India has been admonished and berated for having fallen behind in terms of the development of its corporate economy. In recent years, however, numerous initiatives have been taken to revamp the corporate sector in terms of legal, procedural and ritualistic practices in India. The goods and services tax, the Amended Arbitration and Conciliation Act, labour reform and most essentially the prelude of the Insolvency and Bankruptcy Code, 2016 marked the improvement within the sector.
The Insolvency and Bankruptcy Code has by far been the most crucial and essential piece of legislation that was needed in India’s statutory books. Considering the large number of non-performing assets (NPAs) that the Indian banking system has been afflicted with, the Insolvency and Bankruptcy Code serves as an amalgamated mechanism for dealing with corporate insolvency in India. The desideratum of the Code is to enable effectualness within the insolvency and bankruptcy law regime disentangling the commercial and judicial aspects of insolvency and bankruptcy process.
The Code is sustained and supported on the four pillars: Insolvency and Bankruptcy Board of India, the National Company Law Tribunal, National Company Law Appellate Tribunal and the Insolvency Professionals and Information Utilities. It has reinvigorated the previous mechanism of debt resolution and has made it more productive and efficacious. By enormously strengthening the legal infrastructure pertaining to the liquidation, rehabilitation and revival of failing commercial entities it assures amelioration of India’s ranking on the Ease of Doing Business Index.
The Code, consequentially, aims to depart from the preceding approach of “debtor in possession” to “creditor in possession”. It has the capability and proficiency to play an integral role in strengthening the country’s credit ecosystem.
The objective of the Code:
The primary aim with which the Code was formulated was to plug the loopholes that existed in the earlier legislation. Furthermore, it accredited the formation of a new institutional framework constituting an Insolvency and Bankruptcy Board, professional insolvency agencies, information utilities and adjudicating authorities thus benefiting and proffering a uniform and comprehensive legislation for the abetment of the time-bound insolvency resolution and liquidation. Finally, the code planned to amend and cultivate the ease of doing business in India and boost faster debt recovery mechanisms.
The Preamble of the Code clearly lays down ‘to merge and modify the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner’. ‘maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders’.
The most significant and preeminent problem in the already existing mechanism was the existence of multiplicity laws, overlapping jurisdictions and limited links between the existing statutes. These impediments and barriers ultimately resulted in postponement in the resolution process for insolvencies thereby creating dissatisfaction and resentment amongst all stakeholders, especially creditors who were destitute and dispossessed of their right to credit realization. With all the appurtenant and relevant laws coming together under one roof and a single authority, there is hope that the bankruptcy proceedings will be resolved in a timely manner.
Also, the Code acknowledges and addresses better utilization of resources by preventing the use of resources below the optimum level thereby enabling efficacious resource use within the firm through the resolution of insolvency and discharging underutilized resources that can then be utilized assiduously through the closure of the firm. As observed by Jongho Kim “resources that are currently unutilized or underutilized for whatever reason can be put to more efficient use. The growth rate may well go up by a few percentage points, other things being equal, particularly when this is accompanied by the availability of credit and entrepreneurship”
Being at an embryonic and evolving stage, the Code is naturally besieged with numerous teething problems but it is imperative to highlight that there exists, certain fundamental anagrams within the designing of the law itself.
Strict timelines are deemed as a bane rather than a bone by many commentators. The law clearly states that the entire process must end within 180 days with a possible extension of 90 days. This appears to be a little unfair as many companies do not have sufficient time to evaluate and scrutinize relevant financial information and retort within the stipulated time.
Too Much Power in the Hands of the Committee of Creditors
The Committee of the Creditors have been given eminent power to determine the fate of the corporate debtor i.e. whether it would be a going concern or whether it would be liquidated. The Dearth of any specific guidelines in relation to the manner in which decision-making will take place, it is probable that the committee of creditors will presume considerable power over the corporate debtor, which may not be in public interest.
Variance in Behavior of Stakeholders at Odds with the Overall Objective
There is a possibility that each stakeholder can have his own interest and these interests can often ramble and deviate from the encompassing objectives of the resolution process.
The Insolvency and Bankruptcy Code has played a meaningful and substantial role in refurbishing the entire credit ecosystem in India by enhancing and modifying the old foundations of the insolvency processes. The Code affirms to facilitate far-reaching reforms with an accentuation on the credit-driven insolvency resolution. It covets early identification of financial failure and thereby aims at maximizing the asset value of insolvent firms. Ample proof exists on how the law is on the right path, however, the success of the Code will depend upon the manner in which its provisions are implemented.