A recent observation by the Parliamentary Standing Committee on Finance has highlighted significant delays in corporate insolvency under the Insolvency and Bankruptcy Code (IBC), 2016. The committee has criticised the Ministry of Corporate Affairs (MCA) for the continual vacancies in National Company Law Tribunals (NCLTs). This report comes in the wake of the Insolvency and Bankruptcy Code (Amendment Bill), 2021, submitted to the Lok Sabha. This bill proposes a new insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs), known as the Pre-packaged Insolvency Resolution Process (PIRP).
Insolvency and Bankruptcy Code Explained
The Insolvency and Bankruptcy Code, implemented in 2016, consolidates various statutes that pertain to the insolvency resolution of commercial enterprises. The IBC initiates streamlined and expedited insolvency procedures that aid creditors, such as banks, to recover dues and mitigate bad loans, a significant burden on the economy.
Understanding Key Terms
Insolvency refers to circumstances wherein individuals or corporations are unable to pay their outstanding debts. Bankruptcy, on the other hand, is a situation where a court having proper jurisdiction declares an individual or an entity insolvent and passes appropriate orders to rectify it and safeguard the rights of the creditors. It is a formal declaration of one’s incapability to pay off debts.
Key Points and Major Concerns
There are several alarming concerns about current insolvency proceedings. Firstly, there is a significant shortfall of members in the NCLT, with only 29 present members against the sanctioned strength of 63 members. Secondly, the committee observed that delays in admitting insolvency cases by NCLTs and sanctioning of resolution plans are the primary reasons behind the non-adherence to timelines under the IBC. These delays give defaulting owners a window to divert funds and transfer assets.
Evidence of Challenged Decisions and Delayed Plans
Many high-profile cases under the IBC have seen multiple decisions being challenged by stakeholders. Often these appeals are frivolous efforts to decelerate insolvency proceedings. Cases where creditors have evaluated resolution plans submitted following the set deadline deter bidders from bidding within prescribed timelines, contributing to delays and value destruction.
Recommendations for Improvement
Among the recommendations made, it was suggested that NCLT should admit a defaulting company into insolvency procedures within 30 days and hand over control to a resolution professional. The MCA, being the primary ministry, should streamline the operational processes in both NCLT/National Company Law Appellate Tribunal (NCLAT), monitoring and analysing the workflow, disposal, and outcomes consistently. Amending the IBC to provide MSMEs with increased protection is also vital, as the current IBC prioritises financial creditors over operational creditors.
About National Company Law Tribunal
The National Company Law Tribunal (NCLT), established under Section 408 of the Companies Act, 2013 in 2016, is a quasi-judicial body governing the companies registered in India. When established, the Company Law Board according to the Companies Act, 1956 was dissolved. Appeals from orders of the NCLT can be made to the NCLAT within 45 days from receiving a copy of the order or decision.
About National Company Law Appellate Tribunal
The National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013 to hear appeals against orders of the National Company Law Tribunal (NCLT). Any person aggrieved by any order of the NCLAT can file an appeal to the Supreme Court.
