Efficient insolvency framework vital for 8% GDP growth

New Delhi: An improving insolvency framework is important for achieving 7-8 per cent economic growth over the next decade, the Economic Survey said on Friday and pitched for imposition of higher costs to prevent entities from filing frivolous applications during the resolution process.

The suggestion also comes against the backdrop of long delays in the insolvency resolution process in various cases. The Survey, tabled in Parliament, also called for reforms to improve operational efficiencies to speed up the resolution process under the Insolvency and Bankruptcy Code (IBC), which came into force in 2016.

“By addressing financial distress and NPAs (Non-Performing Assets), the Code has had an indelible impact on the health of the country's banking sector and redefined the debtor-creditor relationship,” it said. Creditors have recovered around Rs 3.6 lakh crore through resolution of stressed assets.

“The deterrent effect of the Code has led to a significant shift in debtor behaviour. Thousands of debtors are resolving distress in the early stages of distress. Till March 2024, 28,818 applications for initiation of CIRPs of CDs having underlying default of Rs 10.2 lakh crore were withdrawn before their admission,” the Survey said. An efficient bankruptcy system will help in freeing up capital, allowing better production, employment, and growth prospects.

“A continuously evolving and improving IBC framework is important to achieving a 7-8 per cent growth over the next decade. India's growth aspirations require capital to operate at the frontiers of productivity and efficiency,” the Survey noted.

According to the Survey, improving operational efficiencies to speed up the resolution process is important, especially for MSMEs, for whom legal costs can prove to be substantial. Improving time efficiencies in the system comes down to using innovative resolution routes such as the pre-pack arrangements for MSMEs, inter-disciplinary capacity building of resolution professionals across legal, financial and industry basics and minimising judiciary delays in proceedings, it said.

With respect to the National Company Law Tribunals (NCLT), a key institution in the insolvency ecosystem, the Survey said the tribunal could improve the time taken for admission with the use of technology and the aid of the court registry for verification, scrutiny, and clearing of defects in the application. “In dealing with frivolous applications, the tribunal needs to be more stringent, and using prevention by way of the imposition of high costs would have the necessary deterrent effect,” it said. Further, the Survey said tribunals have addressed the burden on the traditional judicial system by enabling specialisation in narrower domains to enable speedy relief by reducing formalist procedures and complexity. Tribunals are envisaged to reduce costs and improve efficiency.

The same would be possible if the trappings of the traditional judiciary were avoided both in procedure and stakeholders' mindsets, as per the Survey. “The IBC provides a non-adversarial resolution process but has not been enabled in practice at the NCLT. The design and execution of procedures in the NCLT may be revisited, keeping the quasi-judicial nature of the mandate as a foundational tenet.