Strengthening IBC

News: The need for quicker resolution of insolvencies cannot be overemphasised. It makes capital more efficient, improve credit culture, and help boost growth.

In this light, it is encouraging to see that the government is consistently working to strengthen the IBC by addressing the emerging gaps.

Recently, it proposed another set of changes that would help address insolvency issues more effectively by reducing delays. 

What changes have been proposed by the Govt in the IBC?

Fixed time for approval or rejection of a resolution plan: the Code should provide a fixed time for approving or rejecting a resolution plan by the adjudicating authority (AA).

The Supreme Court has noted that the resolution plan approved by the committee of creditors should not be delayed.

Record reasons in writing: If the resolution plan is not approved or rejected within 30 days, the AA will be expected to record reasons in writing. This proposal should reduce the time taken by the AA.

Also, written reasons for delays will enable the government to make targeted interventions in the future.

Authentication of records by Information Utilities (IUs): Further, the government has proposed that financial creditors may be required to submit records authenticated by information utilities (IUs) to establish default for admitting an application for insolvency resolution.

According to the Code, the AA is expected to decide within 14 days whether it should accept or reject the application, but in practice the time taken is much longer. Thus, it is envisaged that considering IU-authenticated records will help make quick decisions.

Change in the look-back period: The Code provides for a look-back period for avoidable transactions. The commencement of the insolvency process takes more time than the mandated 14 days. Hence, the Govt has proposed that the threshold for the look-back period be changed from the date of commencement of the insolvency process to the date of filing the application.

This would reduce the incentive for debtors to delay the admission and also help protect value for creditors. Besides, the government has proposed to make voluntary liquidation easier.

What is the way forward?

The changes proposed by the government are in the right direction and will help reduce the time taken to resolve insolvencies, which is critical to protect value.

However, the Govt should also consider augmenting capacity at the National Company Law Tribunal (NCLT). The NCLT would require about 360 members, given the caseload, and two-member Benches.

At present, its strength is just 63 members. The government would be well advised to provide an adequate level of human resources to the NCLT.

Source: This post is based on the article “Strengthening IBC” published in Business Standard on 28^th Dec 2021.