The low-resolution rate of insolvency cases is a cause for concern, as it affects not only the distressed company but also its creditors, employees, and other stakeholders. A comprehensive approach to insolvency reforms is required to address the challenges faced by resolution professionals, provide clarity in the law, and improve the infrastructure. It is only by addressing these issues that the insolvency process can be made more efficient and effective in resolving distressed companies.
Introduction
Insolvency is a legal process that allows struggling companies to restructure or sell off their assets to repay their debts. In India, the Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to provide a swift and effective resolution for distressed companies. However, a recent report by the Insolvency and Bankruptcy Board of India (IBBI) shows that only 15% of insolvency cases reached a resolution in the October-December quarter of 2022. This article delves into the reasons behind this abysmal success rate.
Lack of Timely Filing
The IBBI report revealed that out of the 1,256 cases filed under the IBC in Q4 2022, only 187 were resolved. One of the primary reasons for this low-resolution rate is the lack of timely filing by companies.
Many firms wait until the last minute to file for insolvency, leaving little time for resolution before the company’s assets are completely exhausted. This delay in filing also leads to a backlog of cases, making it difficult for resolution professionals to keep up.
Challenges Faced by Resolution Professionals
Another reason for the low-resolution rate is the numerous challenges faced by resolution professionals. These professionals are responsible for managing the company’s assets, finding buyers for the assets, and overseeing the entire resolution process.
However, they often face resistance from stakeholders, delays in court proceedings, and a lack of cooperation from the company’s management, which can hinder the resolution process.
Lack of Clarity in the IBC
The IBC was introduced to provide a clear framework for insolvency resolution, but there are still several ambiguities in the law. For instance, there is no clarity on how to deal with cross-border insolvency cases or how to prioritize the claims of different creditors.
This lack of clarity has resulted in several legal challenges, which can delay the resolution process.
Insufficient Infrastructure
The resolution process also suffers from insufficient infrastructure, which can impede the progress of resolution professionals. For instance, there is a shortage of insolvency professionals, and the existing professionals are overburdened with work.
Moreover, there are only a limited number of National Company Law Tribunal (NCLT) benches to handle insolvency cases, resulting in delays and backlogs.
Need for Holistic Reforms
The low-resolution rate highlights the need for holistic reforms to the insolvency process. This includes addressing the challenges faced by resolution professionals, providing clarity in the IBC, and investing in the infrastructure required to handle insolvency cases efficiently.
The government can also consider incentivizing companies to file for insolvency early, providing a conducive environment for distressed companies to restructure and revive themselves.
