One of the major challenges for effective implementation of the Bankruptcy Code is effective functioning of insolvency professional agencies which in turn, would depend upon getting competent Insolvency Resolution Professionals also known as IRP’s on board for discharging important functions attributed to them under the Code.
Some of the Key Responsibilities of the IRPS Includes
Further, during the moratorium, the IRPs will be also responsible for exercising the power of board of directors of the corporate debtor. For fulfilling all of these responsibilities attributed to them under the Code, the Insolvency Resolution Professionals will require not only the knowledge of the law relating to bankruptcy but also business acumen to run the business of the corporate debtor during the insolvency resolution process. Further, it appears that in a situation like bankruptcy of Lehman Brothers, the IPAs would be required to understand the intricacies of complicated derivative contracts, financial instruments in order to maximize the realization value of the assets.
It will be interesting to see as to how the Insolvency and Bankruptcy Board of India in consultation with Insolvency Resolution Professional Agencies gets such qualified professionals on board. Considering the fact that Recovery of Dues to Bank and Financial Institution Act was enacted in 1993 and still after almost 23 years, all DRTs (approx. 30 in no.) in the country are not having sufficient presiding officers to handle the claims filed by banks, it will be a big challenge for the government to find these highly qualified resolution professionals for discharging their duties under the Code.
While handling the similar situation, US Bankruptcy Code empowers creditors and the court to appoint a trustee acting on their behalf and for their benefit. Under the US Bankruptcy Code, the court is also empowered to appoint an examiner to investigate the affairs of the debtor. In essence, while the management runs the business of the corporate debtor during the bankruptcy process, the same is being done under the shadow of a trustee in order to rule out the possibility of the company indulging in asset stripping
The possible way forward could be establishment of special training institute for providing sufficient training to IRPs or adopting the process similar to what has been provided under US bankruptcy code.
Under the Code, all decisions of Committee of Creditors are required to be approved by 75% of the voting shares/value of the Financial Creditors. The COC only includes Financial Creditors and Operational Creditors having more than 10% of exposure can attend the meeting of COC only as an observer.
While it is a positive change that 75% of financial creditors of the company will finalize the resolution plan and decide as to whether or not the corporate debtor should be liquidated, it would have been better, had the Code also provided certain checks and balances to protect the interests of the minority financial creditors.
In past we have seen that many small banks and financial institutions have opted out of the CDR scheme of RBI, since the resolution approved by majority of lenders were not equally beneficial to them. For example, in few cases, the minority lenders were asked to take haircut on the outstanding exposure or share their exclusive security with other lenders. However, while in the case of CDR they had the option to opt out, the same will not be the case under the Code.
I am sure while approving the resolution plan, NCLT/NCALT will take care of the interest of minority creditors, but a clear provision in this regard under the Code would have been highly appreciated.
As mentioned earlier, the Code seeks to reduce time lines for Insolvency Resolution Process to 180 days, extendable by 90 days While all of us are very excited about the initiative taken by the government under the Code to achieve early closure of the Insolvency Resolution Process within the stipulated timeframe, it will be a major challenge for the Adjudicating Authorities and Insolvency Resolution Professional to adhere to such strict timelines.
Our experience in the case of DRTs, where Recovery of Debt Due to Banks & Financial Institution Act also provides for similar timelines, has not been good enough. We all are aware that not even a single case in last 23 years has been decided by the DRTs within the stipulated time frame. Therefore, if the authorities responsible for adhering such timelines fail to do so, it will frustrate one of the key objectives of the Code.
Further, it may not be practically possible for the authorities to adhere to the strict timelines provided under the Code in case the Corporate Debtor is big corporation having multiple layers of subsidiaries and group companies. Any wrong decision taken in haste will not only adversely impact employees and workmen of the corporate debtor and their livelihood but also the shareholders of the corporate debtor.
One of the possible ways forward in this regard would be to set a threshold monetary limit for completion of IRP within a particular time period.
As per the waterfall mechanism provided under the Code, the Secured Creditors who have relinquished their security enforcement right will be paid in full after realization of the cost of insolvency resolution and bankruptcy process. The Code does not make any distinction amongst the Secured Creditors who have relinquished their security enforcement right in terms of the value of the collateral that they hold.
Hence, there may be situation where the value of the collateral held by one lender is very minimal as compared to its exposure and in such event if such lender opts to relinquish its security enforcement right, it will receive entire outstanding amount, rather than an amount equal to the value of its collateral.
This will be very detrimental to unsecured creditors as on the other hand at least other secured creditors who hold substantial collateral will have an option to stand out of liquidation process for enforcement of their securities.
Under the Coder, DRT/DRAT have been designated as Adjudicating Authority for exercising control over the Insolvency Resolution and Bankruptcy Process for individuals and partnership firms. The same is likely to have adverse impact on equitable access of the adjudicating authorities by the debtors, if we have to compare the same with existing bankruptcy regime where district courts were having jurisdiction to entertain bankruptcy suit pertaining to an individual. This is due to the reason that most of the DRTs are located in state headquarters and it will be difficult for the debtor located in small town to access the adjudicating forum or participating in an insolvency proceeding involving small amounts and especially the fresh start process. We will have to wait and watch as to how the government will come up with a suitable solution to this far reaching challenge which will have an impact on the larger section of the society.
Under the existing bankruptcy regime, various High Courts and Hon’ble Supreme Court of India have time and again held that merely by filing a suit for winding up by the creditor, the courts will not pass an order of winding up/bankruptcy of the debtor. In this case, the courts have applied the doctrine of commercially insolvent and only if a debtor is found to be commercially insolvent, the courts have passed the order to winding up/bankruptcy.
The new Code is silent on this aspect and considering the fact that wide powers have been given to committee of creditors to decide as to whether or not a corporate debtor should be liquidated, in case, the NCLT/NCLAT decides to apply the doctrine of commercially insolvent, it may adversely impact the power of the committee of the creditors granted under the code.
So, in my view, these are the key positive changes which the code has brought in the existing bankruptcy regime and key challenges, which all concerned parties may face.
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