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Liquidation can’t be a benchmark under IBC, peer economies should be our benchmark: Jayant Sinha

In an interview, Jayant Sinha, chairman of the Parliamentary Standing Committee on Finance, said that India should compare its recovery from insolvent business resolution to that of peer countries, rather than the low liquidation value of hazardous assets. The committee, which issued a report on the Insolvency and Bankruptcy Code (IBC) earlier this month, expressed concern that the five-year-old law has deviated from its initial goals due to excessive delays in resolution and hefty losses for lenders.

The National Company Law Tribunal (NCLT) and insolvency professionals (IPs), according to Sinha, have a responsibility to prevent defaulting promoters or their surrogates, who are ineligible to bid under section 29A of the IBC, from delaying the resolution process through frivolous litigation, which is often blamed for asset value erosion. “With the exception of a few high-profile cases, recovery tends to be pretty modest, and in some situations, people are thinking about liquidation as the benchmark,” Sinha added. “We should not look at liquidation as the gold standard; instead, we should look at insolvency resolution across the globe, particularly in our peer economies. The true benchmark should be secured financial creditors' recovery (in peer economies).”

While the average recovery from hazardous assets was 39 percent of creditors' claims through March 2021, haircuts of up to 95 percent were seen in rare situations. Critics argue that the imbalance must be addressed. Of course, recovery under the IBC is still far superior to recovery through other existing procedures such as Lok Adalats, DRTs, and the Sarfaesi Act.

When asked if the panel's suggestion that a professional code of conduct for the committee of creditors (CoC) be established to define and circumscribe the CoC's function would lead to more litigation since disgruntled parties may challenge the CoC's judgement, she said yes. Sinha answered with a resounding no. “The Supreme Court has said unequivocally that the CoC's business decision is final. However, a code of conduct with well-known traditions and protocols should be developed so that the CoC recognizes that certain standards exist and that meetings and processes should be transparent, among other things.”

Sinha proposed that rules and regulations be simplified, potentially by another modification to the IBC, and the NCLT (National Company Law Tribunal) apparatus be reinforced to accelerate the settlement process, in order to achieve the IBC's original aims. The most important cause for the delay in resolution and asset value degradation, according to Sinha, is the NCLT system's bottlenecks. The NCLT is now hearing 13,170 bankruptcy cases with claims totalling Rs. 9.2 lakh billion. Approximately 71% of the cases have been outstanding for more than 180 days.

Similarly, only high court judges should be selected as judicial members of the NCLT, according to Sinha, in order to increase the quality of decisions. “This is because if the NCLT makes a faulty decision, the aggrieved party can appeal it. The matter is subsequently sent to the NCLAT or the Supreme Court, which causes more delays. As a result, we should concentrate on raising the quality of NCLT judges, as well as their training and competence,” he stated. The group also recommends digitizing the whole resolution process. In order to maximize profits, Sinha believes that insolvency professionals (IPs) should be permitted to sell individual assets rather than the stressed business as a whole as going concerns.

He also advocated for tight timeliness and warned the CoC against accepting late bids since they "raise a lot of procedural uncertainty." Analysts have noted that defaulting promoters or their proxies sometimes try to prolong resolution by submitting late bids. The House panel, led by Sinha, also advocated for a pre-pack resolution mechanism for major businesses (now confined to just MSMEs) and a single regulator for both IPs and IP agencies (IPAs). Currently, the IPs are governed by the Insolvency and Bankruptcy Board of India (IBBI), whilst the IPAs are supported by organizations like the ICAI and ICSI, which are governed by separate laws.

It further demanded that the cross-border insolvency law be implemented as soon as possible. The panel's proposals, according to Sinha, are a well-balanced blend of legal and operational improvements that are necessary to enhance the insolvency ecosystem. “It puts to rest the anxiety that companies and investors have about retrospective taxation,” Sinha said of the government's decision to scrap the 2012 retrospective taxation legislation. It also does it in a legal manner that protects the sovereign right to taxation. The administration came up with a great answer to the uncertainties generated by the choice of the UPA government.”

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