Operational Challenges in the Process of Insolvency. Navigating the realm of corporate insolvency is no straightforward affair. While the Insolvency and Bankruptcy Code (IBC) 2016 aimed to streamline the process in India, there are operational challenges that corporates, professionals, and regulators grapple with. This article delves deep into these operational hiccups and their implications.
1. Determining the Authenticity of Claims:
When insolvency proceedings begin, there’s a flurry of creditors staking their claims.
- Challenge: Verifying the genuineness of each claim is time-consuming. It’s often tough to distinguish between genuine creditors and those presenting dubious claims.
2. Value Maximization:
The ultimate aim is to get the best value for the corporate debtor’s assets.
- Challenge: Inaccurate valuation can hinder this. It requires sophisticated techniques and professionals, and in the absence of these, undervaluation or overvaluation is possible, leading to significant financial implications.
3. Maintaining Business Continuity:
Even as insolvency proceedings are underway, the business must continue its operations.
- Challenge: Ensuring this without disruption is daunting. It can be hard to keep employees motivated, retain clients, or ensure the supply chain remains intact when the company’s future looks uncertain.
4. Timely Completion of Proceedings:
The IBC mandates completion of the insolvency process within specific timelines to ensure value preservation.
- Challenge: Overburdened tribunals, complex legal issues, or the sheer number of claimants can delay resolutions. This often leads to value erosion and reduced creditor recovery.
5. Management Takeover by Resolution Professionals (RP):
Once the insolvency process starts, the company’s management is transferred to the appointed RP.
- Challenge: This transition isn’t always smooth. The existing management may resist, leading to conflicts, loss of critical data, or operational roadblocks.
The aim is always to revive the company rather than liquidate it. The insolvency landscape is punctuated with a critical decision-making crossroad: whether to opt for resolution or to proceed towards liquidation. This choice isn’t just about numbers and assets; it’s also tied to livelihoods, investor trust, and market dynamics.
Liquidation:- This is the process of winding up a company, selling its assets, and distributing the proceeds to the creditors. Once completed, the company ceases to exist. Resolution:- This involves formulating and implementing a plan to restructure the company’s debt, ensuring its continuation. This could mean new investment, change in management, or a merger.
Challenge: However, finding a suitable resolution plan is often difficult. Creditors may not agree, or external factors might render resolution implausible, pushing the entity towards liquidation.
7. Protecting the Rights of Multiple Creditors:
Different classes of creditors (secured, unsecured, operational) often have conflicting interests.
- Challenge: Striking a balance where everyone feels they’re getting a fair deal is challenging. This can lead to disagreements and prolong the insolvency resolution process.
8. Cross-border Insolvencies:
With businesses operating globally, insolvency might involve assets and creditors across borders.
- Challenge: Dealing with cross-border insolvencies is complex due to varying legal frameworks, jurisdictions, and interests.
The journey of corporate insolvency is fraught with operational challenges. Recognizing and addressing these issues proactively can make the resolution more efficient and beneficial for all stakeholders involved. While the IBC 2016 was a step in the right direction, continuous refinements based on the evolving landscape will further smoothen the path to effective insolvency resolutions.
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