Insolvency and Bankruptcy Code, 2016

In India, the legal and institutional machinery for dealing with debt default has not been in line with global standards. The recovery action by creditors, either through the Contract Act or through special laws such as- 

• Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes. 
• Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor aid restructuring offirms.
• Laws dealing with individual insolvency, the Presidential Towns insolvency Act, 1909 and the Provincial Insolvency Act. 1920, are almost a century old.

This has hampered the confidence of the lender. When lenders are unconfident, debt access for borrowers is diminished. This reflects in the state of the credit markets in India. Secured credit by banks is the largest component of the credit market in India. The corporate bond market is yet to develop. 

Objective of the new law

• to promote entrepreneurship, 
• availability of credit, and 
• balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and 
• for maximization of value of assets of such persons and matters connected therewith or incidental thereto

  Aim of law

• to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation. 
• Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt

The salient features of the law are as follows: 

i- Clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable. 

ii- Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”. 

iii- Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authorityand deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liabilities entities respectively. 

iv- Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities. 

v- Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals. 

vi- Information utilities would collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings. 

vii- Enabling provisions to deal with cross border insolvency.

VISION of law

The vision of the new law is to encourage entrepreneurship and innovation. Some business ventures will always fail, but they will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past. 

Pillars

A key innovation of the Insolvency and Bankruptcy Code is four pillars of institutional infrastructure. 

• First pillar is a class of regulated persons, the ‘Insolvency Professionals’. They would play a key role in the efficient working of the bankruptcy process. They would be regulated by ‘Insolvency Professional Agencies’. 
•  Second pillar is a new industry of `Information Utilities'. These would store facts about lenders and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place. 
• Third pillar  is in adjudication. The NCLT will be the forum where firm insolvency will be heard and DRTs will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate bodies, viz., NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.
• The fourth pillar of institutional infrastructure is a regulator viz., ‘The Insolvency and Bankruptcy Board of India’. This body will have regulatory over-sight over the Insolvency Professional, Insolvency Professional agencies and information utilities.

Challenges in implementation

• The NCLT will face the biggest challenge in the process of transitioning existing cases to the IBC.
• Adjudication capacity need to be enhanced, otherwise NCLT will fail to hear and dispose cases in a timely manner from the start. If it compromised due to capacity constraints, the effectiveness of the IBC will get diluted.
• NCLT concern is regarding the case law that develops under the IBC. Given that it is a new law, the procedures and common practices under it need to develop independently from the case laws under the pre-IBC regime. For this, the IPs, the IUs, the NCLT and the IBBI all need to be properly set up and functioning in a manner envisaged by the IBC.
• IPs form the backbone of the IBC. To ensure that the IPs perform their role without any misfeasance, well-defined entry barriers to the profession must be designed and the IPs must be closely regulated by the IBBI. A qualification examination has been proposed to get registered as IPs. This is modelled after the best practices of other jurisdictions such as Canada and the UK that have a well-functioning industry of IPs.
• The IBBI, however, has now licensed the first batch of IPs only on the basis of their professional experience.  IPs registered in the first round also need to be prepared to handle the complexities of the existing cases. The IBBI needs to have adequate capacity to monitor the IPs and ensure that malpractice and fraud do not seep into the profession in the early days. For this, the IBBI needs to ramp up its human resources and its IT capability and build a far greater level of preparedness than it is at, right now.
• The lack of IU infrastructure is going to be another challenge.
• All information regarding the creditors’ claims needed by an IP to form the committee can be easily collected from the IUs. It is therefore likely that in absence of IUs, initiating a case as well as forming the creditors’ committee will take far longer than envisaged in the IBC design. First, the delay in forming the creditors’ committee will reduce the time available to agree on a resolution plan. Secondly, the NCLT may exercise its judicial discretion and extend the CIRP beyond the time limit specified in the law.

The manner in which the IBC is currently being implemented seems to focus more on expeditiously operationalising the law rather than effectively implementing it. These concerns, if not addressed suitably, will defeat the purpose of enacting a new insolvency law to improve the recovery rate in order to promote the development of credit markets and entrepreneurship.

Suggestions

The IBC is an important reform for India and its successful implementation depends on meticulous transition planning. The first cases coming to the IBC are likely to be the existing corporate insolvency cases. Four steps are needed to ensure that these do not impact the design and effectiveness of the IBC in an adverse manner. 

The capability of the NCLT needs to be developed with adequate project planning. This could mean a special bench designated only for the IBC cases, scaled to the expected IBC case load and trained in dealing with commercial matters including the complexities of the existing cases. The NCLT needs to ensure that for any case coming to the IBC, whatever be its priors, the IBC provisions are followed without any exception. If the NCLT is built like a conventional Indian tribunal, it can develop a multi-year backlog very soon.

It is critical that the winding-up cases that come to NCLT are disposed of separately from the IBC cases and their outcomes in no way impact the IBC case laws. The capacity of the IBBI needs to be brought to scale as quickly as possible so that no malpractices or adverse priors develop in the IP practice and the entry barriers to the profession need to be implemented in accordance with the law. India has a long history of failure in the regulation of professions. The regulatory system for IPs must be designed to avoid creating yet another failed profession.

Finally, the IUs need to be operationalised. In their absence, the IBBI needs to specify clear guidelines that enable the timely admission and disposal of the existing cases. This means a rapid creation of regulatory capacity in terms of people, processes and information technology systems.

Adequate institutional capacity is essential to ensure that the IBC does not suffer from the predicament of earlier reform attempts such as the DRTs. Doing all of these needs time and needs proper planning. Rushing through the implementation of the new law may serve to improve India’s ranking in World Bank’s ‘Doing Business’ report but may not result in a de facto improvement of the insolvency resolution framework, thereby defeating the very purpose of the IBC.

Conclusion

The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from among relatively weak insolvency regimes to becoming one of the world's best insolvency regimes. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.

Commerce Gurukul