This article has been written by Diva Rai, a student of Symbiosis Law School, Noida.

India lacked an effective bankruptcy system, despite being a basic necessity for any well-functioning economy. While many government appointed committees had suggested modifications to the ancient system, despite the gravity of the issue and its cost to the economy, these suggestions have never been enforced. The Insolvency and Bankruptcy Code, 2016 is hailed as one of India’s largest economic structural reforms after independence. The Code will have a far-reaching effect on corporate governance (for both banks and borrowers) and loan accessibility in India as long as it continues to be correctly enforced. The code seeks to safeguard small investors’ interests and make the business process less complicated. Because corporate borrowers internalize bankruptcy costs (which were not much before the Code was adopted), they are likely to become more disciplined and prevent inefficient development. Better screening and tracking procedures are also probable to be deployed by banks to restrict exposure to unviable projects.

As better informed people demand more accountability from the state and the legal system, the Indian economy will continue to become more based on “rule of law”. This development is emblematic of the Code as well as the political and economic forces that led it to be enacted. If the law causes overcorrection (if, for instance, it has a chilling impact on borrowing activity or decreases businesses’ risk appetite), the same forces that led it to be enacted are also likely to guarantee that it is reformed to strike a balance again.

The procedures in the Insolvency and Bankruptcy Code,  2016 (Code) for corporate persons were introduced in December 2016 and welcomed on the market with a sense of excellent hope and anticipation. 

Two years later, the Code’s execution trip was evaluated in October 2017 in EY’s document “Experiencing the Code” to take inventory of the Code’s accomplishments and recognize future problems and possibilities. The study gives a point-by-point evaluation of top issues based on relationships with insolvency experts, attorneys, creditors, promoters, candidates for resolution and other stakeholders. It is an updated review as of 1 December 2018 of the execution of the Code’s journey.

Judicial Interpretation

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) and Supreme Court (SC) appeal framework deal with issues relating to insolvency. Since the Code was implemented, the judiciary has clarified important conceptual problems such as the compulsory nature of timelines, the nature of economic debt and operational debt, and the applicability of the Code in the event of conflict with other legislation. The exceptional attempts of the judiciary were essential to keeping the Code momentum.

On essential problems, though, there is still a lack of clarity. For example, since Section 29A was included, the meaning of the terms “acting in concert”, “control”, “management” etc. has been ambiguous. While in ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors, the SC has tried to provide advice on these terms, further clarity is needed to distill values that can be implemented in all instances. In the lack of this, we may discover that promoters are afraid of the implication of failure to the point of paralysis, which can hinder overall financial development. In addition, various NCLT benches have embraced divergent interpretations in some instances, and legislative changes were essential to clarify the law.

Improving judicial assistance and the infrastructure available will assist to resolve cases more quickly and hopefully decrease appeals, further delay and the burden on senior courts.

Role of the Regulator

IBBI remained proactive and responsive to the sector and its advances. It seeks to participate and take action, by setting up training modules for fresh IPs and even for its own policemen, for instance. As the market and regulator continues to mature, a measured reaction to changes is essential and the IBBI’s goals remain at the forefront of its decision-making.

Through its quarterly reporting, the IBBI now has a wealth of information to be used for empirical studies and to benefit both experts and business. It wasn’t a simple task for IBBI and expectations stayed high. Given the role of regulators in mature markets, IBBI must continue to play a leading position in the Code’s ongoing commitment and growth over the coming years.

Committee of Creditors

The creditors’ commission (CoC) had 24 months to mature in its role and proved the means for assessing and selecting corporate debtor resolution plans. Developments show that both the IBBI and the NCLT are alive to the CoC’s significance in reaching a good resolution result, as well as the effect of the CoC’s behavior on the legislative timelines. For example, the IBBI has mandated that meeting notices to members of the CoC should state that only persons authorized to take decisions at the meeting should be represented in the CoC without postponing decisions for lack of approval. 

In some cases, some criticism has been leveled at CoC’s for failing to take choices in the interests of all stakeholders and only protecting the interests of CoC members. Overall, however, the responsibility of being a member of the CoC has started to sink in, and recognition is understood that the CoC is supportive of a resolution for the advantage of the corporate debtor and all its stakeholders.

The CoC must work with the resolution specialist to truly address the distress of the corporate debtor, acting in place of the suspended board. This dynamic creates the need for real knowledge in corporate turnaround. The creation of the CoC will be backed by inner training given for their own individuals by financial institutions and by the insolvency and restructuring society, which will continue to promote the teaching of the CoC on each scenario.

Behavioral Change

The Code has had an effect on how promoters and management view and handle debt repayment. At the first indications of trouble, there is now a deliberate move to encourage promoters or directors and all participants to participate sooner with problems.

The Ministry of Corporate Affairs has stated that the Code has had an effect on non-performing assets (NPAs) of around INR 3 lakh crore and, more specifically, the resolution instances have resulted in the recovery of about INR 71,000 crore, cases at a mature resolution point of INR 51,000 crores, totaling INR 1.2 lakh crore from resolution. Some of the recovery was also produced by payments produced after default by the debtor, but before the Code initiated the official insolvency process.

