The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been the talk of the business and legal world since its inception. It is touted as the primary reasons for India’s rise in the Ease of Doing Business ranking from 130 to 63 in the span of 5 years. Owing to its relationship to the economy and commerce, the government has been incredibly proactive in tweaking with yearly amendments. However, what has been lost is the certainty of the process that is a fundamental pillar of a strong insolvency resolution framework. The waters are further muddied by over-liberal feel-good addendums to matters of commerce that erode from the ambitious objects under the IBC.
In this article, I will broadly cover the amendments made under the IBC over the years and highlight some of the systemic errors that India’s insolvency regime is being subjected to.
1. Background and Overview of IBC Amendments
1.1. First Amendment (2017)
In the initial period of the operation of the IBC, certain amendments were made both of substantial and procedural nature, including (i) Introduction of prohibition on related persons, willful defaulters, undischarged insolvents, etc. from presenting resolution plans to the Committee of Creditors (‘CoC’) in case of CIRP and sale of assets in case of liquidation. This was contrary to the spirit of the Bankruptcy Law Reforms Committee Report (‘BLRC’) which did not seek to distinguish between business failure and malfeasance. (ii) Giving the IBBI power to provide conditions to be fulfilled in acceptance of a resolution application by the CoC. (iii) extending the application of IBC to the personal guarantors of the corporate debtor along with partnership firms and individuals. (iv) insertion of a residuary clause for punishment for the contravention of the provisions of the Code.
1.2. Second Amendment, 2018
This amendment has perhaps been the most controversial of all the amendments to the IBC. the Highlights of the second amendment were: (i) Inclusion of Real Estate Allottees to the definition of financial creditors, (ii) adding exceptions to the multi-layer framework of disqualifications under Section 29A to bona fide investors and promoters in the case of MSMEs, (iii) expand the scope of ‘dispute’ in the case of creditors’ right to apply, (iv) clarifying sureties to the be outside the protection of moratorium, (v) threshold for the approval of the resolution plan was reduced from 75% to 66% and for the other routine decisions was reduced to 51% (vi) clarifying the application of the Limitation Act, 1963 to the proceedings under the Code.
1.3. Third Amendment (2019)
Highlights: (i) Crafiying the usage of methods of mergers, amalgamations or demerger under the resolution plan, (ii ) introduction of the 330-day time limit for the completion of the CIRP, (iii) strict 14-day timelines to decide on the admission of the insolvency application, and in the case of any extension, reasons to be recorded in writing, and (iv) clarifying the scope of the voting power of authorized representatives on the CoC.
1.4. Fourth Amendment (2019)
The third amendment to the IBC comes as a respite and correction of a lot of past mistakes. (i) a threshold to the filing of applications by Financial Creditors, (ii) Expansion of the scope of interim finance, (iii) expanding the scope of the moratorium to prohibit termination of government contracts or critical goods and services to the corporate debtor during the insolvency proceedings, (iv) immunity to successful resolution applications or attachment of property with regard to offences committed by the past management.
2. India’s Performance in Insolvency Resolution
India’s overall ranking in the Ease of Doing Business rankings has reached soared from 130 in 2016 to 63 in 2020. One of the key players in this jump is India’s performance in insolvency resolution. India’s score in insolvency resolution has just about doubled since the introduction of the IBC. However, even among these metrics, there are few that stand out, first, the average time for insolvency resolution has come down from 4.3 years to 1.6 years. Second, the cost of the resolution has remained the same. Third, the strength of the resolution framework has seen a downward trend falling from rising from 6 to 8.5 but falling to 7.5 in the last year. While these indices are positive overall, there are some fault lines that cannot be ignored. Here is a more elaborate look of India’s performance since the introduction of the IBC:
|Insolvency Outcome||Time (years)||Cost (% of estate)||Framework Strength||Commencement of Proceedings Index (0-3)||Management of Debtor’s Assets Index (0-6)||Reorganization Proceedings Index (0-3)||Creditor Participation Index (0-4)|
3. Glaring Errors in the Approach
One mustn’t forget that the IBC is not only a means of recovery of debts but a systemic revolution in India’s market for finance and thus affects the economy as a whole. The past regimes were not only fragmented but marred with an inconsistent approach to the resolution of defaults and debt recovery. Not only it is the IBC to be treated with greater latitude, but the goal behind this framework also ought to be institution building and not just problem-solving.
Global best practices indicate that an insolvency resolution mechanism is most effective when bolstered with proactive but stable legislative reforms. Further, working of the insolvency legislation and any reforms to it must be guided by commercial considerations, not by the extraneous ideas of equality and fairness. For example, the NCLAT’s egalitarian verdicts reading in principles of equality and fairness are against commercial wisdom and rightly have been set right by the Supreme Court subsequently. There are numerous instances in which the reforms to the Code have stood in its way, these are:
(i) Hurried Legislation
One of the universally accepted and most pernicious causes of overly complex legislation is hurried and wanton legislation. Sadly, this seems the case with the IBC. Important pillars like public and legislative consultation are largely ignored and even parliamentary processes are flouted. Illustratively, the fourth amendment Bill introduced in parliament in violation of the rule of advance circulation and was hurriedly passed by way of an ordinance.
