In August, the Standing Committee on Finance of the Ministry of Corporate Affairs released its 32nd report on the implementation of Insolvency and Bankruptcy Code (IBC). The report was divided into six parts, viz. introduction, the four pillars of the code, functioning of the corporate insolvency resolution process, monitoring mechanism, the amendments to the IBC and cross-border insolvency.
The code was introduced for consolidating the laws relating to insolvency and bankruptcy of individuals and corporations. Although the IBC is still in its nascent stage, it has developed leaps and bounds since 2016.
The four pillars mentioned in the report are: Insolvency Professionals (IP) and Insolvency Professional Associations (IPA), information utilities, adjudicating authorities such as National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), and the Insolvency and Bankruptcy Board of India (IBBI). The role performed by IPAs is of utmost importance for the effective functioning of the IBC simply because they have been on the forefront and balance both the public and private interest while assuming roles such as executive, quasi-legislative and quasi-judicial. Given the importance of the IPs’ role, there are extensive regulations that have been successful in keeping a check on their conduct. Data shows that approximately 3% of actions have led to the suspension of the licenses and imposition of monetary penalties.
The information utilities now have an extensive database on debts and defaults that will prove useful for the lenders. This important source of information is solely managed by the IBBI through the National E-Governance Services Ltd.
The biggest hindrance in the implementation of the code is at the adjudicatory level. There is a lot of pendency at both the NCLT and NCLAT, and more than 70% of cases are not resolved within the 180-day timeline. The main reasons for the pendency are the unfilled vacancies at the tribunals and the failure to adhere to the prescribed deadlines. The suspension of filing of the cases under the IBC last year may also have distorted some figures in this regard.
The statistics show that in the resolutions that have been completed till date, the creditors had to suffer haircuts between 90–95%, which comes to a huge amount. It was observed that the code was not meant to deal with haircuts but was a creditor-driven process that ultimately depends on the committee of creditors. If the creditors don’t agree to this haircut, then the inevitable consequence is that the company will be liquidated. It also depends on when the company is brought under the ambit of IBC because initially these firms had no value left to be realised. This suggests that the timely filing of applications and commercial wisdom of the committee of creditors play a key role in resolving the debts of a distressed company.
The jurisprudence on the code is still evolving. So we have seen several major amendments almost every year now. The most recent and welcome one was the launching of pre-packaged insolvencies for the benefit of MSMEs. It has some improvements suggested by policy experts, but it was only treated as the first step to help the distressed MSMEs.
The next important point that requires immediate attention is the cross-border insolvency framework. The cases of companies such as Jet Airways and Videocon highlighted the gap posed by the lack of a legislative framework in this regard. The UNCITRAL (United Nations Commission on International Trade Law) Model law on insolvency is the most popular and widely accepted one on cross-border dealings among various jurisdictions, and some countries have even accepted the law as it is or with some modifications. The Insolvency Law Committee, in its report, had showcased its intention to incorporate the UNCITRAL Model Law and in 2020, a Cross-Border Insolvency Rules/Regulations Committee was formed under the chairmanship of K P Krishnan. This change has been introduced quite late as it was first suggested in 2018. Introduction of the UNCITRAL Model Law should be fast-tracked as it will help the code function better in a globalised world.
Overall, the IBC has worked moderately well considering the Indian scenario and most importantly, constant change is being introduced through amendments wherever required.
Kavya Lalchandani
Legal scholar based out of Delhi
(lalchandani.kavya@gmail.com)