Under this mechanism, creditors and debtors can reach an informal agreement on the plan to resolve a bankruptcy case and then approach the NCLT to quickly admit cases, one of the persons said.
The details will be finalised after broader stakeholder consultations. “The government has studied the best practices of several jurisdictions and a similar, if not the same, insolvency mechanism is followed in the UK,” said an official aware of details. “Various aspects and structures of the planned framework are being examined and a final decision would be taken in due course.”
The Insolvency and Bankruptcy Board of India (IBBI) has set up a panel under its whole-time member Sudhaker Shukla to firm up a ‘regulatory approach’ for the new fast-track resolution process under the IBC. The panel comprises senior bankers, a former central bank official, and an insolvency expert. The Corporate Insolvency Resolution Process (CIRP) mandated by the Insolvency and Bankruptcy Code (IBC) has seen lengthening delays amid rising legal challenges and a shortage of NCLT benches.
The new framework and the CIRP will coexist under the overarching IBC.
The existing management of stressed firms may be allowed to continue until resolution is complete. This is expected to reduce litigation in the insolvency admission and resolution process and also ease the workload of the adjudicating authority.
The proposal, which would require amendments to the IBC, was not part of the draft amendments to the code that the ministry of corporate affairs (MCA) had put out in January to seek stakeholder comments.Another person said the creditor-led resolution approach would differ from the pre-packaged scheme, which too, involves an informal arrangement between the lender and the defaulter for the insolvency admission process.
While the pre-pack framework currently applies to only micro, small and medium enterprises, the creditors-led resolution would be for all companies.
Moreover, unlike pre-pack, it could retain reasonable restrictions on bidding for assets by defaulting promoters, especially the wilful defaulters, as currently applicable to the CIRP under Section 29A of the IBC.
“Such a framework will enable all stakeholders to understand each other’s concerns with clarity and resolve the same through discussions,” said Yogendra Aldak, partner at Lakshmikumaran & Sridharan Attorneys.
Ruby Singh Ahuja, senior partner at law firm Karanjawala & Co, said it would offer more avenues for resolving bad debt but called for safeguards in the process. “Adequate steps would have to be taken to ensure that this move does not lead to an increase in dubious transactions,” Ahuja said.
Time-consuming process
According to IBBI data, the 611 bankruptcy cases resolved under the IBC until December 2022 took, on average, 482 days, barring the time excluded by the NCLT.
The IBC stipulates a maximum of 270 days to resolve corporate bankruptcy.
Creditors recovered ₹2.53 lakh crore, or 30.4% of their admitted claims, in these 611 cases. To be fair, in the case of 516 companies, the realisation was 84% against the fair value worked out when they were admitted for CIRP.
Speaking at the Economic Times Awards for Corporate Excellence 2023, finance and corporate affairs minister Nirmala Sitharaman last month acknowledged that delays in filing vacancies at the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are impacting the resolution process.