Govt considering fast-track route to solve insolvency, unclog pipelines

The government is considering yet another fast-track route in the insolvency resolution process to address growing concern of a slowing machinery. The idea is to allow admitting cases where lenders arrive at an informal agreement on how to salvage the debt of a company under its existing management. This should, on paper, improve recovery and bring down litigation. Negotiated settlement can ease pressure on the National Company Law Tribunals (NCLTs) and the National Company Law Appellate Tribunal (NCLAT), which, by GoI's admission, are not adequately staffed to handle insolvency caseload. The Insolvency and Bankruptcy Code (IBC) is yet to deliver on its promise to speedily free up capital locked in zombie companies, and tweaks based on international experience are welcome. A pre-packaged scheme for small enterprise, which is yet to clock significant numbers, is a forerunner to consultations over the latest proposal by the Insolvency and Bankruptcy Board of India (IBBI).

Time is of essence in insolvency resolution. A company once admitted undergoes rapid degradation of business prospects under administrators. Drawn-out appeals lower recovery rates for creditors. Negotiated agreements sidestep both issues by reducing litigation and by allowing the existing management to steer a company through debt resolution. The rules for such a mechanism will have to ensure agreements entered into between borrowers and lenders are kosher. With the right regulatory design, a fast track in insolvency resolution could improve process efficiency overall.

IBC needs to put out numbers that are a departure from legacy debt-resolution mechanisms. Data from alternative processes do not weigh particularly in favour, except in IBC's capacity to resolve some of the country's biggest cases of debt distress. The government is pushing banks to clean up their portfolios of small bad debts through Debt Recovery Tribunals (DRTs) and Lok Adalats. In parallel, it must unclog the IBC pipeline to handle larger ticket sizes. Innovative approaches are called for.