy and insolvency disputes is still the length of time it takes. One of the problems with the code’s implementation has been the delay in case resolution. In addition to causing lengthy court proceedings, significant haircuts from creditors, and a protracted case pending, this has also caused the value of assets to decline over time. The Indian Institute of Insolvency Professionals of ICAI (IIIPI) has conducted an empirical case-study-based examination of a few ongoing CIRP and liquidation cases in light of this background and the urgent need to fully comprehend the causes of delays.
REASONS OF DELAY
1. Non-cooperation from the Former Management:
It has been observed that CD’s former management and staff generally do not cooperate. RPs are unable to obtain accurate information regarding the CD’s records because of the management and staff’s lack of cooperation. Because of this, RPs find it extremely difficult to assume management, operate the CD as a going concern, and finish the CIRP procedure on schedule. Additional repercussions include the assets’ value decreasing over time.
Section 19(2) of the IBC allows an RP to file an application with AA to protest about negligent management personnel and request the required guidance from the AA. It has been discovered that these court cases not only take a long time, but they often lead to complaints and countersuits, which cause even more delays. Furthermore, the aforementioned support is typically missing in letter and spirit, even in cases where AA instructions have been provided.
2. Interact with COC Members:
It is challenging to call a meeting and make a prompt decision because not all COC members are available. The law stipulates that FCs must vote for the COC to make decisions on all important issues, but certain members (such as OCs with a substantial debt stake) and former management are limited to attending COC sessions. It is envisioned that RP will serve primarily as the COC’s trustee, coordinator, and advisor. The following are some of the problems RPs have with COC:
• COC members’ tardiness in voting on important issues.
• Conflicts or litigation involving intercreditor by COC members.
• Internal decisions made by COC member banks and institutions typically take time before voting.
• Bank-specific RP panels may differ, which could cause conflict about the nomination of IRPs and RPs.
• The COC’s delays in deciding whether to fix or release RP’s fees.
• The disagreement between COC and RP, which resulted in COC replacing RP and/or further legal action.
3. Delays Associated with the Adjudication Process:
The volume of applications for admission, interlocutory proceedings, and appeals at NCLT and NCLAT has grown over time, and it takes time to adjudicate any application after a fair and due process. Competing parties frequently engage in disagreements that lead to litigation, which can occasionally be pointless. The following is a summary of the main problems with the matter:
• Process-related delays are exacerbated by delays in listing petitions on important issues. This includes delays brought on by registrations in which flaws are later discovered by the NCLT register, necessitating additional filings and the ensuing delays.
• Even though the problem is on the cause list, it might not be heard, which would waste RPs’ and liquidators’ time and energy that could be used more wisely elsewhere.
• Delays in submitting admission or other orders to the NCLT portal cause action to be delayed, particularly when specific orders are involved.
• Procedures pertaining to avoidance transactions include significant delays and minimal results. in relation to and causes a delay in the resolution plan’s approval.
• NCLT frequently orders separate processes in Special Courts (under the Companies Act, 2013) in cases requiring punitive action against any negligent stakeholder. These proceedings take their own time and have delayed results.
4. Statutory departments and enforcement agencies lack awareness:
Even though the IBC law has established a moratorium on statutory proceedings, it has been observed that different statutory authorities frequently start the proceedings. RP/Liquidator may occasionally receive notices from agencies such as Income Tax/GST, EPFO, Customs, etc., requesting them to present or defend against procedures that interfere with the CIRP/Liquidation schedules.
Additionally, enforcement authorities such as the SFIO, ED, CBI, and others also involve RPs or liquidators in relation to CD’s previous conduct at the request of its former management or ownership. Because of the strict deadlines for the procedures, this puts pressure on RP/Liquidator’s schedule.
5. Insufficient Technology Solutions and/or Information Utilities:
Resolution may be hampered and the goal of value maximization may be jeopardized if information on CD’s finances, claims, security details, books of accounts, and financial statements is unavailable or delayed. An uneven distribution of value may result from information asymmetry. The industry’s current lack of integrated technology solutions and specialized information utilities exacerbates the issues.
6. Problems unique to the liquidation process:
• Avoidable delays in the liquidation process are caused by stakeholders filing claims repeatedly or late.
• In addition to unclear procedures, businesses sold as going concerns are now unable to seek set-off of business losses under the Income Tax Act; however, this is not the case if the business is sold under CIRP. To make such a benefit possible, the Income Tax Act may need to be amended.
• Delays are being caused by coordination problems among the various classes of Stakeholders’ Consultation Committees (SCC).
• Due to present legal requirements, the liquidation process for “not easily realizable assets” (NRRA) becomes laborious and time-consuming.
SUGGESTIONS
1. Enhancing the Interface with the Former Ownership/Management of CD:
• Requiring relevant agencies, such as auditors, creditors, and statutory/regulatory authorities, to exchange pertinent information about the CD, including PUEF transactions, may improve the flow of information on the CD’s books, accounts, records, and financial statements.
• Strict penalties for non-cooperation by CD’s ownership/management may be implemented, including disqualification from future directorships, in addition to actions for non-cooperation under IBC 19(2). The former management of Erring CD might not be permitted to take part in the COC.
