Streamlining the Insolvency and Bankruptcy Code
Recently, the Prime Minister mentioned the Insolvency and Bankruptcy Code (IBC 2016)as one of the key legislative reforms that would help aid India’s path to self-reliance on a high growth trajectory.
- The Ministry of Corporate Affairs (MCA), in its year end summary press release, provided the context of India’s rapid rise in the Ease of Doing Business rankings, and IBC’s important role of the IBC in it.
- According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018, which is a significant jump of 56 places.
- The recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019 and the overall time taken in recovery also improved nearly three times i.e. coming down from 4.3 years in 2018 to 1.6 years in 2019.
Need of Insolvency and Bankruptcy Code (IBC)
- Increased number of backlog cases in Indian Judiciary: Unfortunately, India suffers from a serious backlog in court cases, to the tune of nearly four crore matters pending final judgment.
- Decriminalization of Minor Offences: The IBC will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.
- The criminal penalties including imprisonment for minor offences act as major deterrents for investors.
- The government’s intent is to help differentiate between good faith mistakes and intentional bad faith actions, so as to penalise the former, and criminalise the latter.
- Requirement of resolution rather liquidation: It is clear that the inability to make significant decisions without full clarity of ownership and control delays resolution and the longer the delay, the more likely that the entity in question would move towards liquidation rather than resolution.
Significance of Insolvency and Bankruptcy Code (IBC)
- Improvement in ease of doing business in India: The IBC has been helping in significantly improving the ease of doing business in India and enabling it to emerge as a ‘Make for World’ platform.
- Transformation of insolvency regime in India: The IBC has been a far-ranging and structurally significant reform that has transformed insolvency resolution in India.
- Increased emphasis on time-bound resolution: It has focused on time-bound resolution, rather than liquidation, as an empowering tool to support companies falling within its ambit.
- It has successfully instilled confidence in the corporate resolution methodologyand creating a possibility for the creditors recouping some of their investments in firms being liquidated or going in for resolution.
- Easy flow of credit within India: Its core implication has been to allow credit to flow more freely to and within India while promoting investor and investee confidence.
- Institutionalised creditor-in-control mechanism: The IBC provides for institutionalised creditor-in-control mechanism for re-organisation and insolvency resolution of corporate entities, including corporate debtors (CDs) and personal guarantors.
Impact of COVID-19 induced lockdown on Insolvency and Bankruptcy Code (IBC)
- Clear provision but unclear proviso: The section 10A of IBC law provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period.
- The proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
- While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
- MSMEs forced to approach civil courts: The government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore, to protect MSMEs from insolvency petitions.
- The move operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
- Flaw in draft ordinance: The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting.
Challenges of Insolvency and Bankruptcy Code (IBC)
- NCLT benches got clogged off: The major challenge to the resolution process under the IBC is clogging of the 27 NLCT benches functioning around the country. The reasons for such clogging are:
- Rising financial stress in the economy leading to more cases being filed and
- A low threshold for the IBC process to set in (the default of Rs 1 lakh), attracting a greater number of cases.
- The other challenges faced by IBC are:
- Lack of adequate resolution professionals;
- Information asymmetry as resolution applicants often don't have information which is complete, robust and correct; and
- Delays caused by multiple appeals and contradictory verdicts at different levels.
- Delay in resolution due to legal disputes: Apart from delays due to legal disputes, there have been issues that are being settled as the law, still in its infancy, requires interpretation when it comes to the spirit of the legislation.
- Maintaining fine balance between Insolvency Professionals: The Insolvency Professionals (IPs) form the backbone of the IBC and their role requires a fine balancing act, given that they are in charge of managing the debtor company and are accountable to the committee of creditors and the adjudicating authority for their actions.
- Lack of Information Utilities (IUs) infrastructure: The lack of IU infrastructure is going to be another challenge.
- In absence of IUs, the IBBI is required to specify the evidence of default that can be used to trigger an IBC case which can cause inordinate delays especially if the NCLT gets involved.
Measures to be adopted to address lacunas in Insolvency and Bankruptcy Code (IBC)
- Improving speed in the working of IBC: The report of the Bankruptcy Law Reforms Committee speaks of the critical need for speed in the working of the bankruptcy code.
- Institutionalization of pre-packed insolvency resolution process: The government should seek at institutionalizing the introduction of a pre-packed insolvency resolution process, the need for which is highlighted by the necessary suspension of the IBC proceedings.
- Digitally conducting all processes and hearings: The introduction of technology would help ease of access to justice and greatly help ease of doing business from a process and efficiency standpoint as well.
- Clear provisions for implementing IBC during pandemic or other emergency: The IBC 2020 ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
- The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
Road ahead
- The IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
- The IBC goes beyond other similar pieces of legislation across the world, and through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy and assesses market realities.
- The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence and helped encourage entrepreneurship while also providing support to MSMEs.
- The streamlining and strengthening of IBC will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.
- The adequate institutional capacity is essential to ensure that the IBC does not suffer from the predicament of earlier reform attempts such as the DRTs.
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