A code for the broke

One of the main issues with the erstwhile Board for Industrial and Financial reconstruction (BIFR) was that the cases were taking ages to be resolved. During its life of 29 years, BIFR has managed to turn around some companies but a significant number of sick companies managed to turn only sicker.

The Government dissolved it in 2016 and replaced it with the National Company Law Tribunal (NCLT). The NCLT needed an Act to commence its work; after some delay, the Government gave it the freshly minted Insolvency and Bankruptcy Code (IBC).

The IBC’s preamble states it has been enacted to consolidate and amend the laws on reorganisation and insolvency resolution of corporates, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance interests of all stakeholders... and to establish an Insolvency and Bankruptcy Board of India.

Time lines

A cursory reading of the Code suggests a lot of importance has been given to time frames to ensure speedy resolution. The Section 5(14) states that insolvency resolution process period means the period of 180 days beginning from the insolvency commencement date and ending on the 180th day.

Section 7(4) mandates the adjudicating authority to ascertain defaults within 14 days from the receipt of the application. Section 12 (1) states that the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.

But, in case of delays, the resolution professional shall file an application to the adjudicating authority to extend the period of the corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 75 per cent. Section 16 (1) empowers the adjudicating authority to appoint an interim resolution professional within 14 days from the insolvency commencement date.

Section 22 (1) states the first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors. Section 56(1) states that the fast track corporate insolvency resolution process shall be completed within 90 days from the insolvency commencement date.

Despite giving so much importance to timing, the insolvency resolution process is swamped by litigation especially where prized assets are involved. The resolution process for Binani Cement best illustrates this; almost every day, the Kolkata bench of the NCLT is admitting petitions challenging the process.

Previous frauds have suddenly come to light, the bid of the winning bidder was bettered by another bidder and the independence of the resolution professional has been questioned. Going by trends, this is set to be a long-drawn out litigation battle. Such applications have also been filed with other benches of the NCLT in other cases.

A common criticism against resolution professionals is they seem to be favouring only secured creditors at the cost of unsecured creditors. As every insolvency process is different, the resolution professional needs to ensure that all creditors get a slice of whatever is left of the cake. One of the reasons for the current spate of litigation could be that some prized assets are up for auction. Once the marquee assets are sold, resolutions should be faster and less litigous.

The writer is a chartered accountant

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