India looks to further reforms of the bankruptcy code

When the Insolvency and Bankruptcy Code (“the Code“) was introduced in 2016, it highlighted the need to create a credit-friendly culture, an area where previous legislation had fallen short. But while the Code has proven its efficacy as a dynamic legal framework, there remain areas of concern over its application.

Below we review these and also highlight some of the updates including a framework for pre-packaged insolvencies that have come into force since the Code was launched.

One notable concern with the Insolvency & Bankruptcy Code is the absence of a structured approach to managing assets and liabilities in India and abroad. The bankruptcy courts in India have highlighted the need for alignment between domestic laws (within the Code) and foreign laws. Such synchronisation would not only foster harmony but also simplify the resolution process while mitigating conflicts stemming from cross-jurisdictional boundaries.

Group insolvency is another pressing issue which needs tackling. Within the corporate landscape, entities belonging to large conglomerates still grapple with complexities, primarily due to the absence of a comprehensive legal framework beyond the standalone model. While the bankruptcy courts in India, in the case of SBI vs. Videocon Industries Ltd & Ors, permitted the substantive consolidation of thirteen out of fifteen Videocon companies, comprehensive laws are yet to be established under the insolvency and bankruptcy regime.

For partnership firms and individuals, the Code has not yet notified the enabling provisions except in the case of a personal guarantor. The Code also lacks provisions to safeguard partner interests or claims against each other or the firm. The resolution procedures for such firms remain unaddressed. As explicitly outlined in the Code, a single partner is ineligible to initiate the resolution process. The provision stipulates that all or the majority of partners must jointly apply.

Progress in the development of the Code

Where we have seen progress is the opportunity for parties to opt for a pre-packaged insolvency following an ordinance that came into force in April 2021. A pre-packaged insolvency, as the name implies, involves an arrangement between debtors, creditors and third parties ahead of the formal insolvency process which can then be implemented once the process begins.

One of the limitations of the corporate insolvency resolution process is the fact that in several cases the threshold of 270 days was getting exceeded. As a result, more time was being taken and consequently more money was being spent, whereas, the pre-packaged process offers a refined version of the IBC mechanism, in terms of the time with the aim of reaching resolution within 120 days with the focus on micro small and medium enterprises. Under the pre-packaged process, the management of the process doesn’t shift to an Interim Resolution Professional but stays with the debtor, thus keeping the hindrance to the business at a minimum.

In other developments, the time consuming multi-jurisdictional aspects of the insolvency procedures has been addressed by The Ministry of Corporate Affairs through its Insolvency Law Committee, which has recommended the adaptation of the UNCITRAL Model law with certain reforms.

Saving the time of the bankruptcy courts in India and considering the pendency of cases, the new regulations under the Code mandate the filing of the Information Utility (“IU“) reports in Section 7 & 9 applications to keep reliance on the records registered under the IU that show the case status as well as progression to creditors and debtors.  IU’s primary objective is to provide undisputed information in the initiation of insolvency resolution processes, with further development in terms of infrastructure and implementation with an efficiency that aims to achieve the objective of the bankruptcy courts in India. IU is established under the Code[1] to accumulate and validate the financial information from companies. These records are relied upon by the bankruptcy courts in India which saves time by achieving the end goals of the time-bound resolution period of the Code.

Bringing it all together

The Code has played a pivotal role in shifting the paradigm from promoter possession to creditor control, earning recognition from the World Bank as a top performer in South Asia. Every code comes with its set of limitations, and the Insolvency & Banking Code is no exception. According to IBBI data[2], the number of resolution processes under the Code has been smaller compared to companies that opted for liquidation. Liquidation poses challenges, particularly with regards to the relatively low returns it yields.

Undoubtedly, the Code stands as a significant stride in reshaping resolution procedures, streamlining businesses, nurturing the nation’s credit culture, benefiting creditors, and providing flexibility in asset liquidation. Nevertheless, legal frameworks cannot remain static, and the Code must continue to evolve across various dimensions to approach a refined state, aligning more closely with its intended objectives.

[1] Section 210 of the Insolvency and Bankruptcy Code, 2016

[2] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India (July-September 2022)

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