Delays in Corporate Insolvency

• 09 Aug 2021

Why in News

Recently, the Parliamentary Standing Committee on Finance has noted the delays in corporate insolvency under the Insolvency and Bankruptcy Code (IBC), 2016.

• It has called out the Ministry of Corporate Affairs (MCA) on persistent vacancies in National Company Law Tribunals (NCLTs).
• Earlier, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha which introduces an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) called the Pre-packaged Insolvency Resolution Process (PIRP).

Insolvency and Bankruptcy Code

• It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.
• It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.

Key Words

• Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.
• Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.

Key Points

• Major Concerns:
  
  • Vacancies in NCLT:
    
    • The combined strength of the current NCLT benches around the country is currently only 29 members against the total sanctioned strength of 63 members.
  • Delays in Approvals:
    
    • The committee noted that delays in the admission of insolvency cases by NCLTs and the approval of resolution plans were the key reasons behind the non-adherence of timelines under the IBC.
    • Delays on the part of the NCLT in admitting cases allowed defaulting owners the opportunity to divert funds and transfer assets.
  • Decisions Challenged:
    
    • A number of high profile cases under the IBC saw multiple decisions being challenged by stakeholders. Many of these appeals are frivolous attempts to slow down insolvency proceedings.
  • Delayed Plans:
    
    • Cases in which creditors have evaluated resolution plans submitted after the specified deadline would disincentive bidders from bidding within prescribed timelines and that such plans also contribute to delays and value destruction.
• Recommendations:
  
  • Timely Action:
    
    • NCLT should be required to admit a defaulting company into insolvency proceedings and hand over control to a resolution professional within 30 days.
  • Ministry should take Responsibility:
    
    • The MCA, as the nodal ministry, should take greater responsibility to streamline the operational processes in NCLT/National Company Law Appellate Tribunal (NCLAT) while constantly monitoring and analysing the workflow, disposal and outcomes with regard to resolutions, recoveries, time taken, etc.
  • Amendment to IBC:
    
    • The IBC be amended to provide MSMEs, which are operational creditors under the IBC, with greater protection in the current economic environment.
      
      • The IBC currently prioritises financial creditors over operational creditors.
      • Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security.
      • Operational creditors are those whose liability from the entity comes from a transaction on operations.

National Company Law Tribunal

• About:
  
  • The Central Government constituted National Company Law Tribunal (NCLT) under section 408 of the Companies Act, 2013 in 2016.
  • It has been set up as a quasi-judicial body to govern the companies registered in India and is a successor to the Company Law Board.
  • It consolidates all powers to govern the companies registered in India.
    
    • With the establishment of the NCLT and NCLAT, the Company Law Board under the Companies Act, 1956 has now been dissolved.
  • It is bound by the rules laid down in the Code of Civil Procedure and is guided by the principles of natural justice, subject to the other provisions of this Act and of any rules that are made by the Central Government.
  • The Tribunal and the Appellate Tribunal has the power to control its own procedure.
• Appeals:
  
  • Appeal from order of Tribunal can be raised to the NCLAT. Appeals can be made by any person aggrieved by an order or decision of the NCLT, within a period of 45 days from the date on which a copy of the order or decision of the Tribunal is received by the Appellant.

National Company Law Appellate Tribunal

• About:
  
  • The NCLAT was constituted under Section 410 of the Companies Act, 2013 to hear appeals against the orders of the National Company Law Tribunal (NCLT).
  • It is also the appellate tribunal for orders passed by the NCLT(s) under Section 61 of the IBC, 2016, and for orders passed by the Insolvency and Bankruptcy Board of India (IBBI) under Sections 202 and 211 of the IBC.
• Appeal:
  
  • Any person aggrieved by any order of the NCLAT may file an appeal to the Supreme Court.

Source: IE