Insolvency & Bankruptcy Code: Mechanism and Challenges

Context: Certain issues have cropped up in the Insolvency and Bankruptcy Code, 2016 (IBC). The recent Supreme Court judgment in Jet Airways case highlighted the structural infirmities in India’s insolvency regime.

Insolvency and Bankruptcy Code 2016 (IBC)

• Rationale: IBC Code was introduced to-
  • Consolidate all the existing laws related to Insolvency and Bankruptcy in India.
  • Simplify the process of insolvency resolution. 
• Deals with: All aspects of insolvency and bankruptcy of all kinds of companies, LLPs, Partnerships and Individuals. However, it does not deal with insolvency of banks.

Institutional Mechanism

• Insolvency Professionals:
  • to administer the resolution process
  • manage the assets of the debtor
  • provide information for creditors to assist them in decision making.
• Insolvency Professional Agencies to conduct examinations to certify the insolvency professionals.
• Information Utilities to report financial information of the debt owed to them by the debtor.
• Adjudicating authorities:
  • National Companies Law Tribunal (NCLT) for companies 
  • Debt Recovery Tribunal (DRT) for individuals. 
• Committee of Creditors (CoC):
  • Either decide to restructure the debtor’s debt by preparing a resolution plan or liquidate the debtor’s assets. 
  • However, such a decision has to be approved by at least 66% of the votes. (Earlier threshold: 75%).
• Insolvency and Bankruptcy Board:
  • to regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. 

Procedure- Insolvency Resolution Process (IRP)

Liquidation (Sale of Assets)

• It takes place if the Committee of Creditors (CoC) fails to come up with a resolution plan within the time limit of 330 days.

Issues in Insolvency Resolution in India

• Double burden for Tribunals:
  • National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) face the dual burden of handling corporate insolvencies under IBC and cases under Companies Act. 
• Not aligning with contemporary demands:
  • NCLT was conceived in 1999 based on Eradi Committee’s recommendations. However, it was operationalised in 2016.
  • NCLT’s structure reflects the economic realities of a bygone era. This leaves it ill-equipped to meet contemporary demands. 
• Inadequatestrength:
  • The sanctioned strength of 63 members divide their time across multiple benches.
  • Thus, NCLT has become a bottleneck for insolvency resolutions and corporate transactions such as mergers and amalgamations.
• Delay in functioning:
  • Several NCLT benches do not operate for the full working day, even when not tasked with handling cases from other benches. As a result, delays have worsened. 
  • According to the Insolvency and Bankruptcy Board of India (IBBI), average time for insolvency resolutions increased to 716 days in FY2023-24, up from 654 days in FY2022-23. 
• Lack of domain experience:
  • The current method of appointment ignores the need for domain experience. Members often lack the domain knowledge required to understand the nuanced complexities involved in high-stakes insolvency matters.
  • This creates a paradox where an institution tasked with resolving complex cases is hindered by a lack of specialized knowledge. (Supreme Court in the Jet Airways case).
• Institutional inefficiency:
  • There is no effective system in place before the NCLTs for urgent listings. The Supreme Court has highlighted a growing tendency among NCLT & NCLAT members to ignore or defy its orders.
    • This threatens the very foundation of India’s judicial hierarchy.
  • This impacts both institutional efficiency as well as institutional integrity.
• Sparse use of alternatives:
  • The limited use of alternative dispute settlement methods adds to the problems of an already overworked system.

Way Forward: Reform proposals

• Mandatory mediation: The initiative for mandatory mediation prior to the submission of insolvency applications.
• Hybrid model:There is the need for a hybrid model that values judicial experience and domain expertise. 
• Specialised benches:
  • Creation of specialised benches for different categories of cases could enhance both efficiency and expertise. This also ensures that mergers and amalgamations are cleared in time.
• Proper Infrastructure:
  • Adequate courtrooms and a qualified, permanent support staff are critical to sustaining these institutions within the broader economic framework. 

India’s insolvency regime must evolve beyond mere debt resolution to serve as a proactive driver of economic rejuvenation, especially as the country aims to attract greater foreign investment. The time for a bold reimagining is now.