Answer

The Insolvency and Bankruptcy Code (IBC), enacted in 2016, aimed to streamline insolvency proceedings and enhance India’s business climate. However, challenges have emerged, notably in institutional capacity and procedural efficiency. For instance, On average, resolution of cases under IBC took 716 days at NCLT in 2023-24, exceeding the stipulated 330-day limit.

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Introduction of IBC to enhance India’s business environment and address defaults

• Addressing Bad Loans: The IBC was introduced to resolve bad loans swiftly, ensuring creditor recovery and minimizing losses for the financial sector.
  For example: The Essar Steel resolution ensured Rs. 42,000 crore recovery, boosting lender confidence.
• Improving Business Climate: IBC was meant to enhance India’s Ease of Doing Business by reducing insolvency resolution time, making India a favorable investment destination.
  For example: India’s World Bank Ease of Doing Business rank improved from 130 in 2016 to 63 in 2020.
• Promoting Financial Discipline: The IBC deterred willful defaults by holding promoters accountable and enforcing stringent timelines.
  For example: Bhushan Steel’s promoters were held liable, leading to its acquisition by Tata Steel.
• Comprehensive Framework: Unlike fragmented pre-IBC laws, it provided a unified legal framework for corporate and personal insolvency resolution.
  For example: The replacement of SICA and other outdated laws streamlined the resolution process under IBC.
• Encouraging Asset Revival: By ensuring timely insolvency proceedings, IBC aimed to maximize the value of distressed assets through efficient resolution.
  For example: Jet Airways’ ongoing resolution seeks asset revival instead of liquidation.

Challenges in Insolvency and Bankruptcy Code (IBC)

Challenges in Institutional Capacity

• Domain Knowledge Deficit: Tribunal members often lack expertise in financial, legal, and technical nuances, hindering effective resolution.
  For example: The Supreme Court flagged this issue in the Jet Airways judgment, affecting high-stakes insolvency matters.
• Non-Functioning Benches: Many NCLT benches operate below capacity, further burdening the system and delaying cases.
  For example: Cases requiring urgent hearings are postponed due to non-availability of functioning benches.
• Overlapping Jurisdictions: Handling IBC and Companies Act cases creates inefficiencies, overburdening tribunal members and reducing resolution quality.
  For example: NCLT’s dual jurisdiction slowed insolvency timelines in FY 2023-24.

Challenges in Procedural Efficiency

• Delayed Timelines: The average resolution time of 716 days far exceeds the stipulated 330 days, undermining IBC’s effectiveness.
  For example: SC noted excessive discretionary extensions by tribunals in the Jet Airways case.
• Mandatory Hearings: Unnecessary hearings for progress reports cause delays without adding value to case resolutions.
  For example: Non-critical updates are still subject to tribunal scrutiny, prolonging the process.
• Limited ADR Usage: Minimal adoption of mediation or arbitration overburdens the tribunal system, contributing to prolonged case timelines.
  For example: ADR in pre-resolution stages could prevent lengthy litigations in high-value cases like Essar Steel.

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Suggested Reforms

• Strengthening Tribunals: Increase NCLT and NCLAT strength, appointing members with domain expertise to enhance resolution efficiency.
  For example: Specialized benches for insolvency cases can prioritize IBC matters, reducing delays.
• Promoting ADR Mechanisms: Encourage pre-resolution mediation and arbitration to prevent case overloading in tribunals.
  For example: Mandatory mediation for insolvency applications can resolve disputes faster.
• Streamlining Procedures: Simplify progress report submissions by removing mandatory hearings and automating case updates.
  For example: Digital filings and automated updates reduced delays in global jurisdictions like Singapore.
• Infrastructure Development: Improve courtroom infrastructure, hire permanent staff, and reduce reliance on part-time benches.
  For example: Additional courtrooms in major cities like Mumbai and Delhi could speed up resolutions.
• Enhanced Training and Compliance: Regularly train tribunal members and staff to improve understanding of insolvency laws and compliance with SC directives.
  For example: Workshops for NCLT members can address gaps in financial expertise flagged by SC.

To uphold the IBC’s objectives, urgent reforms are essential to bolster institutional capacity and enhance procedural efficiency. This includes increasing the number of National Company Law Tribunal (NCLT) benches and training more insolvency professionals. Such measures are vital to ensure timely resolutions and maintain creditor confidence in India’s insolvency framework.

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