As has been consistently been held by the Supreme Court, the ordinance making power of the President cannot be utilized as a matter of course. The current practices fly in the face of that settled law. Even otherwise, the government cannot claim immunity from all due process merely because the IBC acutely affects the economy. On the contrary, that itself is a call for legislative discipline.
(ii) Home Buyers as Financial Creditors
In one of the most egregious examples of popular self-sabotage, the 2018 Amendment to the Code had deemed all real estate allottees, a financial creditor. The underlying logic of this move was itself shoddy at best. If a real estate allottee gives an advance and makes a payment for a home, it is in anticipation of receiving an asset and not purely as a loan to the builder, more as an advance on a purchase. That cannot strictly be termed a ‘financial debt’. Yes, the real estate market has been over-run with malfeasance and defaults but when considering a ‘fair’ remedy, legislators cannot forget the propriety and logic underlying the remedy. As a result of this amendment over 1800 applications have been field against builders by real estate allottees, in the exercise of their statutory power.
Finally, to mitigate this disaster, the 2019 Amendment Ordinance put a limitation on the right to apply under Section 7 of the Code. Now, an insolvency application must be filed jointly by at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less.
(iii) The Perils of Section 29A
An insolvency regime is meant not only to address resolution of defaults arising out of malfeasance but an equally, to provide a way out to the bona fide promoters to start afresh with the reorganization of their corporate debt. This has been the international best practice that was espoused even in the report of the Bankruptcy Law Reforms Committee. The bar against related persons as resolution applicants under Section 29A abrogates revamping of business failure. A promoter cannot hope to come out such business failure with his company in hand. The only option that is left to such a promoter is to either settle the debt out of the court or post-admission by approval of 09% of the CoC. All this is largely outside the scope of reform under the IBC and renders a fundamental part of the IBC defunct. Looked at broadly, such blanket prohibitions are the result of denial mentality vested in short-sightedness. Rather than developing practical solutions, to blanketly abandon business reorganization under the Code betrays the true intent of the law.
(iv) Judicial Intervention
Very few laws in recent times see the level of judicial intervention that this special law does. Though the scope of judicial intervention is admittedly fairly low according to the BLRC and the United Nations Legislative Guide, intervention persists. The primary cause behind this are high stakes and indo-litigative approach to insolvency.
The supreme court had rightly intervened in the Essar CoC Judgement and circumscribed the realm of judicial review over the decisions of the CoC. While the Court’s dictum is the law under the constitution, it cannot still be denied that there is sufficient room for the legislature to step in and limit the scope of judicial intervention. I have been particularly concerned with the decisions of the NCLAT that overindulge in extraneous principles forcing them into the interpretation of this fundamentally commercial legislation.
(v) Timelines for Insolvency Resolution
Time frames have been largely useless under the IBC, even after the 2019 amendment had made 330 day resolution period mandatory. The reasons for these are (i) indo-litigative and not commercial approach to insolvency, (ii) substantial demand, (iii) abuse of process, (iv) excess of judicial intervention, etc.
To begin with, one cannot ignore the fact that this legislation has been a long time coming in India and resolutions long overdue had found recourse all together only at the introduction. However, the institutional mechanism of the NCLTs is grossly overburdened by the pressure of the IBC matters which marred by our over-litigative nature, are treated as civil suits and not as a commercial remedy. This problem goes to core governance matters like the appointment of judges, adequacy of resources, governance frameworks, etc. Therefore, the best place to start to chop down the current backlog would be first, to strengthen the NCLT infrastructure and second, to statutorily restrict judicial interference. Thereon, the IBC process ought to be reformed in a more commercial and less litigation light.
Introduction of egalitarianism or conflated models of democracy into strict matters of commerce are not only absurd, but they also militate against the effective exercise of commercial wisdom. While in the short terms these feel-good measures may bring out a feeling of equity and justness, in the long run, they prove hostile to the larger framework of commerce, especially when affected in something as all-encompassing as insolvency resolution. As we had to scrap a substantial part of our socialist ideology when the fat lady sang in 1990, one would think that we would have learnt a lesson. I believe that the best way to realise the objects of the IBC is to take a more stability-oriented approach driven by the primacy of commercial wisdom and efficacy in policymaking.
Matters like insolvency resolution cannot be relegated to ad-hocism as they flourish under stable institutionalism. The current reactionary policy standard betrays the objects it seeks to uphold under the IBC. While targeted improvements can be appreciated, as they are pursued today, they detract from the overall object of ease and effectiveness that the law espouses. Stability and certainty in the policy of government ensure more meaningful development of the law, to the benefit of the stakeholders. If the legal basis of commercial decisions is oft augmented, the result would be a haphazard regime that knows only to play catch up and the not, in sports terms, the long game.
– Siddharth Kumar