Insolvency code has strayed from intent: Parliament panel

Committee seeks IBC review; flags low recovery rates, delays, vacancies in NCLTs

August 03, 2021 11:01 pm | Updated August 04, 2021 05:14 am IST - NEW DELHI

Guiding principle: The panel suggests a benchmark for the quantum of such ‘haircuts’ to be taken by creditors, in line with global standards.

Guiding principle: The panel suggests a benchmark for the quantum of such ‘haircuts’ to be taken by creditors, in line with global standards.

The Parliament’s Standing Committee on Finance has sought a review of the design and implementation of the Insolvency and Bankruptcy Code (IBC) as it has deviated from the original intent and questioned the low recovery rates, long delays in the resolution process and the high number of vacancies in the National Company Law Tribunals (NCLTs).

The panel, chaired by MP Jayant Sinha, stressed that the low recovery rates under the IBC ‘with haircuts as much as 95% and the delay in resolution process with more than 71% cases pending with NCLT for more than 180 days, clearly point towards a deviation from the original objectives of the Code intended by Parliament’.

In a report tabled on Tuesday on the ‘Implementation of IBC — pitfalls and solutions’, the Committee noted that the Code has undergone six amendments since its introduction in 2016, but the operationalisation of these changes ‘may have altered or even digressed from the basic design of the statute’.

Calling for a thorough evaluation of the extent of fulfilment of the Code’s original aims, the panel said the fundamental aim of the statute was to secure creditor rights so as to reduce borrowing costs with the reduction of risks.

“Greater clarity in purpose is needed with regard to strengthening creditor rights through the mechanism devised in the Code, particularly considering the disproportionately large and unsustainable ‘haircuts’ taken by the financial creditors over the years,” it observed, suggesting a benchmark be put in place for the quantum of such “haircuts” to be taken by creditors, in line with global standards.

While the Corporate Affairs Ministry responded by saying that ‘the commercial wisdom of the Committee of Creditors (COC) is supreme’ in IBC cases, the Committee said there was an ‘urgent need to have a professional code of conduct for the COC’ to define and circumscribe their decisions.

Expressing apprehensions over fresh graduates being appointed as Insolvency Resolution Professionals (RPs), the committee said it is doubtful about their competency in handling cases of huge and complex corporations and flagged ‘numerous conduct issues’ in their functioning. Disciplinary action has been taken in the case of 123 RPs out of 203 inspections conducted so far, it pointed out.

On the functioning of NCLTs, the adjudicating authority under the IBC, the Committee said their tardy admission of cases and approvals of resolution plans were the main reasons for delays in insolvency resolution. Expressing ‘deep concern’ about the NCLT currently functioning without a regular President and 34 members short of its sanctioned strength of 62, the panel said this issue has plagued the tribunal for years and the vacancies must be filled ‘without any further delay’.

Responding to these concerns, the Secretary, Corporate Affairs Ministry said that active steps were being taken to fill the more than 50% vacancies, which was attributed to ‘a lot of retirements’ happening in May and June this year. “In the National Company Law Appellate Tribunal, against the sanctioned Bench strength, we have vacancy of Chairperson and two Members only,” the Secretary said. The NCLAT has two benches with an approved strength of a chairperson and 11 members.

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