Project-Wise Insolvency in IBC: A Contradiction Explained by Baijayant Panda

The concept of project-wise insolvency is a contradiction in terms, according to Baijayant Panda, chairperson of the Parliament’s Select Committee on IBC. In an exclusive interview, Panda discussed the principles of the IBC and the recent amendments aimed at improving the resolution process.

The IBC, enacted in 2016, has had a revolutionary impact on the Indian economy. Before IBC, companies that were performing poorly would linger on for decades, leading to high non-performing assets (NPAs) in banks. However, thanks to IBC, there have been numerous resolutions and liquidations, significantly improving the health of the banking sector. According to Panda, banks now recover about Rs 50,000-60,000 crore annually from stressed assets, a figure that could double with the new amendments.

One of the key focuses of the IBC Amendment Bill is to enforce strict timelines. The resolution process was often taking longer than the 330-day period, which the new Bill aims to address. The strict timelines will dramatically reduce the time for resolution, leading to higher recovery rates. Additionally, the Bill makes the resolution process for MSMEs (Micro, Small, and Medium Enterprises) easier by lowering the threshold for initiating the pre-packaged resolution process from 66% to 51% of financial creditors' votes.

Another significant change is the introduction of cross-border insolvency and group insolvency norms, which were previously a major gap in India’s insolvency ecosystem. If a resolution is not possible, the Bill mandates the appointment of a new resolution professional (RP) for liquidation, ensuring the company is saved where possible.

Panda also addressed concerns regarding operational creditors (OCs) and their dues in liquidation. He clarified that the IBC is primarily about the insolvency and bankruptcy of companies, not debt recovery. OCs have other avenues such as debt-recovery tribunals (DBTs) and the SARFAESI Act. The waterfall mechanism, which determines the order of payment to creditors, has not been changed in the new Bill.

The backlog of cases in the National Company Law Tribunal (NCLT) is another issue being addressed. The government is working on increasing the strength of benches and improving court infrastructure to clear the backlog. Panda noted that the single largest source of backlog is pre-RERA (Real Estate (Regulation and Development) Act) real estate cases. The Committee has recommended that new real estate cases should first be resolved by RERA before coming to IBC.

Panda emphasized that the concept of project-wise insolvency is fundamentally flawed. Real estate companies often take money from homebuyers and use it for other purposes, leading to incomplete projects. However, insolvency is a matter of the company, not individual projects. The IBC mandates that the promoter must leave the company, and new promoters come in to resolve the issues. This principle is enshrined in the IBC to ensure that promoters do not continue to mismanage the company.

The Select Committee has also recommended a 3-month timeline for the National Company Law Appellate Tribunal (NCLAT) to decide on IBC appeals. Despite the imposition of timelines, the strength of the benches remains a concern. The government is working to address this issue and ensure that the resolution process is expedited.

The clean state principle, which ensures that new promoters are only liable for approved dues, has been clarified in the new Bill. This principle has existed since 2016, and the Committee is reiterating it to ensure clarity. The Supreme Court has ruled in favor of the clean state principle, and the Bill makes it amply clear to prevent any further disputes.

In conclusion, the IBC Amendment Bill aims to improve the efficiency and effectiveness of the insolvency resolution process. By enforcing strict timelines, making the process easier for MSMEs, and clarifying the clean state principle, the Bill seeks to address the challenges faced by the IBC and ensure a healthier economic environment.