The Standing Committee on Finance’s report on the Insolvency and Bankruptcy Code has pointed out a number of shortcomings in the Code and has pitched for an overhaul of the law.
IBC HAS DIGRESSED FROM BASIC DESIGN
Coming down heavily on the government, the panel observed that the IBC may have “digressed from basic design” and the last 6 amendments to the law have given it a “different orientation, not originally envisioned “
95% HAIRCUTS WITH 71% CASE PENDENCY BEYOND 180 DAYS
The committee of parliamentarians notes, the IBC has low recovery rates with 95 percent haircuts with over 71 percent of the cases pending for over 180 days.
According to the report , out of 20,963 cases pending in tribunals, 13,170 cases are of IBC , with amount involving 9.20 lakh crores. Meanwhile, 4365 cases are with financial creditors and the amount involved is 6.77 lakh crores.
The panel observed, “It's a matter of grave concern that insolvency process stymied for long delays beyond 180 days” and “Disproportionately large and unsustainable hair cuts have been taken by financial creditors”.
NEED A BENCHMARK FOR QUANTUM OF HAIRCUT
So much so the panel has recommended that it is “imperative to have a benchmark for quantum of haircut” which is comparable to global standards.
The MCA Secretary has been quoted in the report saying, “ The IBC is not designed for a haircut but the entire wisdom is lying with the Committee of Creditors, …if the CoC does not agree for a 90 percent-95 percent haircut, then the plan will not go to the NCLT. If it does not go to the NCLT it will not approve, and then the company will have to go liquidation…we have provided a framework its mainly for the CoC who have a predominant role in the entire process”
NO TO BIDS POST ANNOUNCEMENT OF H1 BIDDER
The Standing Committee has also come down hard on bids being placed after the announcement of the H1 bidder.
It said that these bidders typically wait for the H1 bidder to become public and then seek to exceed this bid through an unsolicited offer that is submitted after the specified deadline. The CoCs have discretion in accepting late and unsolicited resolution plans.
“Late, unsolicited bids create tremendous procedural uncertainty, genuine bidders are discouraged from bidding at the right time. The overall process is vitiated and there are significant delays leading to further value erosion “
The panel has recommended, “IBC needs to be amended so that no post hoc bids are allowed during the resolution process . There should be sanctity in deadlines so that value is protected and the prices move smoothly “.
Similarly, the panel also recommended “ a professional code of conduct for the CoC which will define and circumscribe their decisions” The panel submits this is an urgent need.
ALLOW MULTIPLE BIDDERS TO BUY PARTS OF BUSINESS
The panel has also pitched for amending the IBC to clarify that resolution can be achieved through proper implementation of the CIRP regulations.
The CIRP or Corporate Insolvency Resolution Process rules allow the resolution professional to sell parts of a business to multiple bidders. This gives flexibility to the resolution as the parliamentary panel observes many a time bidders are interested in parts of the corporate assets and not the entire business.
NCLT MUST ADMIT CASES WITHIN 30 DAYS
To cut back on delays the panel also recommended that NCLT must admit cases in 30 days. The report said the NCLT takes considerable time in admitting cases that leads to asset stripping, funds diversion by the defaulting promoter. “ NCLT should accept defaulters within 30 days and transfer control to a resolution process during this period”