The enactment of the Insolvency and Bankruptcy Code (IBC), 2016, is an important reform for India and its implementation has to be meticulously done. India does not have a great track record on the implementation of laws. IBC presents an opportunity to alter that image and exhibit that India can deliver prompt and effective implementation. While the government has chartered the course of its implementation with great zeal, the onus to make IBC successful now rests with other key stakeholders—the judiciary, adjudicating authority, insolvency professionals, lenders and borrowers. Each stakeholder must play an enthusiastic and constructive role in potent implementation of IBC and ensure that IBC matures commensurately with economic developments in the country.
Government of India
The scale and pace of insolvency reforms undertaken by the Narendra Modi government prove that political will is critical to drive reforms. As General Elections approach, the attention of the government might be taken over by policies involving populist agenda. The government must ensure the current momentum is not disrupted. In the world of insolvency, developments are rapid and many. The government will have to stay constantly on its toes and plug the gaps in insolvency law as they become visible. One of these is the absence of cross-border insolvency framework for fair and efficient administration of issues. India should adopt the UNCITRAL Model Law on Cross-Border Insolvency. Otherwise, courts and insolvency professionals will struggle to deal with insolvency cases involving cross-border issues.
Judiciary and the National Company Law Tribunal
The approach of higher judiciary and NCLT will have a far-reaching bearing on the outcome of IBC. The exigencies of IBC and its economic goals require the adjudication of issues by judiciary and NCLT not on the basis of technical questions of law, but based on the policy intentions and unique principles of insolvency law. The recent decisions of the Supreme Court with respect to the Lokhandwala Kataria Construction Pvt Ltd case allowing withdrawal of insolvency application after its admission, in exercise of powers under Article 142 of the Constitution, has sent shock waves amongst insolvency experts. IBC does not permit withdrawal of insolvency application after admission. Such restriction is based on the recognised principle that insolvency proceeding is a collective mechanism to pool together an insolvent debtor’s assets for the benefit of all creditors.
Once insolvency proceedings commence, the creditor or debtor, which has filed the application, becomes functus officio. Insolvency proceedings are thereafter driven by a committee of creditors for the benefit of the entire body of creditors. Even if the Supreme Court were to allow settlement between the parties, insolvency proceedings in respect of the debtor should have been allowed to continue. For insolvency law to work, it is important that players in the judicial arena appreciate the fundamental principles of insolvency.
The Insolvency and Bankruptcy Board of India
IBBI has been at the forefront of creating the architecture of the new insolvency law. It has set the bar high right from the start and must constantly raise the standards so that the market is vying to match its pace rather than the reverse of it. Global standards demand that the insolvency regulatory body should be independent from the government. IBBI should have expert independent directors on its board. The advisory committee cannot be a substitute for the role independent directors play.
As a regulator operating in the financial sector, IBBI should be rubbing shoulders with other financial sector regulators and work closely with institutions under the domain of the ministry of finance. The regulator will need to have a robust surveillance system. There are already murmurs in the market about the incompetence of a few insolvency professionals in performing their duties.
Such professionals sit at the heart of the insolvency system. Non-availability of adequate number of skilled and trained insolvency professionals is fast becoming a matter of concern. The complexity of insolvency demands that insolvency professionals are appropriately qualified and possess skills to balance commercial reality with legal requirements to preserve the entitlements of stakeholders. Equally important are personal qualities, such as integrity, impartiality and independence. It is important that insolvency professionals are able to operate independently, free from the threats and pressures of frivolous complaints, constant nagging by creditors or debtors, and uncertainties around payments of legitimate fee and expense.
It is critical that IBBI evolves a more stringent mechanism for licensing insolvency professionals. In fact, insolvency professionals working on high-profile cases should transfer knowledge and experience to other professionals in the market by participating in seminars and workshops.
Businessmen will need to swiftly reconcile with the new “credit in control” insolvency system. The promoters of the 12 big accounts in respect of insolvency proceedings that have been commenced lately, and of other companies, should offer full cooperation in handing over the management, control of affairs and assets to resolution professionals. The promoters sincerely interested in revival of enterprises should not see their displacement as a threat, but as an opportunity to focus on putting together a resolution plan free from distraction of managing the business. The debtors commencing insolvency process should take creditors in confidence before filing insolvency proceedings. The directors and officers have to be mindful of liabilities arising from wrongful, fraudulent and preferential transactions in the pre-insolvency period.
IBC envisages a “creditor in control regime,” with the creditor committee comprising of financial creditors being an important stakeholder, in a way the most important one. Since each decision of the committee is carried through 70% vote in the value of its members, responsibility rests on secured and unsecured financial creditors to ensure, together with resolution professionals, absolute fairness of the process and decision-making. The creditors must ensure faster decision-making process as compared to the joint lender forum. They should recognise that good quality professionals will come at a price and should be willing to pay market-based fees.
India must aspire to compete with the best insolvency system on the strength of its unique characteristics. Its success can make the country an attractive choice of jurisdiction for resolving insolvency. All stakeholders must make the success of IBC a common goal and national aspiration.