As the Narendra Modi government celebrates the “Azadi Ka Amrit Mahotsav”, an initiative to celebrate 75 years of independence, it is worth assessing the success of India’s bankruptcy code, which is arguably one of the most progressive commercial laws enacted in recent times. is one. The country offers companies “freedom to exit”.
This game-changing law made its debut in 2016 as the Insolvency and Bankruptcy (IBC) Code of India, which allowed companies an easy and time-bound exit. The IBC effected a tectonic shift in the method of lending. At the beginning of its implementation, the default is as small as Insolvency proceedings can be initiated by the 1 lakh affected creditor. This gave creditors confidence that borrowers, especially promoters, would take their debt obligations seriously.
However, the law was found to be wanted. Persistent delays were observed. In 2020, the delays and contributions of each of these stages were mapped, and it was noted that the average total delay accounted for 64% of the time taken to obtain approval for a resolution plan from the Committee of Creditors (CoC). The reason was and adjudicating authorities, bankruptcy courts.
In its early years, IBC faced initial problems and it was expected that with the passage of time these would be resolved and its functioning would improve. However, according to the Insolvency and Bankruptcy Board of India (IBBI) newspaper for January-March 2022, 64.7% of all cases accepted for Corporate Insolvency Resolution Process (CIRP) since 2016 have closed, 11 of them. % withdrawn, approximately 14% settlement, 30% liquidation and 9% resolution (in which a resolution plan was approved). The data released by IBBI shows that the resolution rate of cases under CIRP is quite low and the number of cases which see liquidation is three times more than the cases resolved.
Thus, it is clear that the CoC and the courts have been impediments to the success of the IBC. Banks, especially public sector banks, are unable to take practical decisions as any risk taker who can potentially get a lower rate of recovery of dues in the short run may be subject to vigilance inquiries and audits. It withholds decisions. Therefore, we should allow banks to take bold decisions and not create an environment where they limit their decisions to choosing ‘L1’ or the shortest possible haircut coat for fear of future trouble. Most importantly, banks need to be freed from this regulatory overhang so that they can take bold measures to restructure. To achieve this, bankers must be protected to make actual decisions during the resolution process, based on grounds such as the ‘business decision’ rule available to board of directors in many countries.
Further, given that most of the delay occurs at the stage of case admission, it is permissible to apply for admission u/s 7, 9 and 10 of IBC on written petition instead of oral argument. In addition, one can identify provisions under the IBC where courts are mandated to administer, not adjudicate. But concerns remain over the expertise of commercial court judges to decide on such matters. Commercial Courts require fresh talent with business sense to take proper decisions.
The aim of the insolvency litigation process should be to reduce the duration of the process and also reduce the volume of the case, so as to reduce the resulting uncertainties. This can be done by shortening the window within which a party must file a claim, whether it is a preliminary challenge or appeal, which is shorter than elsewhere in civil or criminal litigation. In France, it is usually 10 days; In 2021, through insolvency and reorganization law reforms, it further enhanced this by providing for full judicial settlement of certain disputes before the reorganization plan is ratified by a court. In the same spirit of limiting bankruptcy litigation, the reform also limits which parties can initiate certain legal actions. These include court-appointed insolvency practitioners or parties involved in the reorganization process. Another feature that is worth noting is that either the insolvency professional of the case should be given some adjudicating power or a supervisory judge should be appointed for each case. In France, such judges have the exclusive power to authorize significant settlements with a bankrupt company, some of which also require the insolvency court’s ratification. They are often the first to decide on an issue, and although their decisions are subject to challenge in bankruptcy court and subsequent decisions can be challenged before a court of appeal, bankruptcy courts uphold the orders of supervisory judges. Huh. Most litigants expect that they will have to take their case to a court of appeal in order to effectively challenge a supervisory judge’s decision, which is not easy.
Finally, we need a serious rethink on how to design an appropriate insolvency ecosystem for India amidst our current challenges of limited court capacity and high regulatory cholesterol. Whatever decision the government takes, it is important to take timely action before the IBC loses its sheen and stakeholders who see this law as a savior have given up hope and search for a new regime.
Neeti Shikha is the Associate Dean of the Indian School of Public Policy.