When the IBC was adopted by India in 2016, Parliament had intended that the time period for insolvency resolution be mandatorily limited to 330 days, inclusive of one extension and the time taken in legal proceedings. This time limit is observed more in the breach than in performance. We must recognize that a delay depreciates the value of the enterprise in question, often causing a drastic drop in value.
There is no evaluation mechanism to determine the balance of public interest versus private interest when resolution proceedings are stalled (by injunctions, for example). But it’s clear that the loss of a lender’s security value affects the tax-paying public adversely, as public money is lost, and so such losses need to be clipped.
First, new amendments to the IBC must stipulate provisions akin to Section 41(ha) of the Specific Relief Act, 1963 (as amended), to prevent any injunction from being granted in favour of failed resolution applicants, as they have no financial stake in the corporate debtor.
Injunctions impede or delay the completion of corporate restructuring in time. Delays are seen to be caused by obstructive promoters, third-party litigators or competitors getting injunctions with an oblique motive to cripple their competition, and this must stop.
Second, the priority accorded to the secured financial creditors of an insolvent business has a great bearing on the cost of credit in India. Secured lenders adjust financing costs based on the priority that their claims are expected to get and the certainty of being able to recover dues in priority of their charge, whether the company is liquidated or not.
Any dilution or disruption of the priority order in insolvency proceedings goes against globally accepted principles and market practices. As India seeks external money for distressed asset acquisition financing and international interim financing, the country must abide by global norms. Otherwise, international and national lenders would avoid participating in the Indian market for distressed assets.
Third, three judgements of the Supreme Court in the cases of Rainbow Papers Ltd, Paschimanchal Vidyut Vitaran Nigam Ltd and Vidharbha Industries Power Ltd have significantly impacted or slowed down the process of admission of insolvency applications, which is the first step for the protection of companies faced with insolvency.
The Rainbow Papers case has created a significant hurdle for the resolution of insolvency of distressed corporates. It places the recovery of sovereign debt in the first-priority category along with dues to secured financial creditors.
The government back in 2016 had decided to relegate itself to fifth priority, as if their dues were equated with Operational Creditors under Section 53(1)(e) of the IBC. Urgent amendments are needed to nullify the impact of these judgements and restore the earlier status quo.
Fourth, the siphoning of bank funds or corporate money by promoters is a well-identified perversity. Some crooked promoters create group enterprises and create multiple entities in India and abroad to facilitate the movement of funds and diversion of money fraudulently.
In cases involving group enterprises, the IBC should incorporate provisions for procedural coordination among such entities (and their substantial consolidation) and clear rules to deal with perverse and criminal behaviour involving the misappropriation of creditor and/or public-sector funds. These must apply in India and extra-territorially as well.
Protocols may need to be put in place for reciprocity between countries on common procedures, so that assistance can be sought in dealing with fraudulent diversions of funds, the country can better enforce recoveries and also resort to other remedies. Monies and assets thus recovered would add to the pool available for distribution to creditors that need to minimize their losses.
Fifth, cross-border insolvency, as expected to be incorporated in India’s IBC, may not yet be in line with recommendations of the UN Commission on International Trade Law (UNCITRAL), which prepared and adopted a model law on enterprise group insolvency in 2019. States need to be equipped with modern legislation addressing both domestic and cross-border insolvency relating to multiple debtors and creditors of the same group.
We need to take a leaf out Singapore’s Insolvency Restructuring and Dissolution Act of 2018 to legislatively provide for a moratorium over a company that can be extended to its holding company, ultimate holding company and subsidiaries to enable group-wide restructuring and asset tracing. Minimally, such protocols need to be established between India and its trading partners by means of appropriate reciprocal arrangements.
Sixth, ad hoc solutions or mechanisms crafted by particular judgements have been applied in India for group insolvency and cross-border cases, as seen in the cases of Jet Airways and Videocon.
This exposes a bare cupboard for dealing with group insolvency involving multinational creditors and debtors, which need to participate in the process under the assurance of legislative certainty, rather than on the basis of fallible judicial discretion and judge-made procedures.
Lastly, the IBC and its regulations and their adjudication by the National Company Law Tribunal and its appellate body reveal a conflict between the principles of value maximization and time-bound resolution. Breaching statutory regulations by sidestepping these as merely ‘directory’ and not mandatory casts corporate insolvency cases into disrepute.
Not only is it against the Rule of Law that India abides by, it causes international participants to contend that the insolvency law and its procedures have little certainty and sanctity in India. Evaluating their risks as unacceptably high, such participants then avoid participation in the Indian market. This does not serve the country’s economic interests well.
These are few salient examples of shortcomings that need to be addressed as India moves to amend the IBC to boost its efficacy as a law for tackling cases of corporate insolvency.