India’s Insolvency and Bankruptcy Code (IBC), 2016, was designed to focus on easing stress in chronically ill companies, either through resolution or liquidation, as in our banking sector with non-banking companies. The prevailing system can do that by increasing the performing assets (NPAs). well not well. Globally, mechanisms such as the IBC’s Corporate Insolvency Resolution Process (CIRP) have been the last resort; That is, once all other options like arbitration, settlement and arbitration are exhausted. However, over the past 5 years IBC law and practice in India has matured to address enterprise morbidity and focus on resolution of disputes through means other than litigation.
However, critics of the IBC may not be justified in blaming it for the delay in resolution and the huge haircuts that creditors inevitably suffer, given the chronic illness of corporate debtors and the absence of a market for stressed assets, It is imperative that measures are taken to reduce the IBC delay. , Long delays result in larger haircuts, as the value of sick companies depreciates at an increasing rate over time. Resolution, and in some cases liquidation, takes up to 450 days under the IBC, as against the mandated period of 180 days (extendable to 270) as of March 2022, according to records of cases. According to a study conducted by ICAI’s Indian Institute of Insolvency Professionals, each CIRP takes an average of three litigation suits, which involve 113 days and cost approx. 18 lakhs. This is eye opener. The time limits of the IBC are guide and not mandatory. Benches of the National Company Law Tribunal (NCLT) are bound to decide on every application filed by any stakeholder, even if the latter is found to be frivolous in nature. Such an adjudication process, with litigation, counter-litigation, and multiple appeals, renders the IBC’s timeline meaningless.
The Standing Committee on Finance in a recent report has said that our insolvency process has been hampered due to long delays far beyond the statutory limits. It recommended that misuse or abuse of well thought out provisions and procedures should be prevented by ensuring an element of finality within a statutory stipulated period, without protracted litigation.
Increase in NCLT benches cannot in itself be a permanent solution, unless the quantum of litigation is reduced. Thus the solution lies in promoting arbitration for out-of-court proceedings, with legislative recognition for speedy dispute resolution. As an alternative mechanism for this, arbitration may prove to be an economical option. Being non-adversarial in approach will help in maintaining harmony in business relations and save honest entrepreneurs from the stigma of bankruptcy.
In India, there are no special provisions for arbitration under the IBC. Furthermore, we lack uniform rules of procedure to govern arbitration; Thus, the proceedings take place in accordance with the rules laid down by each High Court. The Companies Act of 2013 and the MSME Development Act, 2006, provide for arbitration as a means of dispute resolution mechanism. However, these processes are irregular in the pre-litigation stage, whereas in the post-litigation, these cases are governed by the Code of Civil Procedure.
The US has been at the forefront of applying arbitration to various stages of bankruptcy proceedings – such as claims, creditors’ disputes, resolution plans, avoidance transactions and cross-border and group insolvency. More than half of US bankruptcy courts expressly authorize arbitration; It gained momentum with the enactment of the Alternative Dispute Resolution Act of America in 1998.
International experience shows that arbitration can be used under the IBC before and after the commencement of CIRP, and also disputes relating to verification of claims, assets, third parties, resolution plans, avoidance actions and the like. can be covered.
The Arbitration Bill of 2021 is a step in the right direction, as it requires the disputes to be resolved and settled through arbitration, whether civil or commercial, before going to any court within a mandatory period. Agreements resulting from arbitration shall be binding and enforceable in the same manner as the decisions of the court. However, the effectiveness of the proposed framework may be undermined by the fact that unwilling parties are allowed to withdraw from arbitration proceedings after having communicated as much as possible to the arbitrator concerned.
To be effective in insolvency and bankruptcy cases, the country’s IBC has moratorium provisions that mandate the suspension of ongoing civil legal proceedings until the CIRP’s findings need to be suitably amended. Appropriate steps should also be taken to lay down provisions relating to arbitration that cover the enforceability of arbitral settlement and the roles, rights and responsibilities of insolvency professionals, other stakeholders, etc., as such practice may lead to out-of-court arbitration. will be required. Legal return to ensure discipline and proper enforcement.
Mediation under the formal insolvency resolution process may prove to be more helpful than a protracted resolution plan aimed at business restructuring (or liquidation). It is now well appreciated that the interests of home buyers in the cases of insolvent housing construction companies would have been better served through mediation. Bankruptcy is a serious matter, as seen in the collapse of Lehman Brothers, which led to the 2008 financial crisis. Give mediation a fair chance.
Ashok Haldia is the former secretary of the Institute of Chartered Accountants of India.