Why resolution in India is often tougher than bankruptcy itself

The insolvency-resolution process in India has been slow to take off, with a large number of businesses being shut down during the resolution process itself. Also, a significant number of such cases drag on for years, well over the time limit set under the Insolvency and Bankruptcy Code (IBC), 2016.

From September 2016 to September 2023, realisations for creditors of insolvent companies were just about a third of the total claimed amount, and every third business that sought a resolution was shut down. In other words, of the 7,058 businesses that went bankrupt and sought resolution during these seven years, 2,249 have faced closure and another 2,000 are still awaiting a resolution after nearly six years. The time allowed under IBC for the resolution process is just 270 days.

In this scenario, a Parliamentary panel has flagged two issues: quality and experience of resolution professionals, and under-staffing of the National Company Law Tribunal (NCLT). Rectifying these could significantly improve the outcomes under IBC.

Inexperienced RPs

Resolution or insolvency professionals (RPs/IPs) play a critical role in getting a business back on track. They play pivotal roles as liquidators or bankruptcy trustees within the insolvency ecosystem. But do some of these RPs lack adequate experience in handling large corporations and complex businesses needing a resolution?

The Parliamentary committee has highlighted this fact. It may not be generally known, but this committee, headed by Jayant Sinha, has pointed out that even fresh graduates are appointed as RPs.

“The committee is apprehensive about fresh graduates being appointed as Insolvency Professionals or Resolution Professionals without any experience and is doubtful about their competency in handling cases of huge and complex corporations,” the 67th report of the Standing Committee on Finance noted earlier this week. The same committee had highlighted the same point about RPs in 2021, too.

Given the complexity of the resolution process and the number of RPs who have been penalised in the past seven years due to different reasons, the committee continues to be apprehensive of the capability of the RPs in carrying out time-bound resolution of huge companies with complex cases. It believes that there is a need to revisit the functioning of RPs.

Disciplinary action by regulators

It is interesting to note that because of several issues being flagged about the conduct of RPs, the two regulators — the Insolvency & Bankruptcy Board of India (IBBI) and the Insolvency Professional Agencies (IPAs) — have been forced to take disciplinary action on 123 RPs from 203 inspections conducted till date.

The Parliamentary panel has also flagged the issue of multiple IPAs overseeing the functioning of their member RPs instead of a single regulator, questioning the rationale behind this strategy.

Not just the Parliamentary committee, others have also raised concerns over the quality and conduct of RPs.

In a report by IIM-Ahmedabad professors published in August last year, participants noted that most RPs did not have a business/managerial background, and an additional, internal control mechanism was needed to monitor their conduct. The report concluded: “While the industry participants were content with the performance of Resolution Professionals they interacted with, they, however, highlighted the need for business and domain-specific knowledge training for RPs to ensure appropriate and timely decision making.”

Government’s stand

The government, on its part, has quoted the Bankruptcy & Law Reform Committee’s report of 2015 to reiterate that competition among multiple IPAs is being promoted to help achieve efficiency gains.

“Greater competition among the IPAs will in turn lead to better standards and rules and better enforcement. A single IPA or regulatory body like the Institute of Resolution Professionals will result in a monopoly which will be inefficient and less progressive over time,” it said. There has been no response to the committee’s observation about mere graduates becoming RPs.

The government has also pointed out that the two-tier regulatory structure, of IPAs as the front-line regulator and IBBI as the principal frontline regulator, works well. “They monitor disclosures by IPs in respect of relationship and fee and expenses of CIRPs and disseminates the same on their respective websites. IPAs also conduct and monitor continuing professional education of their member RPs.”

So, for now, there appears to be no move to improve the lot of RPs.

Strengthening NCLT

The Parliamentary panel has also flagged the continued understaffing of NCLT, seeking an increase in the sanctioned strength.

In 2021, the tribunal was functioning at just about half the sanctioned strength. After the government announced a number of appointments against vacancies at the tribunal last year, the staff strength became 90 per cent for the first time since the inception of NCLT.

Further, an offer of the appointment of 21 members of NCLT was issued in August, bringing the total strength to 57 members against the sanctioned 62.

“The committee acknowledges that for the first time since its inception, the strength of NCLT would be more than 90% of its sanctioned strength. However, the committee feels that in order to tackle the huge pendency of more than 20000 cases in NCLT at the end of every year, the sanctioned strength of NCLT needs to be enhanced,” the offer read.

After all, as vacancies keep arising at the tribunal, the number of insolvency cases pending resolution keeps mounting as well.