The Insolvency and Bankruptcy Code, 2016 has ushered in a new era of restructuring process in India. This effective legal framework for timely resolution of insolvency and bankruptcy proceedings has promoted the availability of credit and emboldened the investors’ confidence in the Indian economy. While earlier, there existed multiple laws which led to the creation of multiple fora for dealing with corporate insolvency, the Code has been successful in creating a single unified umbrella which is exhaustive and complete in itself. The establishment of Insolvency and Bankruptcy Board of India (IBBI) as a separate regulatory authority makes regulations robust and precise, relevant to the time and for the purpose.
CONCERNS
However, no system is perfect, and the Code too, notwithstanding its distinct qualities, is not an exception. Chapter II of the Code lists out the process wherein Corporate Insolvency Resolution Process (CIRP) may be initiated against a corporate debtor in case of default of payment. Once the National Company Law Tribunal (NCLT) admits the application, it appoints an Insolvency Profession who manages the affairs of the Corporate Debtor. The lack of emphasis within the Code on the need of aggrandising the value of the property of the debtor and reorganisation of the company is worrying. This not only takes away the protection offered in doing business but provides no incentive for the Committee of Creditors (CoC) to work towards the revival and reorganisation of the corporate debtor during the CIRP. This often results in liquidation of the company, immediately followed by substantial economic loss.
The relatively nascent jurisprudence on the subject and the constant changes made in the Code adds to the problem. The recent amendment brought about by the Government in insolvency law does not inspire much confidence either. In light of the unprecedented pandemic, the Section 10A amendment to the Code grants protection to corporate persons who may have defaulted in discharge of their debt obligation, from any insolvency proceedings against them, starting from 25th March of 2020 until March 25 of this year. The amendment, however, is silent on granting the same relief to the corporate and personal guarantors, who may have been equally affected by the pandemic. This leaves them in a vulnerable position, wherein the creditors have the recourse to take action against them under the Code. Moreover, due to this blanket immunity, it creates an environment wherein corporate debtors are encouraged to commit defaults intentionally, without regard to the creditors.
The Code would do well by incorporating a ‘pre-packaged insolvency scheme’ similar to the practice used extensively in the United States, where the stressed company prepares a reorganisation plan before the Adjudicating Authority for approval. This could be viewed as a pre-IBC window having twofold benefit – it expedites the resolution process, and ipso facto results in less value destruction of the assets, thereby offering better value to the creditors. Such an intended measure assumes special significance at a time when creditors have had to endure long delays even under the new framework of insolvency provisions. Consider the latest IBBI quarterly newsletter as an illustrative example. Out of the 1942 CIRPs filed and pending under the IBC as of 30th September 2020, 1442 have been going on for more than 270 days, while another 349 have been pending for more than 180 days but fewer than 270 days. This structural problem is clearly reflected in the World Bank’s “Ease of Doing business Index” with US ranking 6th whereas India ranks a lowly 63rd.
The complication further arises due to the territorial nature of the statute which seldom acknowledges the international character of insolvency matters. Herein lies the need to implement the UNCITRAL Model Law on Insolvency in India which effectively deals with cross-border insolvency issues without interfering with the individual sovereignty of nations.
Another area of concern is the jurisdictional indifference of the tribunals against the commercial viability of resolution plans. A case in point is the recent order passed by the National Company Law Appellate Tribunal in the case of Kundan Care Products v. Amit Gupta, wherein the bench rejected the successful resolution applicant’s plea for withdrawal of his plan which became unviable post CoC’s acceptance, citing lack of jurisdiction to entertain such plea post CoC’s approval. However, a careful perusal of I&B Code suggests that it does not contain any provision to compel specific performance of a Resolution Plan by an unwilling Resolution Applicant. Moreover, rule 11 of NCLAT rules 2016 gives it ‘inherent powers’ to pass orders as it may deem fit. Such self-imposed restraints on the exercise of powers would deter prospective resolution applicants from laying out their plans, thereby defeating the very purpose of IBC law, which is to maximise the value of assets in the interest of all stakeholders. Nevertheless, the issue must be dealt judiciously, since excessive laxity too, can risk degenerating resolution application into a farce.
CONCLUSION
While the Code has indeed allowed for higher legal clarity when there arises any question of insolvency or bankruptcy, the implicitly incomplete statutory provisions, rising cost of rehabilitation and somewhat questionable jurisprudential layout is threatening to undo much of its positives. Overall, the IBC 2016 could well be termed as a knight, indulging in the classic one step sideward and two step forward movement, as displayed in chess. In this unprecedented time, the level of fine-tuning made in the Code will be crucial in determining the future course of insolvency and bankruptcy law in India.