Former Union law secretary TK Viswanathan was the key architect of the just-enacted Insolvency and Bankruptcy Code, as chairman of the Bankruptcy Law Reforms Committee which produced the report in this regard. Lex Witness gets into an interaction for insights on the subject.
The Reform of the Bankruptcy Laws was influenced by the following guiding principles:
The need to distinguish between business failure and default. Many times, a project may be a successful business while still failing to repay its creditors. In the Indian context due to the numerous instances of malfeasance where promoters have siphoned of public money landing the banks in trouble has led to widespread discomfort on these issues and has generated two strands of thinking, namely-
Risk taking by firms is the wellspring of economic growth. And Some business plans will always go wrong which will induce default. If default is equated to malfeasance, then this can have a chilling effect on risk taking, which would hamper risk taking by firms. At the same time, we also have to deal with the situation that when a company approaches default, managers may anticipate this ahead of time and there is ample scope for illegitimate transfer of wealth out of companies by controlling shareholders which is malfeasance. So, we designed the bankruptcy process with a particular focus on blocking such malfeasance by;
Current state of credit market in India is far from satisfactory. There is excessive dependence of banks and financial institutions for raising capital. There is total absence of Debt Financing and Bond Market which is yet to take off. The natural financing strategy in all countries is for large companies to obtain all their debt financing from the bond market. This channel has been choked off in India, partly owing to the fact that corporate bond holders obtain particularly bad recovery rates under the present legal framework.
At present, many lenders are comfortable giving loans only against collateral. The concept of looking at the cash flows of a company and giving loans against that is absent. This has created an emphasis on debt financing for firms who have fixed assets.
When a firm has secured credit, and fails on its obligations, the present legal framework (SARFAESI) emphasises secured creditors taking control of the assets which were pledged to them. Thus, the present legal framework does not allow for the possibility of protecting the firm as a going concern while protecting the cash flows of secured creditors.
From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence in liquidation, the realization is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay.
There is asymmetry of information between creditors and debtors. Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court.
Another important source of delays lies in the adjudicatory mechanisms dealing with insolvency matters. This fact is aggravated by multiplicity of fora which facilitates forum shopping and cross litigation prolonging the resolution process. We learnt from the experience of the Sick Industrial Companies (Special Provisions) Act, 1985 that well-defined time limits would help the system to avoid many of the problems faced under that Act. Time limits would ensure that commercially unviable corporate debtors are not kept in the resolution process for long periods and are liquidated based on decision taken by the financial creditors at the earliest opportunity. The time limits would reduce the cost to creditors and other stakeholders (including employees and workmen) of a long-drawn out procedure.
To effectively address all these issues, we in the Bankruptcy Law Reforms Committee felt that a good bankruptcy law should be structured around these guiding principles namely:
A key element of a credit contract is predictability around what happens if the borrower cannot repay. It may be possible for debtors to restructure payments. This requires a conversation between the creditors and the debtor. Bankruptcy law should facilitate this conversation. The mechanism has to be designed such that the debtor can renegotiate payment, and the creditor can enforce payment. At the same time, the creditor needs to be prohibited from coercive collection. Both creditors and debtors need to know that decisions will be taken swiftly.
Early recognition of financial distress is very important for timely resolution of insolvency. A default based provides a simple test to initiate resolution process rather than net worth erosion test.
A single law which comprehensively deals with corporates, individuals, partnerships and LLP has a great advantage. This is lacking under the Indian legal Framework.
The Insolvency and Bankruptcy Code 2016 is a comprehensive law which covers the entire subject matter of corporate as well as individual insolvency under a single umbrella eliminating multiple judicial fora and laws each impacting the other not always complimenting the other. The Insolvency and Bankruptcy Code 2016 is a land mark legislation of the third Millennium since the Code will accelerate the flow of credit into the market easing the burden on the public sector banks and enhance our ranking in ease of doing business. Entrepreneurs can raise money from the market and need not depend upon Banks for finance. Our youngsters can explore new business models. We missed to capitalise on the opportunities opened up by the industrial revolution for historical reasons but digital revolution is the creation of our youth. So, the Code will be the engine through which India will emerge as a major player in the Global economy by exploiting the vast opportunities offered by the digital revolution. The Finance Minister is right saying that the Insolvency and Bankruptcy Code 2016 is the most important economic reform next to GST since independence.
