• Arun Raghuram Mahapatra, Akshat Verma

Causes of Inordinate Delays in the IBC and the Elixir to Cure Them - Part I

[Akshat and Arun are students at Rajiv Gandhi National University of Law, Patiala, Punjab.]


Introduction


The Insolvency and Bankruptcy Code 2016 (IBC) was drafted to strengthen and revise the laws pertaining to insolvency resolution in India. Its main aim is to ensure a time-bound process for maximizing the value of assets, promoting ease of doing business, enhancing the accessibility of credit, and balancing the interests of all the relevant stakeholders.


However, even after the passage of five and a half years since the code coming into force on 28 May 2016, the scenario is looking grim. The 32nd report of the Ministry of Corporate Affairs Standing Committee on Finance on the 'Implementation of Insolvency and Bankruptcy Code- Pitfalls and Solutions' represented a very dire status quo concerning the pendency of applications before the adjudicating authority. The committee observed that the average time to resolve insolvency is 1.6 years in 2020 which is way past the prescribed time limit of 330 days. It also noted that low recovery rates with delays in the resolution process point towards a deviation from the original objectives of the code. Recently, in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Another, the Supreme Court once again urged the NCLT and NCLAT to adhere to the time limit stipulated under the IBC and clear pending resolution plans within the deadline of 330 days.


In this article, we shall try to analyze and scrutinize some of the primary reasons for the delay in the insolvency process. We would also try to propose solutions to those problems in a bid to rescue the IBC from becoming a lost cause like its predecessors due to inordinate delays.


Insolvency Professionals: The Under-Developed Foundation


Insolvency professionals are certified persons who are enrolled with an insolvency agency and are involved in the dissolution operation of insolvent individuals, businesses, limited liability partnerships, or other partnerships. These specialists have the authority to act on behalf of bankrupt businesses, persons, and other entities.


These professionals have a critical function in the liquidation of an entity's assets and other settlement activities during a bankruptcy situation. Their primary function is to assess the financial position of a business, company, or partnership organization. If they believe it is possible to restart the firm’s operations after careful analysis, they employ all their efforts and techniques to resolve its distress. To be succinct, they are the technical backbone of any insolvency resolution process.


Hence, it can be inferred from the above facts that the dearth of insolvency professionals can cause a severe backlog in the insolvency resolution processes around the country. And in India, the same has been a persistent problem for many years, as even now, there are only 2,977 registered (with valid authorisation for assignment) insolvency professionals. While this number might seem decent, it is not comparable to the number of cases pending before the NCLT (there are 13,170 IBC cases pending before the NCLT as of 3 August 2021).


There are two routes to gain eligibility for the Limited Insolvency Examination (LIE) and subsequent procedures that lead to the final certification by the Insolvency and Bankruptcy Board of India (IBBI). And it is in these eligibility routes where complications start cropping up.


The first eligibility process is for the professionals (Advocates, Company Secretariats, Chartered Accountants) who have the requisite experience. This procedure is very long and stringent as it mandates a minimum of 10 years of experience for applicants in their respective fields. The process is even more arduous for simple graduates, requiring a whopping 15 years of managerial experience. As one can see, this excessive demand for work experience is unreasonable as in-any-event an applicant has to give the LIE afterward to prove their knowledge. Furthermore, most experienced professionals are not likely to switch professions and become Insolvency Professionals as they might already be well-settled in their respective fields.


The government, too, identified the shortcomings of the first route and introduced a more lenient pathway in the form of the Graduate Insolvency Programme (GIP) course in 2019. The GIP offers a shortcut to bypass the experience gap as it allows young aspiring professionals to apply for LIE right after the 2-year course. However, this route is also not devoid of problems. The problem, in this case, is the minimalistic intake of GIP (52 students yearly intake in Indian Institute of Corporate Affairs (IICA) since 2019, and an additional 40 students intake in National Law Institute University (NLIU), Bhopal starting in 2021). Hence, due to the sparse number of seats, it does not efficiently fast-track the process of creating more insolvency professionals.


In response to the problems highlighted above, a few suggested solutions are as follows:-



The Dearth of Information Utilities: A Need for Fresh Air


Information Utilities (IUs) are organizations that behave as databases of financial information which receive, authenticate, maintain and deliver financial information pertaining to a debtor. Their information network stores financial data like borrowings, defaults, security interests, etc. They provide the aforementioned information to businesses, financial institutions, adjudicating authorities, insolvency professionals, and other relevant stakeholders. This kind of data transfer aims to facilitate and speed up the insolvency resolution process. The definition, eligibility, and registration procedures of an IU are codified in Section 3(21), Section 209, and Section 210 of the IBC, respectively.


IUs have an indispensable role in limiting the time required in the Insolvency Resolution processes. Without them, there would not be a one-stop solution for all insolvency-related information leading to even more elongated periods for the resolution process. Furthermore, the authenticity of data cannot be verified without IUs. Hence, a dearth of IUs in India is a grave concern.


The National e-Governance Services (NeSL), India's first and the only registered IU under the IBBI, got its registration in 2017. Despite there being a detailed ruleset for new registrations under the IBBI and sufficient scope for new players to enter the field, there have been no new registrations since the maiden one. On a closer look, the possible explanations for the lack of registrations can be traced to the eligibility criteria of registration for the IUs.


The eligibility criteria for the IUs mandates that a company must have a minimum net worth of INR 50 crores, which is five times the minimum amount needed for a company to be identified as large-scale in India. This high economic hurdle automatically eliminates small-scale companies, which otherwise could have been potential IUs. G-Square, Realbox, Aureus Analytics, and other top emerging data analytics companies (having net worth less than INR 50 crores) which could have hoped to diversify and become an IU cannot do so because of the said restriction. Additionally, the criteria for eligibility also says that the sole object of the company should be to provide core services and other services under the IU Regulations and discharge such functions as may be necessary for providing these services. Effectively, this means that the only way for the company to make turnover is by charging fees for the services they can provide as an IU. The conclusion that can be drawn from this is that only companies that already deal with data management and core services would be interested in becoming an IU. The companies that deal with other areas would not find it profitable to diversify and become an IU. For example, a well-established company like Reliance or Tata, having chains of businesses, cannot enter into this field directly, and the only way they can enter is by creation/investment in a new and independent body. The creation of an independent body is a cumbersome process, and this restriction could result in companies going into the general data analytics/management sector rather than the niche IU sector. These companies would be interested in the creation of an independent body only if the profits are worth their time and effort.


In response to the problems highlighted above, a few suggested solutions are as follows: -

  • The minimum net worth criteria could be reduced to allow more players to come into the IU field. Start-ups and medium-scale companies are the future of India, and they should be encouraged to join this field as well.

  • To make the role of an IU profitable for companies, the base charges/fees applied on core services could be slightly hiked. Furthermore, the fees can be substantially hiked for subsequent submissions, revisions, or error rectification. Steps such as these would not only create greater profits but would also result in a more holistic verification of data, as for every error, there would be a penalty in the form of hiked prices. It would also lead to lesser erroneous/wrong information, which is the primary cause of delay in insolvency proceedings.

That concludes this part of the two-part blog. The next part of the post discusses the need for judicial delays pertaining to the NCLT and NCLAT benches in the country and concludes the article.

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