‘No doubt, we have come out with the statutory regime. But it is more important that there is effective and successful implementation of this important legislation’, says Justice AK Sikri in a conversation with LW Bureau
It is a matter of satisfaction that after long wait Insolvency and Bankruptcy Code has seen the light of the day and is now on our statute book. Some of our commercial statutes had become virtually obsolete in the present scenario ever since India adopted economic policy based on globalisation and liberlisation. With globalisation, the world is shrinking and is becoming one global village in economic sense, which hardly recognises political boundaries and permits free flow of international trade and commerce across borders. It necessarily necessitates convergence of commercial and economic laws. That was precisely the reason for amendment in so many statutes to bring it in tune with international standards demanding uniform approach. In the year 1996, Arbitration and Conciliation Act was passed replacing the Arbitration Act of 1940. It was based on UNCITRAL suggested model. We made sweeping amendments in intellectual property laws as well, i.e. Copyright Act, Patents Act and insofar as Trade Marks Act is concerned, it was completely replaced by the old Act.
In the year 2002, lots of amendments were made in the Companies Act as well, but before these could be implemented, a new wisdom dawned to replace the old Companies Act by completely new enactment. It took almost 11 years in bringing out the new Companies Act, which was passed in the year 2013. However, even after deliberations over a long period in bringing about the Companies Act, it lacked proper insolvency regime. Fortunately this realization came soon after passing of Companies Act, 2013. In this backdrop, legislating a complete law on insolvency and bankruptcy is a welcome step.
I have already said that now we have a comprehensive law on insolvency and bankruptcy which not only covers corporate entities but natural persons in India as well. It is the most impressive feature of this Statute. Earlier, for insolvency of individual/natural persons, we had two enactments, viz. Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920, which were a century old. Though there may be a debate as to whether individual insolvency should have been covered by this very Code, eschewing that debate, insofar as insolvency and bankruptcy of corporate entities is concerned, this law is enacted, again keeping in view the international scenario with convergence in mind. In fact, in order to have uniform economic and commercial laws, UNCITRAL, which is a United Nations body, has been coming out with model laws and legislative guides. The primary purpose is to achieve convergence. UNCITRAL has also issued ‘Legislative Guide of Insolvency Law’, which was developed by UNCITRAL between 2001 and 2004. At the outset, this legislative guide developed key objectives and common substantive features that should be considered when a State is refusing to update its insolvency laws. There are many key features which are stipulated therein and the following amongst them are most significant:
Indian law has kept in mind many of the aforesaid objectives, though some of them are not included, to which I will refer at the later stage.
The other feature which has impressed me is the balancing between creditor’s rights and rehabilitation which is sought to be achieved. We want to attract maximum Foreign Direct Investment (FDI) and for this purpose, the Government has adopted several measures aimed at ease of doing business in India. This is also one of the steps in that direction.
Foreign investors would always like to have an environment where their investment is safe and they are able to get reasonable return thereupon. Therefore, in the eventuality of a company becoming insolvent, it is important that value of the assets is maximised and there is timely resolution of insolvency proceedings. This aspect is taken care of. So, to put it in nutshell, following features of the Act have impressed me:
You are right about the concerns raised in the aforesaid areas and even some more areas.
The Insolvency and Bankruptcy Code provides the following institutional framework:
In the aforesaid framework, the Board is going to Act as a regulator that shall regulate insolvency professional agencies. The Board is invested with large powers and given wide range of functions that include power to appoint, licence and de-licence insolvency professionals and hold disciplinary proceedings against them. It shall, however, comprise of senior Government functionaries and other members who would be appointed by the Government. The debate centers around as to whether such kind of regulatory powers should have been vested in a Board of such a composition or these functions should have been assigned to an autonomous body, independent of Governmental control.
Some experts feel that there should have been a mechanism of selfregulation through statutory framework that is provided in other statutes. Examples are Bar Council of India, Medical Council of India, Indian Institute of Chartered Accountants, etc. However, of late, there is a criticism in the manner Medical Council of India or even Bar Council of India have functioned. Therefore, only time would prove as to whether constitution of such a Board is a better proposition. Insofar as giving adjudicatory function to DRT with respect to personal insolvency is concerned, I am of the view that this may not be a wise step. Normally, these DRTs are presided over by judicial officers who are of the level of District Judges. They may not be very well equipped with the nuances of insolvency laws. At the same time, they also have huge pendency of other cases. May be, this compromise is done to avoid creation of another tribunal.
