CONTEMPORARY ISSUES WITH INSOLVENCY AND BANKRUPTCY CODE

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (IBC or the Code) is India’s most major financial policy since the 1991 New Economic Policy, which included the liberalisation, privatisation, and globalisation of the Indian economy.[1] Because of the significant policy reforms that followed this strategy, India saw enormous economic development, including the reduction of protectionist policies, inbound capital flows, and the start of divestment in government-owned public sector firms. As a result, India’s banking industry has grown as a source of financing for the country’s expanding business sector. There is a need to amend and transform insolvency and bankruptcy laws for strengthening India’s business operations and money markets, the Indian government introduced the Insolvency and Bankruptcy Code of India 2019, as a holistic code for dealing with personal and commercial insolvency and bankruptcy (IBC).

CRITICAL ANALYSIS

  • Lacking Infrastructure and shortage of benches:

Given the National Company Law Tribunal’s (NCLT) lack of administrative and competent members, efficient resolution of insolvency problems may become a distant dream unless specific benches to hear insolvency cases are created or the number of Benches is greatly raised and fully equipped. There are just 14 benches in the NCLT network around India.[2] A large number of matters involving corporation law has to be decided by the NCLT. Amongst which only 94 of the 1,858 cases are tied to insolvency, and they have had a resolution plan approved.[3]There are several instances where NCLT is asked by a creditor to place a corporate debtor in Corporate Insolvency Resolution Process (CIRP). Another reason for the delay is that wealthy and strong corporations stall cases by constantly moving them between the NCLT, NCLAT (National Company Law Appellate Tribunal), and Supreme Court while creditors await decision of various tribunals. Another issue of debate is whether the amount of time which litigation uses should be included in the 270-day settlement timeframe or not?Nonetheless, the value of assets has obviously been lowered due to the delays.

  • Lack of experts:

The Code’s effective implementation will need a large number of qualified and qualified insolvency experts. A strong emphasis and well-defined plan will be necessary to establish a sizable pool of insolvency specialists and an institutional structure that will generate, certify, and govern them.These insolvency specialists will need to be able to not only grasp the subtleties of restructuring/liquidation, but also manage the company’s affairs during the process. Excellent execution of the Code would be greatly hampered unless an efficient infrastructure of insolvency experts who are also effective managers is put in place.

  • Interconnections with current legislations :

The Code amends eleven other statutes, including SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002), the Companies Act 2013, SICA (Sick Industrial Companies (Special Provisions) Act1985) and others, to carry out the requirements of the Act related to insolvency and bankruptcy of all natural and legal people. To guarantee that there are no conflicts or overlaps with current laws, it is critical that the provisions of all essential legislations be synchronised.[4] Failure to do so may result in additional misunderstanding in the near term over the applicability of certain legislation.

  • Financial creditors v. operational creditors:

In order of succession, operational creditors will be paid after distressed financial creditors. Financial creditors extend loans after a greater level of risk evaluation, whereas operational creditors may not have the same chance owing to business constraints. As a result, their position in the terms of priority for managing the financial actions after liquidation has a negative impact on their interests. In the instance of Mobilox Innovations Private Ltd v. Kirusa Software Private Ltd, this was also considered.[5]

  • Tackling higher costs:

The Code uses the UK bankruptcy framework, which has a high cost of bankruptcy resolution. According to studies performed in the United Kingdom on their bankruptcy system, while adoption resulted in better realisations, it also raised the expense of bankruptcy, which may not appreciably boost recoveries.

  • Obstinate management:

The reliability and availability of the information provided in the information memorandum (‘IM’) would determine the design of a resolution strategy. The IRPAs’ capacity to create a thorough IM would be contingent on management’s participation, as they would be the only ones with access to the company’s management and operations.

  • Lenders’ rights:

The Code divides creditors into two categories: financial and operational creditors. Operational creditors are not included in the Committee of Creditors unless they represent for 10% or more of the overall debt. As a result, they are unable to vote on the proposed resolution. Consequently, they must take a higher percentage on their claims than financial creditors. Because small and medium-sized enterprises make up the bulk of functioning creditors, this is a huge issue for the Indian economy.

  • Repeated rounds of auction are prohibited:

Multiple rounds of bidding are prohibited under the IBC for businesses interested in purchasing bankrupt firms’ distressed assets. This condition was added to put an end to the endless negotiations and keep the bids competitive. However, it has led to out-of-court settlements. High-value bids are occasionally filed beyond the deadline. The Code isn’t clear on whether or not these late offers should be evaluated and taken into account. In some cases, rejecting an offer because of a timeliness violation is unfair to creditors since it obstructs real-time price discovery of distressed assets. Liberty House, for example, submitted a bid after the deadline had passed in the case of Bhushan Power and Steel Ltd. Following that, the winning bidder, Tata Steel, launched a lawsuit.

