After about half a dozen amendments in five years, the Insolvency and Bankruptcy Code (IBC) seems to have deviated from its original objectives, thanks to inordinate delay in resolution and the low recovery rate with haircuts running up to 95% in few cases, the Parliamentary Standing Committee on Finance said in a report.
As many as 13,170 insolvency cases involving claims of Rs 9 lakh crore are awaiting resolution before the National Company Law Tribunal (NCLT), the report tabled in the Lok Sabha on Tuesday said.
About 71% of these cases have been pending beyond 180 days, it said, as it called for a review of the NCLT’s performance. The IBC sets a time frame of 180 days to resolve stress of a firm, which can be extended by another 90 days with the NCLT approval.
“…the Committee are of the opinion that actual operationalisation of amendments made so far may have altered and even digressed from the basic design of the statute and given a different orientation to the Code not originally envisioned,” the panel, headed by former minister of state for finance Jayant Sinha, said.
A greater clarity in purpose is required with regard to bolstering creditor rights, particularly considering the “disproportionately large and unsustainable ‘haircuts’ taken by financial creditors over the years”, the report said. It also suggested that a benchmark for haircuts be set, in sync with global standards.
Creditors have realised an average of 39% of their admitted claims as of March 2021. However, the recovery under the IBC is still much better than that via other mechanisms, including Lok Adalats, DRTs and Sarfaesi Act.
While the government says the commercial wisdom of the committee of creditors (CoC) is supreme, the panel has suggested that a professional code of conduct for the CoC be put in place, “which would define and circumscribe their decisions, as these have larger implications for the efficacy of the Code”.
The panel also called for allowing flexible resolution plans, wherein multiple companies can take over the assets of the stressed company, instead of one bidder acquiring all the assets. At the same time, the panel flagged risks of procedural uncertainties from unsolicited and late bids. Analysts say often late bids are submitted by either ineligible promoters or their proxies to delay the process. “IBC should be amended so that no post-hoc bids are allowed during the resolution process,” the panel said.
While the Rajya Sabha on Tuesday cleared the amendments to the IBC to replace an Ordinance that introduced a pre-pack insolvency scheme for MSMEs, the panel suggested that such a scheme needs to be launched for large companies as well.
It also recommended that the NCLT mechanism be overhauled to expedite resolution and reduce the time taken to admit a case. Seeking an urgent filling up of posts at various benches of NCLT, the report highlighted that the tribunal is short of 34 members (judges) from the sanctioned strength of 62.
The panel also highlighted that often NCLT judgments are overturned by the NCLAT or the Supreme Court, flagging the lack of quality verdict by the tribunals. To overcome this, it has suggested that only high court judges be made members of the NCLT.