IBC to be amended for faster turnaround of sick firms

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

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

As the management of a defaulting company loses control of the business to an administrator appointed by creditors during the bankruptcy process, the government wants these professionals to measure up in terms of efficient and transparent conduct of corporate defense.

This has been emphasized by a series of rules changes over the past few months by the Insolvency and Bankruptcy Board of India (IBBI) to bring in greater transparency in the relationship between insolvency resolution professionals and other stakeholders. In addition, IBBI is taking disciplinary action against erring resolution professionals, including penalties and sometimes mandating specified hours of pre-registration training.

The regulatory framework for businesses administered by the Ministry of Corporate Affairs is expected to change in several areas soon. The Parliamentary Standing Committee on Finance, which examined the Competition Amendment Bill, 2022, is also likely to submit its report soon, based on which the competition law will be reworked. In addition, inter-ministerial consultations are currently underway to amend the Companies Act, which includes a radical change in the regulatory framework for statutory auditors. However, this is expected in the budget session itself. Parliament is yet to draw out the schedule for the winter session, which usually begins in November.

An email sent to the Ministry of Corporate Affairs spokesperson on Saturday seeking comment for the story remained unanswered till press time.

Experts said the IBC needs to be amended to ensure timely results. “Prompt acceptance of bankruptcy petitions and approval of resolution plans is of paramount importance, given that the time value of money is an important factor for the investor community. Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co, said investors will lose interest if resolution plans are not approved on time.

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. It also takes time for bankruptcy petitions to be admitted to tribunals, as the managements of defaulting companies often try to block the entry.

“Governance of the defaulting company is an area that needs special attention. The IBC regime should also make provisions to protect the defaulting company’s valuable business data, such as orders, revenue and inventory, which help in planning corporate turnarounds. The directors of the company may be made personally liable to ensure its safety,” Rawat said.

A recent move by IBBI, which has been welcomed by experts, is letting institutions take over the responsibility of administering sick companies as a professional team is expected to bring in multiple skill sets required for the task. It is considered better than entrusting the complex matters to individual insolvency professionals.