  • Promoters are prohibited from bidding for their own enterprises:

Following the first revision, Section 29A of the IBC was enacted. Micro, Small, and Medium Businesses, on the other hand, were given a break. This condition was put in place to keep unsuccessful promoters from regaining ownership of their company at a lesser cost. Section 29A fails to recognise that not all promoters are defaulters, and that in certain cases, debt default is the outcome of a business failure rather than a deliberate or planned default. A contrast should be established between these circumstances and fraud or intentional default. Promoters of such enterprises should be allowed to bid for their own businesses because they are the ones that make the highest bids and are most invested in the success of the company.

  • Insufficient provisions on cross-border bankruptcy and group insolvency:

The IBC lacks clarity on cross-border insolvency and group insolvency issues. Multiple entities of the same business group are referred to as “group insolvency.” The existing legislative structure of the IBC makes it difficult to resolve bankruptcy and liquidate corporate debtors within the same group. For example, Videocon Industries, Videocon Telecom, and a slew of other Videocon Group companies are bankrupt. Creditors may save time and money if they are offered the option of launching a combined action against the debtor group firms.

RECOMMENDATIONS AND CONCLUSION

The code is a ground-breaking piece of legislation that represents a significant shift in the rules governing insolvency and bankruptcy. India may now brag about having legislation that complies with international norms. The code’s institutional architecture suggests a large number of facilities, which is challenging given India’s land distribution issues and the poor state of pre-existing tribunals. The code also mentions a large number of professionals as well as well-trained and talented personnel. An appropriate organisation must be established to train, regulate, and certify these individuals. They must be capable of handling both corporate and individual insolvency. Without a doubt, the procedure will drain the exchequer’s resources and require a significant amount of time. There are a considerable number of cases outstanding before the debt collection tribunal (about 55,000), especially because the tribunal primarily deals with matters involving banks and specific financial entities.[6]Debts Recovery Tribunal (DRT) is now overwhelmed with insolvency cases involving businesses and individuals. The code also offers a right of appeal to NCLAT against NCLT and DRT orders. The insolvency and bankruptcy board of India has the responsibility of regulating insolvency experts; however, it will be extremely difficult for the board to monitor all of the country’s insolvency experts. These professionals have no ability to self-regulate.[7] The code interacts with 13 existing laws, 2 of which are repealed and 11 of which are altered, as a result of its implementation. The issue may emerge if there are laws that overlap, even though it is the legislator’s responsibility to guarantee that there are no laws that overlap.

The current implementation of the Code appears to be more concerned with quickly operationalizing the legislation than with successfully executing it. If these issues are not adequately addressed, the goal of implementing a new insolvency legislation, which is to increase the recovery rate in order to foster the growth of credit markets and entrepreneurship, would be defeated.[8]This significant reform will go a long way toward improving the country’s image in terms of ease of doing business, and a process driven by creditors will help attract foreign direct investment because investors and creditors can expect a well-defined time-bound process of 18 days, which is comparable to the best in the world. The Code is a step in the right direction, and though there will be intricacies and disputes in dealing with the process, it is commendable that the NCLT, NCLAT, and Supreme Court have produced several historic and distinctive rulings in such a short period of time. It is too early to say if an insolvency professional will be able to administer and manage a corporate debtor (sick business) if its promoters are unable to do so. However, as the Code has allocated complete power and obligations to insolvency specialists, these professionals will become specialists in dealing with the process in the future. Though most creditors, banks, and financial institutions rely on this Code’s procedures, some creditors have decided to use the Insolvency and Bankruptcy Code as a last resort.

Author(s) Name: Anchal Kanthed (Nirma University, Ahmedabad)

References:

[1]JØrgenDige Pedersen, Explaining economic liberalization in India: state and society perspectives, 28 World Development265 (2000), <https://www.sciencedirect.com/science/article/pii/S0305750X99001321>.

[2]NCLT, <https://www.nclt.gov.in/>, (last visited June 13, 2021).

[3]ANNUAL REPORT, 2018-19, IBBI, <https://www.ibbi.gov.in/uploads/whatsnew/47ab1d4d6412b43867ae8b585a90ba59.pdf> , (last visited June 11, 2021).

[4] Soumya Kanti Ghosh, Three years on, Insolvency and Bankruptcy Code is learning from outcomes, growing stronger, THE INDIAN EXPRESS, (Nov 29, 2019, 11.24AM), <https://indianexpress.com/article/opinion/columns/insolvency-and-bankruptcy-code-nclt-companies-6141701/>.

[5]Mobilox Innovations Private Ltd v. Kirusa Software Private Ltd. 2017 SCC Online SC 1154

[6] Philip Shuchman, Theory and Reality in Bankruptcy the Spherical Chicken, 41 Law and Contemporary Problems72 (1977), https://scholarship. law.duke.edu/lcp/vol41/iss4/5

[7] Michael D. Sousa, Bankruptcy Stigma: A Socio-Legal Study, Electronic Theses and Dissertations (2014), https://digitalcommons.du.edu/ etd/619.

[8]Pravakar Sahoo, Making India an Attractive Investment Destination: Analyzing FDI Policy and Challenges, The National Bureau of Asian Research, Washington (2014), https://www.nbr.org/wp-content/uploads/pdfs/programs/IIP_Sahoo_paper_121014.pdf.