The insolvency and bankruptcy landscape in India underwent a radical transformation with the implementation of the Insolvency and Bankruptcy Code (“IBC“) in 2016. This legal framework has expedited the resolution process and strengthened creditor rights.
However, managing the intricacies of insolvency and bankruptcy cases in a densely populated and economically diverse country like India continues to pose formidable challenges. To effectively navigate these complexities and streamline the process, the use of Artificial Intelligence (“AI“) has emerged as a promising solution.
The Impact of AI
- Data Analysis and Prediction: AI can help practitioners to analyse substantial volumes of financial data, historical case records, and economic indicators to predict potential insolvency risks. When coupled with the existing Information Utility (NeSL) stipulated in the Insolvency law in India (section 210 IBC) this AI-driven early warning system can empower creditors and regulatory authorities to take pre-emptive measures, ultimately reducing the overall number of insolvency cases.
- Preparation of the Information Memorandum: An essential duty of a resolution professional is the preparation of an information memorandum for the Corporate Debtor. Here, AI can play a pivotal role. The insolvency process entails extensive documentation, and AI-powered tools can automate document organisation and review, ensuring precision while minimising human errors.
- Fraud Analysis and Detection: Resolution professionals need to determine if the business of the company has been conducted to defraud the creditors and the company has not undergone any avoidance transactions (section 35A (1) IBC). AI can be used to scrutinize financial transactions and patterns to identify potential fraud, acting as a safeguard against financial losses for creditors and stakeholders. However, it is crucial to exercise caution, as AI-generated results may not always be entirely accurate, necessitating human judgment in reaching conclusions.
- Workflow Optimization: “Speed is of essence“, has been reiterated by various judgments of the Indian courts whilst dealing with insolvency matters and it is essential for resolution professionals to adhere to the timelines under the IBC , it being a time bound process. AI-powered software can streamline case management by efficiently allocating tasks, setting deadlines, and establishing priorities. This optimisation ensures that the insolvency process as run by the insolvency professional remains efficient and transparent, ultimately reducing delays and costs.
Major Challenges and Considerations in using AI
- Data Privacy and Security: Safeguarding sensitive financial and legal data is of utmost importance. AI solutions must adhere to stringent data privacy regulations, including the European Union’s GDPR and India’s Personal Data Protection Laws.
- Ethical Concerns: Upholding ethical standards in the utilization of AI within insolvency and bankruptcy matters is imperative. Mitigating biases, ensuring fairness, and maintaining transparency in AI algorithms should be prioritised.
- Legal and Regulatory Challenges: The legal framework encompassing AI’s role in Indian insolvency contexts must be clearly defined and continually updated to accommodate technological advancements.
- Skills and Training: The implementation of AI in insolvency and bankruptcy proceedings necessitates legal professionals to acquire AI-related skills and knowledge. This may entail training and upskilling initiatives.
Although AI undoubtedly promises to reshape the landscape of insolvency and bankruptcy proceedings, it is vital to emphasise that AI serves as a tool to augment professional efforts rather than replace them. Human judgment, empathy, and ethical considerations remain irreplaceable and central to this sector.
The potential for harnessing AI in insolvency and bankruptcy matters in India is immense, offering the prospect of heightened efficiency, transparency, and accuracy in the resolution process. As AI technology continues to evolve, it is imperative for stakeholders, including regulatory bodies, legal professionals, and financial institutions, to embrace these innovations collaboratively. By doing so, they can effectively address challenges and leverage AI’s transformative capabilities.
Photo: 132528154 | Artificial Intelligence © Wrightstudio | Dreamstime.com