April 18, 2017    6 minute read

Five Steps India Should Take to Improve Its Insolvency Resolution Process

Fixing India    April 18, 2017    6 minute read

Five Steps India Should Take to Improve Its Insolvency Resolution Process

The World Bank has ranked India 136 for insolvency resolution in 2017, down from its position in 2016 despite the Indian government’s hard push towards new insolvency laws. A new regime to deal with insolvency and bankruptcy has been established. In theory, it looks great. But the ills that plague India’s corporate world have not been removed. The efforts to implement the new regime do not match the intent behind it. In reality, they fall short substantially.

Corporate Insolvency in India 

Corporate insolvency in India has gone up over the years. As of March 2015, the number of closed companies stood at 268,142. Of this, the number of liquidations and dissolutions was dismally low, at 3.8% of the companies closed. The break-up of company closures is given in this table:

S.No. Description

Number of companies

Percentage
1. Liquidated/Dissolved 10,264 3.8
2. Defunct/Struck off 238,417 88.9
3. Amalgamated/Merged 15,365 5.8
4. Converted to LLP 4,096 1.5
Total 268,142 100

 Source: Government of India.

The data also indicates that there were 5,079 companies in liquidation as of March 2015. The high tally of the companies under liquidation demonstrates that the winding up process in India is a protracted affair, lagging behind the growth of the country’s corporate sector. Over the years, the liquidation process has not been able to keep pace with the changes in the business environment. This has resulted in the blocking of valuable national assets without any use: a national waste.

The data published by the Ministry of Corporate Affairs does not indicate how long the companies have been under the liquidation process. World Bank data on insolvency resolution indicates that in India, it takes 4.3 years on average to liquidate or dissolve a company. This does not compare well with any region, much less South Asia where the average time is 2.6 years.

Fast Forward to Resolving Insolvency

India has brought in a new regime of corporate and individual insolvency by legislating the Insolvency and Bankruptcy Code (IBC) in 2016. The winding-up of companies under the Companies Act 2013 has been substantially revised and consolidated under IBC. The process of insolvency resolution has been mandatorily brought under the IBC prior to making the companies enter the path of liquidation.

The timescales have been shortened in order to curtail the process, with an aim to cut down the pain suffered by stakeholders and promoters. The decision-making process has been relegated to an expert tribunal with the expectation of faster turnaround. This new era would see shutting down of offices of Official Liquidators – a source of inefficiency coupled with the waste of economic resources on their upkeep.

What should the Indian Government do to improve its world ranking in resolving insolvency? There are a few options:

Establish More NCLT Benches

In insolvency, the number of benches in the National Company Law Tribunal matters for speedy disposal of cases. Right now, the criteria for establishing benches is unknown. But the benches should be set up based on the number of cases which a bench can expected to handle. The time for action is now: once lethargy sets in, it becomes onerous to bring about change. The rationalisation is required on the basis of a number of cases – pending and expected. This is the time to make the best use of available data.

Encourage Meritocracy and Select Younger Members

Merit should not take a back seat in the selection of members sitting on benches. NCLT members (technical or judicial) are expected to deal with a specialised subject of company law and IBC. Selection should be based on merit and not on personal equations or with a preset mind. There is a need to opt for a cleaner selection system with qualitative and objective criteria.

The NCLT’s members often have little exposure to company law, breeding discontent amongst stakeholders. The tribunals in India have become a destination for post-retirement employment, and the NCLT is also seen as moving in that direction. Lowering the minimum age criteria needs to be considered, in order to bring in a younger lot with knowledge of the subject, clarity of thought, excellent writing skills and posession of a rational mindset.

Transfer Cases from High Courts Quickly

The dual system never works, and the High Courts are saddled with winding-up cases even today. The transfer of cases from the High Court to the NCLT is taking place in slower batches. Nothing will move – least of all India’s ranking – with this slower pace. The Government should concentrate on creating more benches and transferring all cases in one go in order to spread confidence amongst the stakeholders. The present state of affairs will see India’s ranking dip further. Quicker transitions would energise the system and bring results.

Shut Down Official Liquidator Offices Soon

The system of Official Liquidators has not worked well. Inefficiency, red tape, delays and lack of genuine effort have been the hallmarks of Official Liquidators across India. This ineptitude has plagued the corporate insolvency process since OL offices were born in 1956. The efficiency of OL offices has never been measured. The slow liquidation/dissolution rate (174 companies in a year) speaks volumes of the ineffectiveness of the winding-up system which in some respects is now more than 60 years old.

Closing down these offices sooner will increase confidence, and this aligns with objectives sought to be achieved by the IBC: a fresh start and a faster exit for the insolvent companies. OL offices have taken full advantage of the overburdened judicial system. It is time to shut them down and usher in a new, more efficient system under the IBC. India’s ranking will substantially improve if recoveries are made faster. This has not happened in the regime of OL offices.

Monitor Performance

‘Regulating the regulator’ is the need of the hour. Measuring NCLT members’ performance in dealing with insolvency matters will keep them on their toes. Institutional lethargy is the worst form of corruption: it kills enthusiasm and hope. This assessment process should no longer be restricted to quantitative measurement – quality matters, too. A quick disposal of cases still calls for well-written judgments and orders. This underlines the need for meritoracy, which would encourage and support excellence while weeding out incompetence. Zero tolerance should be the mantra.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details

or    

Forgot your details?

Create Account

Send this to friend