Tweak in IBC to turn sick firms around faster

The corporate affairs ministry will soon seek cabinet approval for a bill to amend the Insolvency and Bankruptcy Code (IBC), which will be tabled in the winter session of Parliament beginning this month, a person familiar with the development said.

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The amendments will address deficiencies in how insolvency professionals run the companies ending up in tribunals and achieve timely decisions, the person said on the condition of anonymity.

Since the management of a defaulting company loses control over the business during the bankruptcy process to the administrator appointed by lenders, the government wants these professionals to measure up in terms of efficient and transparent conduct of the corporate rescue.

The emphasis given to this is evident from a series of rule changes brought out by the Insolvency and Bankruptcy Board of India (IBBI) over the past few months to bring more transparency in the relationship between insolvency resolution professionals and other stakeholders. In addition, IBBI has been taking disciplinary action in the case of erring resolution professionals, including penalties and sometimes mandating specified hours of pre-registration training.

The regulatory framework of businesses administered by the ministry of corporate affairs is expected to undergo changes in several areas soon. The parliamentary standing committee on finance, which examined the Competition Amendment Bill, 2022, is also likely to give its report soon, based on which competition law will be reworked. Also, inter-ministerial consultations are currently on for amending the Companies Act, which includes a radical revamp of the regulatory framework for statutory auditors. This, however, is expected only in the budget session. The Parliament is yet to bring out the schedule for the winter session, which usually starts in November.

An email sent to the spokesperson for the ministry of corporate affairs on Saturday seeking comments for the story remained unanswered till press time.

Experts said the IBC needs amendments to ensure timely outcomes. “Expeditious admission of insolvency petitions and approval of resolution plans are most important, given that the time value of money is a key factor for the investor community. If resolution plans are not approved well in time, investors will lose interest," said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas and Co.

Official data from bankruptcy rule maker IBBI showed that as of June, more than 60% of the nearly 2,000 ongoing bankruptcy cases are pending for more than 270 days. Bankruptcy petitions also take time to get admitted to tribunals, as managements of defaulting companies often attempt to block admissions.

“Governance of the defaulting company is an area that requires special attention. The IBC regime should also put in place provisions to protect the valuable business data of the defaulting company, such as orders, revenue and inventory, which help in planning for the corporate turnaround. Directors of the company could be made personally liable to ensure its safeguard," said Rawat.

One recent step taken by IBBI, which has been welcomed by experts, is letting institutions take on the responsibility of administering sick companies as a professional team is expected to bring in multiple skill sets needed for the task. This is seen to be better than entrusting individual insolvency professionals with complex cases.

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