Why in the News?

The recent Supreme Court judgment in the Jet Airways case has highlighted several major problems in India’s insolvency system.

What are the structural inefficiencies in the current Insolvency and Bankruptcy Code (IBC)?

• Overburdened Tribunals: The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are tasked with handling both corporate insolvencies under the IBC and cases under the Companies Act. This dual burden leads to inefficiencies and delays in resolving insolvency cases.
• Inadequate Institutional Capacity: The NCLT’s structure, established in 1999, is outdated and does not align with contemporary economic demands. With only 63 sanctioned members, many of whom split their time across multiple benches, the tribunal struggles to manage its caseload effectively, resulting in significant backlogs.
• Lack of Domain Expertise: Members of the NCLT often lack the necessary domain knowledge to handle complex insolvency cases effectively. This deficiency hampers their ability to make informed decisions, as highlighted by the Supreme Court in the Jet Airways case.
• Procedural Delays: The requirement for mandatory hearings for all applications contributes to lengthy delays. The average time for insolvency resolutions has increased, indicating that procedural inefficiencies are exacerbating the situation.
• Ineffective Urgent Listings: There is no robust system for urgent listings before the NCLTs, leading to further delays in critical cases. The discretion given to registry staff regarding case listings can lead to inconsistencies and unpredictability in case management.
• Judicial Discretion Issues: There is a growing tendency among NCLT and NCLAT members to ignore Supreme Court orders, undermining judicial authority and eroding trust in the system.

How can procedural innovations enhance the effectiveness of insolvency resolution?

• Specialized Benches: Establishing specialized benches for different categories of insolvency cases could improve efficiency and ensure that cases are handled by members with relevant expertise.
• Mandatory Mediation: Introducing mandatory mediation before filing insolvency applications could reduce the number of cases entering the formal insolvency process, alleviating pressure on tribunals.
• Streamlined Hearing Processes: Revising the requirement for mandatory hearings on all applications could expedite processes, allowing for more efficient case management and resolution.
• Improved Infrastructure: Investing in adequate courtrooms and permanent support staff is essential to enhance operational capacity and ensure that tribunals can function effectively within the broader economic framework.

What reforms are necessary to transform the IBC into a proactive economic tool?

• Reassessment of Tribunal Structure: A comprehensive review of the NCLT and NCLAT structures is needed to align them with current economic realities and demands, potentially increasing their sanctioned strength and operational hours.
• Focus on Domain Expertise in Appointments: Reforming the appointment process for tribunal members to prioritise candidates with relevant experience in insolvency matters will enhance decision-making quality.
• Encouraging Alternative Dispute Resolution (ADR): Promoting alternative dispute resolution methods within the insolvency framework can help manage caseloads more effectively while providing quicker resolutions for stakeholders.
• Legislative Amendments: Continuous legislative amendments should be made based on empirical data and stakeholder feedback to address emerging challenges within the IBC framework.
• Cultural Shift Towards Credit Discipline: Encouraging a cultural shift that emphasizes credit discipline among borrowers will support a healthier economic environment conducive to investment and growth.

Way forward: 

• Strengthen Institutional Capacity and Expertise: Enhance the operational capacity of NCLT and NCLAT by increasing strength by appointing members with domain expertise, and providing adequate infrastructure and support staff to streamline case management and reduce delays.
• Promote Alternative Dispute Resolution (ADR): Integrate mandatory mediation and other ADR mechanisms within the IBC framework to alleviate tribunal workload, ensure quicker resolutions, and foster a collaborative insolvency ecosystem.

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