Our Opinions on Challenge with Insolvency Code in India
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Our Opinions on Challenges with Debt Resolution & Insolvency Code in India
The Insolvency and Bankruptcy Code (IBC) has been a game-changer in India’s corporate insolvency landscape, but it has also faced significant litigation challenges. When discussing these challenges, it’s essential to understand the fine balance between maximizing value for lenders and adhering strictly to the legal framework. Here are a few perspectives on these litigation challenges:
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Litigation Prevalence:
- A key concern raised by international investors is the frequent occurrence of litigation in major insolvency cases. This litigious environment can create uncertainty and delay resolutions, which can be a deterrent for potential investors.
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Reopening Bids:
- Late Bid Submissions: In the Bhushan Power and Steel case, Liberty House (UK) filed a petition with the National Company Law Tribunal (NCLT) after their bid was rejected for being late. The issue here is whether late bids can be considered if the bids have not yet been opened. Allowing late submissions could maximize value for lenders but might undermine the integrity of the process and set a precedent for flexibility that could be exploited.
- Subsequent Higher Bids: The Binani Cement case highlighted another dilemma. After the winning bid was announced, a losing bidder attempted to renegotiate directly with the corporate debtor to offer a higher repayment to the banks. This situation creates tension between achieving the best financial outcome for creditors and maintaining a fair and predictable bidding process. Changing the rules post-facto can erode trust in the system.
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Balancing Value Maximization and Legal Integrity:
- While maximizing returns to lenders is a primary objective of the IBC, it should not come at the cost of contravening the established legal procedures. Ad hoc changes to the bidding process could lead to increased litigation, undermine investor confidence, and ultimately be counterproductive.
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Judicial Clarifications:
- The judiciary’s role in settling these issues is crucial. Clear, consistent, and fair rulings will help establish precedents that balance value maximization with legal integrity. Such decisions can provide the necessary legal certainty and predictability that investors seek.
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Systemic Improvements:
- To reduce litigation, the IBC framework might need refinements, such as clearer guidelines on bid submission deadlines and rules around revising bids. This can help mitigate ambiguities that often lead to disputes.
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Investor Confidence:
- For international investors, confidence in the insolvency process is critical. They need assurance that the rules are clear, fair, and consistently applied. Reducing the incidence of litigation through better regulations and clearer legal precedents will be key to maintaining and enhancing this confidence.
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Systemic Challenges
Prolonged Litigations:
- Post-Approval Delays: Even after the committee of creditors (CoC) approves a resolution plan, prolonged litigations often ensue due to objections or the limited capacity of the adjudicating authority. The shortage of judicial members exacerbates these delays.
- Regulatory Reluctance: Sector regulators in industries like mining, electricity, and telecoms often resist accepting the primacy of IBC provisions, delaying necessary approvals for implementing resolution plans due to demands for pre-insolvency dues payment. This regulatory hesitation increases the implementation risks for resolution applicants, especially in sectors with government concessions, grants, and allotments.
Management Cooperation:
- Disclosure Challenges: Resolution professionals depend on cooperation from former management and personnel to disclose information to prospective resolution applicants. The adjudicating authority must swiftly address issues of non-cooperation under section 19 of the IBC to facilitate the resolution process.
Other Challenges
Consequences for Erring Resolution Applicants:
- Lack of Material Penalties: The IBC currently lacks provisions imposing significant consequences on resolution applicants who default on their commitments. The primary recourse for creditors includes invoking performance guarantees or filing complaints with the Insolvency and Bankruptcy Board of India (IBBI) or the central government, which can lead to penalties or imprisonment under section 74 of the IBC. However, these measures are often insufficient.
- Exploitation of Gaps: The absence of specific provisions addressing the period between CoC approval and adjudicating authority approval allows some resolution applicants to renege on commitments, potentially nullifying the entire resolution process. The Supreme Court’s forthcoming decisions on these issues are anticipated to provide crucial legal clarity.
Suggestions on the Way Forward under Insolvency and Bankruptcy Code
Enhancing the Framework:
- Mandatory Legislative Timelines: Introducing mandatory legislative timelines for adjudicating resolution plans and ensuring administrative compliance can significantly aid in achieving time-bound resolutions.
- Addressing Infrastructural Challenges: The central government should prioritize filling vacancies among adjudicating members to mitigate the infrastructural challenges that hinder the adjudicating authority’s efficiency.
Single-Window Clearance Authority:
- Streamlined Approval Processes: Empowering the adjudicating authority under the IBC to act as a single-window clearance entity, with the authority to direct sector regulators to provide time-bound approvals during the resolution plan approval process, can significantly streamline operations. This authority should have the power to adjudicate and resolve issues of approval withholding by any sector regulator in a manner consistent with the IBC’s objectives.
The IBC is still evolving, and it is hoped that ongoing refinements and judicial interpretations will strike the right balance between achieving the best outcomes for creditors and maintaining a robust and predictable legal framework. By addressing these systemic and procedural challenges through legislative reforms, infrastructure development, and fostering a culture of cooperation among stakeholders, India can further enhance its insolvency and debt resolution framework. These improvements will benefit creditors and debtors alike, ensuring the continued success and credibility of the IBC.
Case Studies of Successful Resolutions Under Insolvency Code in India
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