Corporate insolvency: Making the resolution process better

Noting the surprisingly low number of the IBC Section 19 applications, the section should be amdended to provide for pinching penalties to corporate debtor for not cooperating with the resolution professional

Unsurprisingly, few ministers and officials talk about it these days, but surprisingly there is very little angst about the God that is failing.
Unsurprisingly, few ministers and officials talk about it these days, but surprisingly there is very little angst about the God that is failing.

By Neeti Shikha & Urvashi Shahi

Timely resolution proving elusive has become the biggest bottleneck in the corporate insolvency resolution process. Indeed, there is an inordinate delay from the adjudicating authority. But there are several other stages where the court’s role is limited but are beset by constant delays. In our recent research of 25% of the companies (305 companies) that completed CIRP before March 2020, we found that availability of information and quality of information is one of the biggest challenges in attaining quick resolution.

Globally, experts have argued that imprecise and ambiguous financial reporting often marks insolvency environment. This may be due to internal conflicts and financial incentives to hide reasons for not performing well. However, given the business landscape, where most companies are promoter-driven, the challenge becomes more profound.

In our study, we found problems at two levels. First, the study indicates non-cooperation by corporate debtors is a major cause of concern in timely resolution of cases. This was also indicated in the survey findings conducted with 431 insolvency professionals—79% of them believed that there is general inhibition among corporate debtors in sharing information. To this end, it is worth noting that though the law provides a remedy to this problem in the form of Section 19 of IBC—filing for non-cooperation—it has not been adequately utilised. Only 3% of the resolution professionals filed the application under section 19(2) to take help of authorities against non-cooperation by the corporate debtor.

This issue could be resolved by looking at other jurisdictions. Jurisdictions such as Singapore, the UK, Hong Kong, etc, severely penalise any form of non-cooperation on the part of the corporate debtor with the resolution professional. However, noting the surprisingly low number of Section 19 applications, an amendment in the language of Section 19 must be considered to explicitly provide that non-cooperation on the part of the corporate debtor with such professionals will attract a penalty.

There is a need to design an indigenous solution within the existing framework to ensure a company’s management doesn’t create roadblocks. Section 29A is just one such measure that the law has provided for keeping a check on scrupulous promoters. But, one needs to take a few steps back and address this when the cases are brought under CIRP. Taking cues from Hong Kong’s law, policymakers should consider any form of non-cooperation by the corporate debtor with the insolvency professional liable for contempt of court. Changing the language of Section 13 of the Code will go a long way in facilitating the provision of financial information by the corporate debtor to the IRP/RP.

Besides, it was found that companies, in general, lack a proper documentation model—83% of insolvency professionals opined that companies lacked this for both statutory register and non-statutory register.

Such lack of documentation leads to information asymmetry, impacting timely resolution and resulting in sub-optimal resolution. This issue needs to be tackled on two fronts: First, in the normal course of business, when a company is a going concern, all the annual filings need to be electronically kept and updated. While the law mandates that there should be monitoring of the compliances, the use of technology can make these processes simpler. Second, the information utility needs to be better utilised. Currently, there is only one such entity in India, owing to entry barriers that may be prohibiting others from entering the market. To create a sound and swift insolvency process, the law must allow interested players to enter. The rules need to focus on creating the right incentives. In this regard, information utilities can provide vital infrastructural support. Also, companies could be encouraged to remain resolvable at all times. They could have a shelf-prospectus kind of information-memorandum updated on a quarterly basis.

Insolvency regimes that do not provide sufficient cover for the incumbent management in control increase the private incentives of management to hide the true financial state and gamble on resurrection. This becomes a great challenge as management of the corporate debtor is displaced with an outsider, creating greater incentive for insufficient information disclosure. Hence, there is an imminent need to address this issue to ensure the success of IBC.

Authors work for the Centre for Insolvency & Bankruptcy, Indian Institute of Corporate Affairs. Views are Personal

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