Hindu Editorial Analysis : 20-January-2025

The Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to streamline India’s insolvency processes. Its primary goal is to ensure timely resolutions and maximize asset values for creditors. However, as the law has developed, several issues have surfaced that affect its efficiency and effectiveness. These include procedural delays, institutional limitations, and declining recovery rates.

Key Challenges in the IBC Implementation

The implementation of the IBC has faced numerous hurdles, which have raised concerns regarding its success in addressing insolvency cases effectively.

  • Procedural Delays:
    One of the major challenges is the delay in the insolvency resolution process. The National Company Law Tribunal (NCLT), which oversees insolvency proceedings, has become a bottleneck. With only 63 members, many of whom work across multiple benches, the NCLT struggles to handle the increasing caseload.
    • Average time for insolvency resolutions has risen to 716 days in FY2023-24, far beyond the stipulated 330-day timeframe.
    • Delays often result in asset value deterioration, which reduces the recovery for creditors.
  • Declining Recovery Rates:
    The effectiveness of the IBC is questioned as recovery rates have fallen. From 43% in 2019, the recovery rate dropped to 32% by September 2023, highlighting concerns over the process’s success in maximizing value for creditors.
  • Institutional Challenges:
    • Lack of Domain Expertise:
      Members of the NCLT often lack the domain expertise needed to understand the complexities of high-stakes insolvency matters.
    • Bureaucratic Inefficiencies:
      The absence of an effective system for urgent listings and the overreach of Registry staff adds further complexity to the resolution process.
  • Underdeveloped Credit Ecosystem:
    There is a lack of robust credit information systems and distressed asset markets, which impedes the resolution process.

Proposals for Improving the IBC

Several key reforms have been proposed to address these challenges and enhance the effectiveness of the IBC.

  • Enhancing Transparency and Efficiency:
    The Insolvency and Bankruptcy Board of India (IBBI) has suggested requiring registered valuers to submit comprehensive valuation reports for the entire debtor, rather than just for individual asset classes, to improve transparency.
  • Exploring Mediation:
    IBBI has also proposed the incorporation of mediation as an alternative dispute resolution method. This could help reduce the burden on judicial institutions and offer parties a quicker resolution option outside the court.
  • Pre-Packaged Insolvency for MSMEs:
    Expanding the pre-packaged insolvency framework, initially used for micro, small, and medium enterprises (MSMEs), could reduce delays and costs across sectors.
  • Resolution-Centric Approach:
    The IBC framework must prioritize resolution over liquidation. Emphasis should be placed on innovative restructuring strategies and providing incentives for bidders to keep businesses operational.

Learning from Global Best Practices

India can draw lessons from global best practices to improve the IBC. Countries like the USA and the UK use flexible insolvency frameworks that incorporate debtor-in-possession (DIP) financing and pre-packaged insolvency plans. Additionally, adopting the UNCITRAL Model Law on Cross-Border Insolvency can facilitate better coordination in cases involving international assets or creditors.

Why In News

The Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to streamline India’s insolvency processes, aiming for timely resolutions and maximization of asset value, while also providing a structured framework to promote transparency and accountability in corporate governance.

MCQs about The Insolvency and Bankruptcy Code (IBC)
  1. What was the primary aim of introducing the Insolvency and Bankruptcy Code (IBC) in 2016?
    A. To enhance the corporate governance standards in India
    B. To streamline India’s insolvency processes for timely resolutions and maximization of asset value
    C. To reduce the number of bankruptcies in India
    D. To simplify the process of liquidation for businesses
    Correct Answer: B. To streamline India’s insolvency processes for timely resolutions and maximization of asset value
    Explanation: The IBC was introduced with the goal of improving the insolvency resolution process, ensuring that insolvency cases are resolved in a timely manner and that the asset values are maximized for creditors.
  2. Which of the following has become a bottleneck in the insolvency resolution process under the IBC?
    A. Insolvency and Bankruptcy Board of India (IBBI)
    B. National Company Law Tribunal (NCLT)
    C. Registered Valuers
    D. Credit Information Systems
    Correct Answer: B. National Company Law Tribunal (NCLT)
    Explanation: The National Company Law Tribunal (NCLT) has become a bottleneck in insolvency cases due to its limited number of members and heavy caseload, leading to delays in resolution.
  3. What is one of the key concerns regarding the IBC process, as mentioned in the essay?
    A. High recovery rates from insolvency cases
    B. Delays in the resolution process
    C. Lack of government involvement
    D. Absence of cross-border insolvency mechanisms
    Correct Answer: B. Delays in the resolution process
    Explanation: The resolution process often faces significant delays, which stretch far beyond the stipulated timeframe, leading to asset value deterioration and reduced creditor recoveries.
  4. Which reform proposal aims to reduce delays and costs in the insolvency resolution process for specific sectors?
    A. Introducing mediation as an alternative dispute resolution method
    B. Expanding the pre-packaged insolvency framework to other sectors
    C. Increasing the number of NCLT members
    D. Strengthening the role of insolvency professionals
    Correct Answer: B. Expanding the pre-packaged insolvency framework to other sectors
    Explanation: The pre-packaged insolvency framework, which has already shown promise in the MSME sector, to other sectors to reduce delays and costs in the insolvency resolution process.

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