2. Enhancing the Interface with COC:
IBC envisions a “creditor in control” (of CD) led model rather than a “debtor-in-possession” model, which grants COC several authorities as a broad framework. The commercial wisdom of COC takes primacy in all significant concerns of CIRP and managing the CD’s business as a going concern, as stated in a number of court rulings, including the one made by the Hon’ble SC in the case of Essar Steel Ltd. For any CIRP to be completed successfully, prompt COC decision-making is therefore essential. Recognizing its importance, the IBBI (CIRP) Regulations were recently changed in September 2022 to provide RP to request information from creditors in the format and timing that it deems appropriate. Here are some more ideas to enhance the interface with COC:
• Giving Bank/FI representatives enough early notice so they can vote and make decisions on the topics on the agenda of COC meetings.
• Timely and timely voting on any new issues that need for additional discussion by COC members’ higher authority.
• In conjunction with banks and financial institutions, a code of conduct that is initially optional and then required by rules may be implemented. This would enable prompt choices and actions that adhere to the text and spirit of the law.
• In addition to monetary considerations, COC may assign sufficient weight to experience and other qualitative factors when determining RP’s compensation.
• The bank-wise panel of IPs may no longer be used; instead, IBBI may advertise openings for any professional position with specific requirements regarding experience, etc.
• In addition to monetary considerations, COC may assign sufficient weight to experience and other qualitative factors when determining RP’s compensation.
3. Enhancing the Results of Adjudicating procedures:
The law views non-adversarial mechanisms as “in rem” procedures rather than “in personam” proceedings where IBC serves many parties. However, due to the nature of insolvency processes, opposing parties typically become embroiled in disputes that call for legal intervention based on equity considerations. Along with digitizing the filing and hearing procedure, the government has recently strengthened the NCLT benches thanks to the coordinated efforts of stakeholders. The following are further recommendations to enhance the legal interface:
• Smooth and integrated integration with IBBI/IU portals (including case management software) for online filing, order and record retrieval, and hearing.
• Orders are promptly available after NCLT finalizes them.
• Rather than using lengthy court orders, they may be issued or finalized using pre-established short format templates.
• Adoption of ADR (alternative dispute resolution) procedures, such as “mediation,” which is primarily an out-of-court procedure, within the framework of the IBC by making the required changes. Some sophisticated markets have successfully explored mediation mechanisms. The clear advantages include time and money savings, relieving the judiciary, agreements that courts will recognize, etc. The availability of pleadings, documents/reports, and expert views to NCLT benches can be an additional benefit of the ADR procedure. On September 14, 2023, the Indian Parliament passed “The Mediation Act, 2023,” acknowledging the importance of mediation in settling civil disputes, whether they be business-related or not. This Act’s goal is to encourage and support mediation, particularly institutional mediation, as a means of resolving conflicts, whether they are business-related or not. However, in order for the mediation process to be officially recognized by the law, the IBC would need to be changed.
• Encouraging pre-pack insolvency, which is mostly an extrajudicial procedure. Furthermore, while MSMEs are now covered by this approach, larger corporate segments may also be included.
• Occasionally, specialized NCLT benches may be established to provide additional attention to urgent issues such as resolution plans and avoidance transactions.
• As the court’s official, RP/Liquidator is being given authority over some of the routine matters that currently need AA’s approval or consent. Such activities, which do not involve the judiciary up front, may be reported to AA in a timely way.
• Enough deterrents should be included to discourage frivolous lawsuits by the stakeholders, such as permitting AA to punish the stakeholders who make mistakes.
4. Additional/Miscellaneous Suggestions:
• The use of integrated case management software, which promotes a single source of truth across several procedures and increases efficiencies by enabling anonymous and paperless interaction between various pillars.
• Increasing knowledge of statutory authorities and enforcement agencies regarding IBC procedures. Furthermore, in accordance with a recent ruling by the GST Department, statutory authorities may designate a nodal officer to enhance turnaround times among statutory departments.
• The creation of stress asset markets that serve as a bridge between the information needs of bankers and strategic investors. It may be possible to improve collaboration with sector regulators such as RERA.
• Using group insolvency characteristics to address the intricacies of the CD’s interconnected entities.
• Endorsing lawsuit funding as a workable way to raise money during CIRP/Liquidation, following global best practices.
• Regarding “Not Readily Realisable Assets” (NRRA) sold or transferred through the liquidation process, clarity and flexibility may be offered.
• Ongoing development of stakeholders’ capacity and expertise to raise awareness of common problems and solutions.
CONCLUSION
Even if the early jurisprudence has been resolved seven years after IBC’s founding, there are still certain unresolved issues that need to be addressed in order to improve the overall results of IBC procedures. A successful CIRP/liquidation procedure necessitates coordinated attention and actions by multiple pillars or stakeholders, adhering to the law in text and spirit, since time is of the essence in any resolution endeavour.
In this regard, the study clearly demonstrates that cases are not completed within the timeframes specified by the code. Even though RPs and liquidators make every effort to adhere to the timeliness requirements outlined in the Code and legislation, the results of their actions depend on how they interact with other stakeholders, which is frequently beyond their control. Therefore, problems have been found in several areas of interaction with the former management, COC members, statutory agencies, adjudicating authority, etc. As a next step, ideas for enhancing these interfaces have also been gathered independently. Particular problems or recommendations pertaining to the liquidation procedure have also been noted. The report’s conclusions and recommendations could serve as quick references and policy inputs for addressing CIRP and liquidation process delays.