10 Aug 2021 Elementor #11342

Delays in corporate insolvency:

Context:

The Ministry of Corporate Affairs has been chastised by the Parliamentary Standing Committee on Finance for chronic vacancies in National Company Law Tribunals (CLTs), which are causing delays in corporate insolvency under the Insolvency and Bankruptcy Code (IBC).

About:

Observation of Parliamentary Standing Committee on Finance:

• The present NCLT benches across the country have a combined strength of just 29 members, compared to a total sanctioned strength of 63.

• Delays in the admission of insolvency cases by NCLTs and the approval of resolution plans, according to the committee, were the main causes for the IBC’s timeframes not being met.

• As of March 31, 2016, 79 percent of all IBC cases had been outstanding for more than 270 days, the maximum time allowed for a settlement procedure under the IBC.

• The NCLT’s delays in admitting cases allowed defaulting owners to shift cash and transfer assets, according to the committee, and the NCLT should be compelled to accept a defaulting business into bankruptcy proceedings and give over management to a resolution expert within 30 days.

• “The MCA, as the nodal ministry, should play a stronger role in streamlining the operational procedures in NCLT/NCLAT while continuously monitoring and assessing the workflow, disposition, and outcomes in terms of resolutions, recoveries, time spent, and so on,” the committee stated.

Main issues with bogus lawsuits:

• Multiple rulings were challenged by stakeholders in a number of high-profile cases under the IBC, including those of Essar Steel, Bhushan Power & Steel, and Binani Cement. Many of these appeals have been characterized as frivolous attempts to stall insolvency procedures, according to experts.

• The Standing Committee further stated that situations in which creditors have assessed resolution plans filed after the set deadline may discourage bidders from bidding within the allowed deadlines, as well as lead to delays and value destruction.

• The NCLT instructed the committee of creditors (CoC) to review the resolution plan filed by Liberty House Pte in the bankruptcy proceedings of Bhushan Power & Steel Ltd after the CoC declined to consider the plan since it was submitted after the deadline for resolution plan filing.

• “These bidders typically wait for the H1 bidder to become public before attempting to outbid it with an unsolicited offer submitted after the specified deadline., As a result, genuine bidders are discouraged from bidding at the appropriate time.The overall process is vitiated, and there are significant delays leading to further value erosion,” the committee stated.

Committee’s major suggestions:

• The committee suggested that the IBC be modified to prevent frivolous litigation and non-compliance with the IBC’s deadlines, which can result in asset loss.

• The committee suggested that the IBC make it illegal to submit resolution proposals after the deadline has passed, and that IBC recoveries be compared to a worldwide standard.

• The committee also suggested that the IBC be modified to give more protection in the present economic climate to micro, small, and medium businesses (MSMEs), which are operational creditors under the IBC. Financial creditors are presently given priority under the IBC over operational creditors.

Insolvency and Bankruptcy Code:

• The IBC was adopted in 2016, replacing a number of regulations with the goal of streamlining and speeding up the process of resolving failing enterprises.

• The Code also brings together elements from existing legislation to provide a single venue for debtors and creditors of all types to address insolvency.

• According to the regulation, a stressed company’s resolution procedure must be completed in a maximum of 270 days.

• The Code establishes a number of organisations to aid insolvency settlement. These are as follows: 

  • Insolvency Professionals: It is recommended that a specialised cadre of licenced professionals be established. These specialists will oversee the settlement process, handle the debtor’s assets, and give creditors with information to help them make decisions.

  • Professional Agencies for Insolvency: Insolvency practitioners will be registered with professional agencies for insolvency. Exams are conducted by the agencies in order to certify insolvency experts and to impose a code of behaviour for their work.

  • Creditors will disclose financial information on the debt due to them by the debtor to information utilities. Records of debt, liabilities, and defaults will all be part of this data.

  • The National Corporations Law Tribunal (NCLT) for companies and the Debt Recovery Tribunal (DRT) for individuals shall judge the procedures of the resolution process. Authorities will be responsible for approving the start of the resolution process, appointing the insolvency professional, and approving the creditors’ ultimate decision.

  • The Insolvency and Bankruptcy Board will oversee insolvency experts, professional agencies, and information utilities established under the Code. Representatives from the Reserve Bank of India, as well as the Ministries of Finance, Corporate Affairs, and Law, will sit on the Board.

National Company Law Tribunals (NCLTs):

• • The National Company Law Tribunal (NCLT) is an Indian quasi-judicial organisation that hears cases involving corporations.
  • The company was founded on June 1st, 2016. (Companies Act, 2013)

  • Structure:

    • The NCLT has eleven benches: two in New Delhi (one of which is the primary bench), one in Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata, and Mumbai, and one each in Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata, and Mumbai.

• The National Company Law Tribunal (NCLT) has broad adjudication powers under the Companies Act of 2013, which include:

• All proceedings pending before any District court or High Court under the previous act (Companies Act, 1956) Cases pending before the Board for Industrial and Financial Reconstruction (BIFR), including those pending under the Sick Industrial Companies (Special Provisions) Act, 1985 Cases pending before the Board for Industrial and Financial Reconstruction (BIFR)

• Fresh procedures related to allegations of oppression and mismanagement of a business, winding up of corporations, and all other powers provided under the Companies Act are underway before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).

• Furthermore, the newly adopted Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code) gives the NCLT broad authority to rule on the “insolvency resolution procedure” and corporate debtor liquidation

Source: The Indian Express

Syllabus: GS 3 (Economy)

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