I am extremely satisfied with the progress made in bringing the Insolvency and Bankruptcy Code into force. The Oversight Committee which was constituted under the Chairmanship of the Secretary Ministry of Corporate Affairs had within two months has completed all the formalities relating to the framing of rules regulations under the Code, and with the appointment of the Chairperson of the Insolvency and Bankruptcy Board, we can hope to see the provisions of the Code relating to Corporate insolvency in full operation before this year end. As for the challenges, I can only say no law is perfect. Success or failure of a law will depend upon how the judges interpret them. The Code prescribes strict time lines. I hope the Tribunals adhere strictly to the prescribed time limits. Otherwise, we may encounter problems in effectively addressing the shortcomings for which the Code was enacted. Even a bad law can be put to good use. As Bentham said “Judge Made law can never be better than the judges who make them”. So, we have to focus on capacity building for enhancing the expertise of members of the NCT and DRTs who are going to interpret this Code because the subject matter is emerging, complex and intermingled with market forces.
He is the most important person around whom revolves the Code. The successful working of the Code will depend upon the expertise of Insolvency Professional. Section 208 outlines the functions and duties of the Insolvency Resolution Professional. Section 29 lays down one of the main functions of the resolution professional— preparation of an information memorandum, which shall enable a resolution applicant to prepare a resolution plan. Such an information memorandum is envisaged to be prepared in order for the market participants (resolution applicants) to provide solutions for resolving the insolvency of the corporate debtor. In individual insolvency, he acts as the Bankruptcy trustee who is in charge of the liquidation estate. Since with the globalisation and emergence of knowledge economy different types of business models are merging rapidly, it is difficult to restrict the expertise necessary to manage to any single discipline or subject. In view thereof, section 207(2) of the Code provides that the Board may specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other fields as it deems fit.
Cross Border Insolvency requires a mature Bankruptcy eco system on par with the other countries like dedicated bankruptcy courts, a robust resolution profession, information utilities and a Regulator to oversee these new players in the market. At present this is lacking in our country. With the enactment of the Code these inadequacies will be addressed and we can address Cross Border insolvency in due course of time. Though Cross border insolvency has not been comprehensively addressed in the Code yet section 234 empowers the Central Government to enter into agreement with foreign countries for enforcing the provisions of the Code and section 235 empowers the insolvency professional or the bankruptcy trustee to make an application to the Adjudicating authority for the issue of a letter of request to a court or authority of such country competent to deal with such request. The UNCITRAL Model Law on Cross Border Insolvency is not based upon a principle of reciprocity between States. There is no condition or requirement that a foreign representative wishing to access facilities under the Model Law must be from a state which has itself enacted the Model Law. Thus, if India were to incorporate the Model Law into the Code, a foreign representative from a state that has not enacted the Model Law could gain access to Indian insolvency proceedings. However, an Indian representative would not similarly gain access to foreign insolvency proceedings in that state under the Model Law, though there may be other provisions in the laws of that state enabling access. The underlying assumption behind not having a reciprocity requirement is that some countries will, in enacting the Model Law without any precondition of reciprocity, set an example for others and, in this way, raise levels of international awareness and cooperation. While most countries have enacted the Model Law without any condition of reciprocity (including the U.S., U.K. Australia, Canada, Mexico, etc.), at least three countries (Romania, Spain and South Africa) have added conditions of reciprocity when incorporating the Model Law into their domestic legislation. The crux of this issue is that if India were to adopt the Model Law, it would be most useful when dealing with cross border insolvencies that involve countries that have also adopted the Model Law. For countries that have not adopted the Model Law, India would have to rely on bi-lateral agreements for the coordination/ cooperation principles.
As far as the DRTs are concerned it is reliably learnt that the Government has started the process of re-engineering the DRTs with more manpower and also to make them technologically more modern with video conferencing and electronic filing facilities. The recent amendments made to the Recovery of Debts and Bankruptcy Act 1993 addresses many of the misgivings associated with the functioning of the present DRTs. To provide access to litigants at the grass root level section 17(1A)(b) provides that “(b) The Tribunal shall have circuit sittings in all district Head quarters.” These measures will adequately address the shortcomings experienced in the functioning of the DRTs.
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