Context

• The Insolvency and Bankruptcy Code, 2016 (IBC), stands as a cornerstone of India’s economic reforms, aiming to streamline insolvency resolution and improve economic efficiency.
• Introduced with the promise of strengthening India’s business environment and addressing bad loans and defaults, the IBC has achieved significant milestones.
• However, its implementation has exposed structural and procedural inefficiencies, necessitating a comprehensive re-evaluation.

The Insolvency and Bankruptcy Code, 2016 (IBC)

• The IBC was introduced to address the growing problem of corporate defaults and to streamline the resolution of insolvencies in India.
• A key component of its implementation hinges on the functioning of two crucial bodies: the National Company Law Tribunal (NCLT) and its appellate counterpart, the National Company Law Appellate Tribunal (NCLAT).
• Together, these tribunals serve as the primary adjudicating forums for insolvency matters and corporate governance, making their effectiveness central to the success of the IBC.
• However, the burden on these institutions has become a significant challenge, exposing flaws in both the institutional design and procedural functioning.

A Detailed Examination of the Burden on Institutional Architecture of IBC

• Dual Responsibility: A Structural Imbalance
  • The NCLT and NCLAT were initially tasked with handling corporate insolvency cases under the IBC.
  • Over time, their responsibilities have expanded to include a wide range of cases related to the Companies Act, 2013.
  • The Companies Act governs a wide array of corporate governance issues, such as mergers and acquisitions, corporate restructuring, and shareholder disputes.
  • While these functions are critical, their combination with insolvency cases has stretched the tribunals' capacity, placing an additional burden on an already overworked system.
  • The result is a dual responsibility that leaves the NCLT and NCLAT struggling to manage their workload efficiently.
• A Temporal Disjunction: Outdated Design
  • Another significant flaw in the current institutional architecture is the temporal disjunction between the NCLT's original design and the contemporary demands it faces.
  • Established in 1999 following the recommendations of the Eradi Committee and operationalised in 2016, the NCLT was conceived during a time when the Indian economy was in a very different phase of development.
  • The economic realities and the business environment in the late 1990s were vastly different from the fast-paced, globalised, and highly dynamic economic landscape of today. The NCLT’s structure reflects these past realities.
  • With a sanctioned strength of only 63 members, many of whom divide their time across multiple benches, the tribunal is ill-equipped to deal with the volume of cases it now faces.
  • Furthermore, the NCLT’s design has not evolved to meet the modern demands of corporate governance and insolvency resolution, leaving it structurally inadequate for handling the complexities of contemporary business transactions.

An Analysis of Deficiencies in the Current Framework

• Gaps in Expertise and Procedural Efficiency
  • High-stakes insolvency matters require specialised knowledge, yet appointments often overlook this critical need.
  • As noted by the Supreme Court in the Jet Airways case, the absence of expertise hampers the ability to address the nuanced complexities of insolvency matters effectively.
  • Moreover, bureaucratic inefficiencies compound the problem. For instance, the NCLT Registry’s discretion over case listings creates a bureaucratic bottleneck, often delaying urgent matters.
  • Worse still, a growing tendency among NCLT and NCLAT members to disregard Supreme Court orders threatens the integrity of India’s judicial hierarchy.
  • These issues highlight not only inefficiency but also a deeper crisis of institutional integrity.
• Limited Use of Alternatives and Structural Rethink
  • The procedural framework further exacerbates delays.
  • The requirement for mandatory hearings for all applications, even those unrelated to substantive matters, consumes valuable time without adding to the resolution process.
  • Additionally, the sparse use of alternative dispute resolution methods places undue pressure on an already overburdened system.
  • Countries worldwide face similar challenges in insolvency resolution. However, India’s unique scale, compounded by systemic corruption and ambitious economic goals, necessitates bold and innovative solutions.
  • Promisingly, recent reform proposals—such as mandatory mediation before insolvency filings—signal a move in the right direction.
• Bottleneck Effect: Backlog of Cases
  • The mismatch between the NCLT’s workload and its capacity to handle it has led to a bottleneck effect in the system.
  • This backlog has resulted in significant delays in the resolution of insolvency cases.
  • According to the Insolvency and Bankruptcy Board of India (IBBI), the average time for insolvency resolution has steadily increased over the years, reaching 716 days in FY2023-24 compared to 654 days the previous year.
  • This represents a concerning trend that indicates systemic inefficiencies, despite repeated calls from the Supreme Court for strict adherence to timelines under the IBC.
  • The Jet Airways case serves as a stark example of these delays.
  • Despite the Court’s clear directives, including warnings about the potential obsolescence of the Code if delays continue, the NCLT and NCLAT’s inefficiencies have led to a drawn-out process.
  • The Court's repeated instructions to adhere to timelines underscore the critical need for a timely and efficient judicial process in insolvency matters, which has not been realised under the current institutional setup.

Implications for Corporate Health and Economic Stability

• The inefficiencies in the NCLT and NCLAT systems have far-reaching implications for the broader Indian economy.
• The primary purpose of the IBC is to resolve insolvencies and help struggling businesses get back on track, thereby ensuring that they do not become a burden on the economy.
• However, delays in the insolvency resolution process create a cloud of uncertainty for creditors, investors, and companies.
• This uncertainty discourages investment and undermines confidence in India’s business environment.
• Moreover, the inefficiencies also hinder the smooth execution of corporate transactions such as mergers, acquisitions, and reorganizations.
• The NCLT’s delayed handling of such transactions often results in lost opportunities, as businesses may have to wait for months or even years before the necessary approvals are granted.

The Path Forward: Reimagining India’s Insolvency Framework

• Need for a Hybrid Model and Specialised Benches
  • First, there is a need for a hybrid model that combines judicial experience with domain expertise.
  • This could involve specialised training for tribunal members or appointing experts in finance, law, and corporate restructuring to handle complex cases.
  • Second, procedural innovations are critical. Introducing specialised benches for distinct categories of cases, such as mergers and amalgamations, would enhance both efficiency and specialisation.
• Infrastructure Development
  • Infrastructure development must also take centre stage.
  • Adequate courtrooms and a permanent, well-trained support staff are indispensable for sustaining the NCLT and NCLAT.
  • The IBC must transcend its current role as a debt resolution mechanism and evolve into a proactive tool for economic rejuvenation.

Conclusion

• The Insolvency and Bankruptcy Code, 2016, holds immense potential to transform India’s economic landscape.
• However, realising this potential requires a bold reimagining of its institutional framework, procedural practices, and infrastructure.
• At this critical juncture, India must prioritise efficiency, expertise, and integrity in its insolvency regime to align with its global economic ambitions.