Insolvency code reforms should aim for swift and just resolutions

livemint.com:

Insolvency and Bankruptcy Code (IBC) reforms are expected to be announced in the finance minister’s forthcoming Budget speech. As the IBC is a complex business law on the solvency of corporate enterprises, it deserves priority attention. When the IBC was adopted by India in 2016, Parliament had intended that the time period for insolvency resolution be mandatorily limited to 330 days, inclusive of one extension and the time taken in legal proceedings.

This time limit is observed more in the breach than in performance. We must recognize that a delay depreciates the value of the enterprise in question, often causing a drastic drop in value. There is no evaluation mechanism to determine the balance of public interest versus private interest when resolution proceedings are stalled (by injunctions, for example).

But it’s clear that the loss of a lender’s security value affects the tax-paying public adversely, as public money is lost, and so such losses need to be clipped. First, new amendments to the IBC must stipulate provisions akin to Section 41(ha) of the Specific Relief Act, 1963 (as amended), to prevent any injunction from being granted in favour of failed resolution applicants, as they have no financial stake in the corporate debtor. Injunctions impede or delay the completion of corporate restructuring in time.

Delays are seen to be caused by obstructive promoters, third-party litigators or competitors getting injunctions with an oblique motive to cripple their competition, and this must stop. Second, the priority accorded to the secured financial creditors of an insolvent business has a great bearing on the cost of credit in India. Secured lenders adjust financing costs based on the priority that their claims are