The Code kicked off a cultural change between lender and borrower, promoter and creditor in the dynamics. There is now a framework, coupled with the circular central bank that endorses and promotes proactive action to tackle distress without recourse to official insolvency proceedings.

Insolvency Professionals

In a brief moment since 2016, the Insolvency Professional (IP) has developed. As of 1 December 2018, a total of 2,158 IPs were recorded. However, only a few of these appointments have been recognized and approved. The choice of an IP is likely to be based on a mixture of their knowledge, skills and capacity to perform a good corporate debtor resolution prior to appointment as a professional interim resolution or resolution specialist.

There is a recognized need to provide IPs with extra training and ongoing professional development. There is also an acknowledgement of the duty of IPs to preserve their own professional growth to keep up to date their expertise and abilities. Where the high bar is not reached, IBBI has started issuing disciplinary instructions for some of the worst behaviors or offenders, a beneficial step for the sector.

Continued professional training of insolvency experts is essential as it maintains a favorable dialog among practitioners, regulators and market participants. The sector would anticipate that in due course, the IBBI or the professional insolvency agency (IPAs) will begin reviewing the instances of IPs. Consequently, while the supply side issue has been resolved, the jury is still concerned about the quality and efficiency of IPs.

Creditor Rankings

Section 53 of the Code provides the ranking of creditor claims (and the consequent priority of distribution).

However, a cause for concern is the absence of clarity concerning creditors’ classification and the ranking of their demands. For example, there is restricted clarity about how to treat secure FC’s compared to unsecured FC’s. Also, how would one treat an exclusive or first charge holder with respect to a second charge holder among the guaranteed FC?

Similarly, the reclassification of home buyers as economic creditors and the imposition of criteria for the treatment of inter-se creditors and likewise positioned creditors in a resolution scheme have generated uncertainty for all creditors and market participants, which impedes timely resolution.

Creditor ranking uncertainty creates a range of market problems. However, it is anticipated that case law promotes the proper recognition of safety and the suitable treatment of creditors in a specific rank to be further tested and eventually gain favorable legal precedent at the suitable time.

International Investment

The majority of successful candidates for resolution were strategic investors who are conscious of the on-the-ground scenario and are prepared and capable of transacting in India. While more resources are being invested by global players in India as they seek to create capacity and expertise, significant difficulties continue.

These include outcome uncertainty, information asymmetry, and difficulties in performing meaningful diligence during the compressed timeline of the CIRP. It is expected outcome uncertainty to settle over time as results become clearer and the process embeds. There is, however, concern about the capacity during the CIRP to produce significant data about the corporate debtor and actively market corporate debtors. To attract global investments and funds, these must be resolved.

Resolution Implementation

A resolution plan that has been approved effectively is half performed. Real resolution work starts on execution, where the steps described in the resolution plan are performed to take control and address past trouble-causing problems. However, as the execution of the resolution plans has begun, some difficulties have arisen.

Only in the future can an objective test for effective resolution be recognized after the resolution applicant has completely taken over activities and yielded favorable yields. Or it could be seen in circumstances where the resolution plan’s execution is ineffective leading to liquidation or some corporate debtors could become serial insolvent re-entering the corporate insolvency resolution process. Without assurance, it is evident that further research will be required to help successful candidates for resolution in the implementation stage.

Timeliness

One of the Code’s main goals was to accomplish time-bound distress resolution as delays have a serious impact on deal value, especially as scarce capital is not waiting to be deployed. However, delays in acquiring approvals from the Creditors Committee (CoC) and delays due to litigation have been a source of concern since the execution of the Code.

Of the 1,298 instances accepted (source: IBBI), only 52 (4%) were disposed of with authorized resolution plans, 259 (20%) were in liquidation and 987 (76%) were continuous.

Over half (35) of those 52 took > 270 for authorization.

Steps were taken to provide a model timeline for the CIRP processes, and the Supreme Court highlighted the compulsory nature of the Code’s 180 + 90 day timeline. Nevertheless, the timelines for admitting an application were deemed to be directory and not mandatory and the time taken by the adjudicating authority (AA) to pass orders was excluded from the scope of the timeline of 180 + 90 days. This is especially worrying as serious delays occur once a resolution plan has been submitted to the AA for approval.

Ensuring that the Code procedures are performed in a time-limited way should be a priority for preserving and enhancing value. While the Supreme Court’s thrust is to adhere to the Code’s timelines and the clarity that comes with judgments that settle law positions is likely to assist, measures need to be taken to boost the organizational ability of the Adjudicating Authority and provide higher institutional assistance.

Conclusion

It would have been difficult to predict where the ecosystem of Code and Insolvency would be in the next two years. Some major gains have been accomplished in these years, and some difficulties stay to be addressed.

The Code remains one of India’s latest economic reform’s success stories and continues to evolve as it matures. The moment of bliss however, is over and the difficult job of keeping momentum is now beginning as more debtors enter the scheme. There is a need to prepare the market for the larger number of cases that are likely to occur in the coming years to support resolutions. The system must also stay ready to assess how successfully authorized resolution plans are being implemented. At the same moment, alternative reorganization alternatives must be produced by the market, possibly in the window created by the RBI circular, prior to official invocation of courts. One hopes that corporate debtors will be supplied with the lifeline envisaged by the Code through the phase of corporate insolvency resolution.