According to official data , the average time taken for an insolvency resolution process at the National Company Law Tribunal (NCLT) was 716 days (654 days in 2022-23) with the percentage of realisable amount to admitted claims at 27 per cent (36 per cent in 2022-23) in 2023-24. This data clearly depicts the continuing existence of gap between the legislative intent and effectiveness of the law i.e., Insolvency and Bankruptcy Code (IBC), which was enacted with twin objectives of timeliness and asset maximisation.
Hence, it is imperative to make drastic changes in the administration of IBC to achieve the objectives. The resolution professional (RP), who plays a pivotal role in the administration of IBC, must be allowed to focus only on core activities.
Non-core activities include: processing of claims; handling litigations; filing of avoidance applications; and running the operations of the company. Let us analyse each non-core activities, mandated under Section 25 of IBC, which are presently carried out by RP.
First in line is processing of claims, received from financial and non-financial creditors of the corporate debtor (CD). This activity is to determine the liabilities of the CD, and the outcome is necessary only at the time of distribution of the amount realised either from the successful resolution applicant (SRA) or sale of the economic assets of the company. This activity can be carried out parallelly by another RP or other professional (OP). Meanwhile, if any amount is received either from SRA or from the buyers of individual assets of the CD, the same may be kept in a separate bank account till the eligible creditors are finalised. In short, distribution should be de-linked from the resolution.
Secondly, lot of time is spent by RP during CIRP on litigation matters. Most of the litigations are either initiated by the promoters to disrupt CIRP or by the claimants when their claims are rejected. If the promoters are kept away from participating in CIRP and if the litigations from the claimants are handled parallelly without affecting the core activities, resolution would be quicker.
Avoidance transactions
Thirdly, RP is obliged to file applications under IBC , in respect of avoidance transactions (preferential, undervalued, extortionate and fraudulent transactions) found by him during CIRP before the adjudicating authority (AA). For instance, he is obliged to inform the NCLT in the event of asset stripping or fraud suspected by him. The investigation into such transactions by a ‘transaction auditor’ appointed by the RP should not come in the way of the resolution process.
Fourthly, RP is mandated to run the operations of the company disregarding the viability of the operations, due to the misconception that the realisation would be higher if the operations are running. On the contrary, in most of the cases, running the company during CIRP has only resulted in huge cash loss and substantial erosion in the current assets of the company.
Key reasons for the value erosion include non-availability of credit for the supply of raw materials, default in receivables, lower morale of the employees, unrest amongst workers, etc., which are common for any CD undergoing CIRP.
Moreover, one cannot expect the RP to run the operations of different industries successfully. Hence, it is suggested that unless it is absolutely necessary, the operations of CD be halted temporarily to enable the RP focus on core activities. The buyers of a CIRP company anyhow check the working conditions of the machineries before submitting their offer, and hence there is no question of any value erosion.
Currently, there are two stages in IBC — CIRP and liquidation. In the CIRP stage, if no resolution plan is received or plan is received but not accepted by the committee of creditors, it falls to the next stage, i.e., liquidation stage. In both stages, the sole aim is not to waste any precious resources of the CD, and maximise the realisation.
Most often than not, the prospective buyers are interested in specific assets of the CIRP company but currently that option of selling assets individually is available only during liquidation stage.
While calling for a resolution plan, options should be given to prospective buyers either to buy the CD as a whole or in parts for quicker realisation and effective utilisation of all resources. Preference among bidders may be given to the buyer(s) who bids for the CD as a whole unless selling asset-wise fetches significantly higher amount.
To summarise, linking two processes, i.e., CIRP and liquidation into one, de-linking non-core activities of resolution professional to focus only on resolution plan or realisation of assets would shrink the CIRP period.
The writer is an insolvency professional