There is one more aspect which is not addressed in this Code, viz.: issues pertaining to cross-border insolvencies. However, that involves a long debate and, therefore, I am not discussing this aspect in detail on this occasion. But I would say this much that provisions for cross border insolvencies are necessary and an attempt should be made to include them, keeping in view UNCITRAL guidelines. Though, at the same time those guidelines can be suitably tweaked to take care of national interest as well.
No doubt, insolvency professionals are going to be the key players and are given prime importance in the institutional framework. Office of the Official Liquidator, which is generally made In-charge of the liquidation proceedings of an insolvent company, has miserably failed. Professionalism is brought by introducing the institution of insolvency professional agencies and insolvency professionals. Insolvency professional agencies are aimed at promoting the professional development of and regulation of insolvency professionals; to promote the services of competent insolvency professionals to cater to the needs of debtors, creditors and such other persons as may be specified; to promote good professional and ethical conduct amongst insolvency professionals; to protect the interests of debtors, creditors and such other persons as may be specified; and to promote the growth of insolvency professional agencies for the effective resolution of insolvency and bankruptcy processes under the Code. Many important functions would be performed by insolvency professionals, which include corporate insolvency resolution process and liquidation of a corporate debtor firm. Therefore, it is expected that those who are experts in this field would register themselves as insolvency professional with the insolvency professional agencies and services of such experts, in contrast to generalists, would be available to the adjudicating authorities. A person well versed not only in commercial and economic laws but who knows nuances of accountancy, including cost accountancy etc., would be better suited as insolvency professional. Lawyers and accountants may be forging alliances to render proper and effective services as insolvency professionals.
Let me say at the outset that the problem of Non-Performing Assets which have assumed alarming proportion in this country may be one of the reasons for enactment of the Insolvency and Bankruptcy Code. At the same time, it is to be kept in mind that the main purpose of this Code is not limited to this alone (as highlighted above), though in the passing, to some extent, problem of NPAs would also be taken care of.
Insofar as statement of Mr. Rajan is concerned, I entirely agree with him. Every loan given to a corporate or an individual which becomes bad loan may not be the result of irresponsible and reckless management of the business affairs or criminal intent behind it. There may be various reasons for business becoming unviable. Some of the business ventures are uneconomic and lack feasibility from the beginning and, therefore, such ventures are illconceived and going to turn bad from the word go. They are bound to fail. Other category of failures would be the result of faulty management of business. Then, there are instances where a particular business venture has been doing well but because of changed economic conditions and without any fault of the management, it becomes unviable. Of course, another category where the businesses fail is the one where it happens due to malpractices, misfeasance and malfeasance etc. of the management. It is this category which involves criminal intent and not the others, mentioned above by me. Therefore, in every case where the business runs into losses and the loans entered into the arena of NPAs, we cannot fasten the managements or the directors with criminal liability. Moreover, even if the businesses have gone into losses because of mismanagement on the part of the director, but the business venture has the potential of turning around with the change of erstwhile management by infusing capital and bringing new management, it is in public interest to make such an attempt. It is for this reason I say that Mr. Rajan is right when he says that it is necessary to keep criminal liability separate for putting the stressed assets back on track.
I think the answers given by me above cover answer to this question as well. I repeat that the new legislation is timely not only for the purpose of securing bad loans but for so many other reasons, as stated above.
Let me inform you here that the World Bank measures various countries on the ease of doing business and prepares ranking index. In the index of 2016, India is ranked at No. 130 out of the 189 countries. No doubt, it has gone up by four places compared to 2015. In fact, till a couple of years ago, ranking of India was at No. 179. In this manner, steady progress is made. However, at the same time, even in South Asia, India lags behind inasmuch as Bhutan, Nepal, Sri Lanka and Maldives are at Nos. 71, 99, 107 and 128 respectively. China ranks 84th. Therefore, India needs to adopt some effective measures to improve its ranking. Much would depend upon the implementation of the Insolvency and Bankruptcy Code as it will have significant impact. No doubt, we have come out with the statutory regime. But it is more important that there is effective and successful implementation of this important legislation. Total turnaround and change in mindset of all stake holders is needed to achieve this. There is a need of expert insolvency professionals. We also need to man National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) with those having experience in the field. We must realise that generalists judges cannot be posted to do specialist jobs. As societies develop and become structurally and technically complex, preserving order requires new and complicated laws. Insolvency laws fall in this category of complicated laws. NCLT is going to decide newer types of high volume litigation which would require unique type of approach and those who are specialists and understand the nuances of not only law but economy and economic policies would be able to deliver the results.
Let us hope for the best.
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