Procedural Clarity, Proposed Changes Will Make IBC More Effective
In a modern and dynamic market economy, laws and regulations must be regularly evaluated to improve outcomes. It is likely that changing market conditions require adjustment, or the experience of implementation could itself show gaps in regulation. The implementation of the Insolvency and Bankruptcy Code, 2016, is considered to be one of the biggest reforms in recent years, and it is worth noting that the government and the regulator, the Insolvency and Bankruptcy Board of India, have consistently worked to improve the bankruptcy framework over the years.
In this regard, the IBBI this week published a discussion paper on the various aspects of the workings of the committee of creditors, with the broader objective of improving procedural clarity. Implementing the proposals will improve transparency and reduce friction in resolution.
The Need for Procedural Clarity
As the discussion paper notes, the depth and detail of recording CoC meetings vary significantly, and the deliberations are not appropriately reflected in the record. The basis of commercial decisions is not always clear. This may lead to litigation and delays at later stages.
When decisions are made without clear documentation, they become vulnerable to challenge. Stakeholders who are unhappy with outcomes can question the process, the reasoning, the assumptions. This leads to litigation, and litigation leads to delays. And delays, in the context of insolvency, destroy value.
The bankruptcy framework requires CoCs to objectively evaluate resolution plans. But objectivity must be demonstrable. It is not enough for decisions to be rational; they must be seen to be rational, with a clear trail of reasoning that can be reviewed and challenged if necessary.
Proposed Measures to Improve Clarity
The paper, therefore, proposes measures to improve clarity. In addition to the present requirements, CoCs will be expected to record their deliberations on expected recovery compared to the fair and liquidation value. This is crucial because it forces the committee to explicitly consider what value is being recovered relative to what could be recovered in liquidation.
Further, it needs to record the adequacy of market discovery undertaken during the resolution process. This ensures that the committee has genuinely tested the market, that the resolution plan reflects fair value, and that there has been no collusion or insider dealing.
CoCs will also be expected to record the credibility of the resolution applicant and the certainty of the implementation of the resolution plan. A plan that looks good on paper but cannot be implemented is worthless. The committee must satisfy itself that the applicant has the capacity, the resources, and the intent to deliver.
The basic idea is to ensure that “the CoC’s approval of a resolution plan is demonstrably conscious, informed, and supported by recorded rationale.” Such improvement in the process will make the framework more robust.
Continuing Operations During CIRP
The paper further reinforces that continuing operations during the corporate insolvency resolution process must be guided by the expected value of outcomes and commercial prudence. This is an important principle. The resolution professional should not keep a business running simply for the sake of running it. There must be a commercial rationale, a reasonable expectation that continuing operations will preserve or enhance value.
Delayed Claims
The proposed changes have also sought to clarify the position with regard to delayed claims. Such claims categorised as acceptable by the resolution professional must be placed before the adjudicating authority within a week and before the CoC for its recommendation in terms of their treatment in the resolution plan.
It has been observed that, in some cases, such claims have not been presented before the adjudicating authority because of the absence of the recommendation of the CoC. This creates uncertainty and potential unfairness. The proposed timeline ensures that claims are processed promptly and transparently.
Exclusion of Related Operational Creditors
The paper further proposes the exclusion of related operational creditors from CoCs. This is a sensible measure to prevent conflicts of interest. Creditors who are related to the corporate debtor should not be making decisions about its fate.
The Deeper Problem: Capacity Constraints
The proposed changes will impart greater transparency and operational clarity to the insolvency resolution process, which in turn is expected to reduce delays. However, such changes will not be enough to make the desired level of difference.
The idea behind the IBC was that it would enable bankruptcy resolution at the earliest, which would help protect value in firms undergoing the process. However, that’s not been the case. As the latest quarterly newsletter of the IBBI showed, of the 1,376 CIRPs that had resulted in resolution plans by December last year, the average time taken was 619 days, against the envisaged maximum time frame of 330 days.
This is a staggering gap. The law envisages resolution in under a year; the reality is nearly twice that. And every extra day of delay erodes value, burdens stakeholders, and undermines the very purpose of the code.
The basic problem with the framework, as also highlighted by experts, is capacity constraint at the National Company Law Tribunal and National Company Law Appellate Tribunal. These institutions are overburdened, understaffed, and unable to process cases at the speed the law requires.
The Way Forward
Thus, in addition to improving the law, the government must also address the capacity issue. This means appointing more members to the NCLT and NCLAT, providing them with better infrastructure and support, and streamlining procedures to reduce the burden on the system.
A reasonably smooth exit path will not only reallocate capital efficiently but also encourage investment in general. When investors know that they can exit failed ventures without years of litigation and uncertainty, they are more willing to commit capital in the first place. A functioning insolvency system is not just about dealing with failure; it is about enabling risk-taking and entrepreneurship.
Conclusion: Process and Capacity
The IBBI’s discussion paper is a welcome step toward improving the IBC framework. The proposed changes will bring greater transparency, clarity, and rigour to the resolution process. They will reduce the scope for litigation and ensure that decisions are made on a sound basis.
But process improvements alone are not enough. The capacity constraints at the adjudicating authorities must be addressed urgently. Until that happens, the IBC will continue to fall short of its potential, and the average time to resolution will remain stubbornly above the statutory limit.
The goal is not just a better law, but a better functioning system. That requires both procedural clarity and institutional capacity.
Q&A: Unpacking the Proposed IBC Changes
Q1: What are the key problems with current CoC meeting recordings?
The depth and detail of recording CoC meetings vary significantly, and deliberations are not appropriately reflected. The basis of commercial decisions is not always clear, making them vulnerable to challenge and leading to litigation and delays. Objectivity must be demonstrable through a clear trail of reasoning.
Q2: What new recording requirements are proposed for CoCs?
CoCs will be expected to record: deliberations on expected recovery compared to fair and liquidation value; adequacy of market discovery undertaken during the resolution process; credibility of the resolution applicant; and certainty of implementation of the resolution plan. The goal is to ensure that approval is “demonstrably conscious, informed, and supported by recorded rationale.”
Q3: How will delayed claims be handled under the proposed changes?
Acceptable delayed claims must be placed before the adjudicating authority within a week and before the CoC for recommendation on their treatment in the resolution plan. This addresses the problem of claims not being presented due to absence of CoC recommendation, ensuring prompt and transparent processing.
Q4: What is the deeper problem with IBC implementation that process changes alone won’t fix?
The average time taken for resolution is 619 days against the envisaged 330 days. The basic problem is capacity constraint at the NCLT and NCLAT—these institutions are overburdened, understaffed, and unable to process cases at the required speed. Process improvements must be accompanied by addressing institutional capacity.
Q5: Why is a smooth exit path important for the broader economy?
A reasonably smooth exit path reallocates capital efficiently and encourages investment. When investors know they can exit failed ventures without years of litigation and uncertainty, they are more willing to commit capital. A functioning insolvency system enables risk-taking and entrepreneurship, not just dealing with failure.
