One size does not fit all: the need for an alternative insolvency process

Smaller corporations often find the 270-day time frame required for a typical insolvency resolution process to be too long. In many cases, the creditors themselves are likely to wrap up negotiations and decide how to proceed in less time than the required 270 days.

The Bankruptcy Law Reform Committee (BLRC), whose 2015 report served as the basis for Indian insolvency legislation, determined that “there is merit in creating explicit provisions” for cases where the insolvency could be finished sooner.

The three categories of cases, as identified by BLRC, suitable for a fast-track process are:  

• entities with small scale operations.
• entities with non-complex creditors.
• and other corporates as may be identified in the future.

The BLRC report said that time would be the main difference between a typical CIRP and a fast-track insolvency. So, it suggested that the fast-track process be done in half the time it takes for typical insolvency.

When is fast tracking available under Indian law?

The fast-track insolvency procedure is outlined in the Insolvency & Bankruptcy Code, 2016 (IBC), which is India’s insolvency legislation. This mechanism has been available since June 2017, and is available to:

• “small” companies, defined as companies with a paid-up share capital under INR 40 million or turnover under INR 400 million;
• and unlisted companies with assets under INR 10 million.

The standard timelines for completing an insolvency resolution process in India as given in the statute is 180 days with extension of 90 days (270 days in total) plus 60 days exclusion due time taken in litigations during the process which extends the timeline up to 330 days. Fast-track process, on the other hand, have a 90-day deadline with a 45-day extension.  

Even this 45-day extension requires at least 75 percent of the creditors to agree. Once this super majority of creditors agree, it also requires sign off from the adjudicating authority (in India, the National Company Law Tribunal), which will only grant the extension if it agrees that the insolvency cannot be completed in 90 days.

The process is governed by the requirements in Sections 55 to 58 of IBC and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations.

How effective has this option been?

Despite the compressed timelines, the law still requires the same process to be followed as with a standard insolvency. The fast-track process, which would have sped up the insolvency procedure for small corporations, may not have been widely adopted for this reason, according to the Insolvency Law Committee Report of 2018. As a result, the committee advised against continuing with this separate procedure.

The amendments to the law between 2018 and 2023 however did not modify the fast-track process. Earlier this year, the Government of India issued a notice inviting comments from the public on several changes being considered to insolvency law.

One of the proposals suggested was that the fast-track process allow financial creditors of an insolvent company to approve a resolution plan through an informal, out-of-court process, with the court’s involvement being limited to finally approving the plan. The mechanism suggested also involves getting 66% of the company’s creditors to approve such a plan (the threshold is similar for standard insolvency processes)

The notice does not specify which procedural steps can be avoided through this route, and how much time can reasonably be saved through this process. It remains to be seen how and when the government acts on this issue, and whether it can make this an effective and attractive process to resolve smaller insolvencies.