Insolvency proceeding deadline problem 

News: Insolvency and Bankruptcy Code (IBC), 2016 aims for time bound corporate insolvency resolution process or CIRP.

Although initially these timelines were adhered, but with time, considerations of factors like livelihood of those related to the company have led to delays.

Due to this, the focus has shifted to revival rather than on timely resolution. 

How does the IBC 2016 goes about the resolution process? 

IBC 2016, prescribes time limits for the corporate insolvency resolution process, or CIRP, and for each task in the process, starting from initiation till closure. The time prescribed for CIRP is mandatory. 

An early resolution increases the likelihood of a company being revived and, in turn, of productive assets being turned around quickly. 

CIRP envisages two options for resolution — namely, (a) revival of the company through a resolution plan, or (b) liquidation of the company. It lets the market choose the options sequentially. The market first makes an attempt to revive the company, failing which the liquidation process is initiated. 

Is the timeline proposed been adhered to in practice, what has been the experience? 

The code provides for consequences for not adhering to the time schedule.

– These timelines were adhered strictly in the initial days. For example: 23 CIRPs, which concluded with resolution plans in 2017-18, took on an average 243 days. 

However, over the years a perception emerged that the livelihood of many is linked to the survival of a company and thus revival took precedence, even at the cost of time and value. 

Subsequently, the code was amended in 2019 to extend the period given for resolution and also to allow for extensions and exclusions, which became a major reason for delay.

As a result, 98 CIRPs that concluded with resolution plans during April-December 2021 on an average took 709 days, which is far more than the prescribed timeline. 

Apart from preference for revival, there is another reason for delay. CIRP requires several constituents to play their respective roles, and it is possible that any of them may fail to perform its role in time, causing delay.     

What is the way forward? 

Market and adjudicating authority should be given a specific timeline to finish their respective tasks. This will prompt the market to complete the process in time. 

Timely resolution will help to reclaim the economic value of an enterprise under stress.

Source: This post is based on the article “Insolvency proceeding deadline problem” published in Business Standard on 11th March 2022.