Proposed Amendments To IBC Will Restore Confidence

The government introduced a bill in this monsoon session to amend the Insolvency and Bankruptcy Code. This is the first amendment proposal since 2021. The working of the IBC has faced criticism due to delays and judicial pronouncements that were not predictable. While the non-performing loan cycle is down, the confidence in using the IBC to resolve stressed companies is at an all-time low. Therefore, it is an opportune moment to solve some critical hindrances to the effectiveness of the IBC.

The bill proposes wide-ranging amendments, among others, to the admission process, financial creditor rights in insolvency including against statutory dues and inter-se, towards streamlining corporate insolvency processes, and augmenting avoidance powers. The bill also focuses on timelines to be followed. These proposals are welcome.

While the yet-to-be notified select committee will review the bill, it might be helpful to consider a few issues which need further action — both in the bill and in the supporting machinery for IBC’s implementation.

The most pressing is judicial capacity and case management. The well-intentioned timelines in the IBC cannot be met without adequate judicial capacity and procedural safeguards. NCLTs need sufficient staffing both at the judicial and administrative level and better technological and administrative infrastructure. Only one circuit bench of the appellate tribunal has been set up despite the timeline of 6 months promised by the Government in 2019 for setting up more benches.

The bill proposes penalties for frivolous or vexatious proceedings (a high threshold generally), but stricter “loser pays winner’s costs” principle is needed to instil discipline in insolvency litigation. These principles already exist on paper in civil litigation but the need to apply these principles in insolvency processes is acute.

The bill proposes that dissenting financial creditors (DFC) receive at the minimum the lower of their liquidation value or share of the resolution proceeds applying the liquidation waterfall. Operational creditors, who have no voting rights in the process, are entitled to a minimum of the higher of those two values (while noting that their priority in waterfall is lower than the DFCs). Underlying rationale of a creditor not supporting or being interested in the going-concern rescue of the company receiving only its pre-insolvency entitlement does not support this disparity. 

The proposed creditor-initiated resolution process will incentivize the creditors to expeditiously deal with defaults at an early stage without disrupting the ordinary course of business. However, the approval mechanism for resolution plans here should differ from section 31. This is to prevent delays and further litigation. A streamlined mechanism where committee approval binds all creditors with a limited period for challenges (following a proper disclosure to creditors who were not entitled/invited to vote) would expedite the process.

The proposed “standards of conduct of the committee of creditors and its members” seems unnecessary. A creditor should be free to legitimately protect its commercial interests so long as the majority is not acting in bad faith with an ulterior motive while taking decisions in the insolvency process which principle can easily be applied by the NCLT under general law. Further, commercial wisdom of the committee has been judicially recognised and applied by the Supreme Court in several cases. To subject commercial decisions of the committee to a code of conduct is a step backwards. The majority of members of the committee are likely to be regulated by the Reserve Bank of India or the Securities and Exchange Board of India and another layer of regulations to provide standards of their conduct seems to be a retrograde step.

Personal insolvency needs a provision similar to section 32A to prevent bankruptcy trustees from wasting time in asserting rights against investigating agencies when their position (being vestee of the bankrupt’s properties) appears to be as strong (if not stronger) as a resolution applicant acquiring control of a corporate debtor pursuant to a resolution plan.

Last but not the least, cross-border insolvency provisions are urgently needed. Unlike the draft Part Z proposed in 2018, the Government should not adopt a reciprocity requirement which will limit the ability of Indian insolvency professionals to seek cross-border recognition and assistance. These provisions should also cover liquidations under the Companies Act and personal bankruptcies under other applicable acts so as to provide a holistic framework for international asset collection (although this will need legislative creativity as the rules will be framed under the IBC).

The bill is an effective ‘surgical strike’ against several issues, which have cropped up in the operation of the IBC and with some sharpening and capacity building, it can contribute towards restoring confidence in the IBC, which continues to be the most optimum tool to deal with companies in stress.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.

L Viswanathan is a senior partner, and Dhananjay Kumar is a partner (head-insolvency & restructuring) at Cyril Amarchand Mangaldas.