The Insolvency and Bankruptcy Code, 2016 (“IBC”) came at a time of great need for the Indian economy. It is argued that, at the time, Non-Performing Assets were on their way to crippling the Indian economy which would have had far-reaching implications on banks and the economy at large. However, ever since the IBC has come into the picture, far-reaching and substantial strides in the recovery and restructuring of dues have been made whether in the form of pre-admission settlements or the Corporate Insolvency Resolution Process (“CIRP”). Despite its successes, we have seen grave shortcoming under the IBC and the wake-up call with regard to this was seen in the Hon’ble Supreme Court’s decision striking down the Reserve Bank of India’s Feb 12 Circular that had introduced the revised framework on the resolution of stressed assets on the Petition of the aggrieved power manufacturers and other industries. An analysis of this decision can be found here.
Why Context Matters
The Hon’ble Supreme Court had. while upholding the constitutionality of the IBC, held that such economic legislations are to be looked at with great latitude. However, it cannot be ignored that the IBC is, by design, contextually blind. Perhaps it is to tackle the usual abuse of process that such legislations are subjected to, or perhaps this is so to settle once and for all the inviability of excuses and justifications for a default. While this hardline view is what has contributed largely to the laurels it has been able to amass, the fact still remains that the context of why the Corporate Debtor’s insolvency came to be cannot blindly be ignored anymore.
If the preamble of the IBC and the Report Bankruptcy Law Reforms Committee are referred to, it is manifest that one of the primary objects that the IBC aims to fulfil is the maximization of the value of assets for realization, a necessary adjunct of the insolvency process.
However, a conflict arises herein as a premature and blind pursuit of financial debt under the IBC will have the effect of value destruction owing to the disappointing realizations made from such assets compared to the costs associated with them. Even the Supreme Court of India in the case of Dharani Sugars and Chemicals Ltd. v. Union of India took note of the plight of power sector entities that were suffering primarily on account of Government policy changes, failure to fulfil commitments by the Government, delayed regulatory response and non-payment of dues by DISCOMs. This has been further noted in the 37th Parliamentary Standing Committee Report on Stressed / Nonperforming Assets in the Electricity Sector.
Therefore, defaults need not only be the results of the acts and omissions of the corporate debtor but can also be circumstanced by no fault of their own. It is possible that the default might be the result of both. The obvious question that arises at this juncture is, why must a corporate debtor be pursued under the IBC, without any fault of their own (especially where the Government itself has played its role in this default)?
Let’s say in the blind pursuit of such a heavily encumbered debtor (as in the case of the power sector companies) by the Banks for their financial debts, the liquidation of such a company is sought. In realization of the debts, the assets would have to be sold at substantial losses. This will, in turn, lead to the realization of a pittance for its debts and substantial losses to the banks along with the ultimate loss to such corporate debtor and its constituents. The losers, therefore, are two.
Contextualizing Defaults under the IBC
Under the IBC, the creditor has the final decision in making an application for the initiation of CIRP against the corporate debtor. This discretion ought to be checked on the touchstone of the sound macro/micro economic realities, necessities and shortcomings. Such a decision must lie in the hands of the Central Government and be based upon sound reasoning.
Under Section 240A of the IBC, the Central Government may, in public interest, direct that the IBC would not be applicable to or be applicable with modifications to Micro, Small and Medium Enterprises. This power to exempt is not given in generality. The Author suggests that a similar provision be included in the IBC for granting exemptions to larger entities that would be devised by the Central Government in view of the macro/micro economic considerations and sound reasoning. However, this power must be circumscribed by strict safeguards and limitations. For instance, the decision-making criteria must be public and representative of reality, exemptions so granted ought to be mandatorily reviewed by the Central Government regularly and where exemptions are no longer needed, they must be terminated, etc.
It the above-proposed route was to be pursued, it would not be without its challenges and questions. There are:
- Which industries and sectors of the economy ought to be exempted from the provisions of the IBC?
- To what extent can the exemption from the Code be granted?
- For how long should such exemptions be granted?
- What should be the level of involvement/control or the role of the lenders in the course of this exemption?
- What kind of interim recourse be given to the lenders in the course of the exemption?
- Balancing the interests of all the stakeholders in the insolvency resolution process.
- Ensuring that such exemptions do not lead to the abuse of process under the Code.
- It would be expected that the industries and sectors to whom such exemption is denied or not made, would challenge the decision- or decision-making process of the Central Government thereunder.
- There may be a rise in the delinquency in honouring debt obligations in industries where an exemption has been granted. History supports this argument. However, the adjudicatory authority may take note of the behaviour of the corporate debtor to ensure that the default is not willful and in one’s control and if it is found to the contrary, the benefit of the exemption may be withdrawn.
The positive role that the IBC has played in the India cannot be ignored. With over 3 Lakh Crores in the recovery of dues from corporate debtors in just 2 years and its role in the first fall in the Non-Performing Assets in the economy, in recent times, have provided much-needed respite to the economy and the debt market. However, the IBC ought to grow from its hardline rationale of debt realization and take note of the nuances of the industries and the economy to ensure that undue hardship is not met out to working and operational encumbered industries and their constituents, where the government and its policy framework have failed them. For this, the Central Government ought to be vested with the power to exempt certain industries from the IBC or an extent of it.