Editorial. IBC needs systemic rather than legal reforms

The recently tabled Standing Committee ‘action taken’ report on the working of the Insolvency and Bankruptcy Code makes suggestions at two levels: first, on the functioning of the agencies involved in the process such as the National Company Law Tribunal (NCLT), the resolution professionals, the Insolvency and Bankruptcy Board of India; and second, on the need to review the “design of the code” itself. The latter finds a brief and almost cryptic mention towards the end.

Indeed, it is worth wondering whether whether the problems that beset the IBC process — delays in resolution and poor value realisation — require changes in the Code itself. The IBC has been amended on many occasions since its inception in 2016, and the necessary provisions would appear to be in place to achieve the desired improvement. For now, the priority should lie in fixing the governance aspects. The report makes pertinent points on the bench strength of the NCLT. It credits the Centre with plugging vacancies at the NCLT, saying that the bench strength today is over 90 per cent of its sanctioned strength of 62 members. But since there are “perpetual vacancies” on account of retirement and completion of members’ terms, the sanctioned strength needs to be raised — to address “the huge pendency of more than 20,000 cases in NCLT at the end of every year”. However, the NCLT is hobbled not just by bench strength issues, but also by its style of working. Its members, judicial and technical, could do with more domain knowledge of bankruptcy matters in an evolving business landscape — such as the metrics of valuing service-sector companies. A recruitment process that encourages young professionals, given the technical and legal expertise in bankruptcy in India, could infuse the NCLT with a sense of contemporaneity.

Dedicated NCLT benches to deal with bankruptcy matters are needed, given the expertise involved vis-a-vis corporate affairs on the whole (now benches hear all corporate cases) as well as the sheer number of bankruptcy cases. With specialists in place, members need not be slotted as ‘judicial’ and ‘technical’. In the US, for instance, there is just one judge on every bankruptcy bench. India can move towards that set-up so that cases can be dealt with swiftly and correctly. Appeals for appellate review can come down; delays at the admission stage can be addressed.

The report says that the competence of resolution professionals, who are expected to run the affairs of the ‘sick’ company till it is revived or liquidated, prepare an ‘information memorandum’ on its status and scout for buyers, leaves much to be desired. While the IBBI does crack down on RP malpractices, a capacity-building body that assesses them periodically is needed. These steps could bring down resolution time from over 650 days (against the legal limit of 330 days), improve valuations and raise revival prospects of concerns vis-a-vis liquidation.

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