Wednesday, March 29, 2023

Insolvency and Bankruptcy Code shifted India’s insolvency regime from debtor-in-possession to creditor-in-control: Justice Sanjay Kishan Kaul

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Supreme Court Judge, Justice Sanjay Kishan Kaul has said that Insolvency and Bankruptcy Code shifted India’s insolvency regime from the ‘debtor-in-possession’ to ‘creditor-in-control’.

Speaking during the inaugural conference of Insolvency Law Academy on Emerging Global Insolvency Horizon: Indian Footprint and Front View on Saturday, Justice Kaul said the country’s economy has been growing since the early 1990s, leading to an expansion of credit market. This has resulted in an increase in non-performing loans and assets.

To solve this problem, the Insolvency and Bankruptcy Code was enacted in 2016 primarily to serve two purposes- first, to ensure that debtors take sound and practical decisions and second, to give financially ailing corporate entities a chance to rehabilitate and continue their business.

The IBC essentially consolidated laws relating to insolvency resolution of companies, partnerships and individuals. Hence, the implementation of IBC in India marked the beginning of a new era that completely overhauled India’s insolvency regime.

In its six years of existence, the IBC has proven to be a dynamic code, which constantly adapts to the realities of the Indian society.

For instance, the IBC shifted India’s insolvency regime from the ‘debtor-in-possession’ to
‘creditor-in-control’. Thus, the balance of power shifted from the promoters of a company to
creditors resulting in healthy decision making by the promoters.

It also introduced substantially reduced timelines and intermediaries like Resolution Professionals.

The winding-up process of companies has become significantly more efficient since the promulgation of IBC. Faster resolution of cases has spurred M&A deals in India, as bidders can more easily acquire stressed assets at lucrative prices and a number of companies are closer to the conclusion of their resolution processes.

It would be fair to credit India’s rise in the Ease of Doing Business Index to IBC as well to some extent. India’s rank has gone from 142 in 2014 to finally 63 in 2022 – due credit for which should be given to IBC.

In my opinion, IBC has also had a big role to play in India’s new ‘start-up’ culture, by creating a conducive environment for budding entrepreneurs.

IBC has evolved vibrantly through amendments, rules, regulations and judicial interpretations.
The Supreme Court held in its landmark decision of Innoventive Industries Ltd (Corporate Debtor) vs ICICI Bank & Anr (2017) that once an insolvency professional was appointed to manage the company, the erstwhile directors who were no longer in management, could not maintain an appeal on
behalf of the company.

The Apex Court continued to bring in clarity on issues of rights andpowers of stakeholders in insolvency proceedings.

For example, in the recent case of Sundaresh Bhatt, Liquidator of ABG Shipyard vs Central Board of Indirect Taxes and Customs (2022), the Supreme Court opined that IBC would prevail over the Customs Act, to the extent that once the moratorium was imposed under IBC, the Central Board of Indirect Taxes and Customs had limited jurisdiction to assess/determine the quantum of custom duty and other levies, and did not have the power to initiate the recovery of dues by means of sale/confiscation, as provided under the Customs Act.

Currently, the government was in the process of proposing changes to IBC in order to reduce the hardships of homebuyers caught in time-consuming legal battles with real estate developers.

He said these battles were not only about the colossal amounts of money involved, but about the dreams and hard-earned savings of these homebuyers. As per the Government’s suggestion, if an application was filed against a real estate developer having multiple
projects, proceedings may be initiated only against a specific project that has defaulted. This suggestion would, in a way, be a formal recognition of the concept of ‘reverse CIRP’, which allowed promoters to infuse funds into stalled projects, where the focus is on the completion of the affected project rather than revival.

Hence, even if the company was legally under insolvency, the economic solution would be limited to the affected project.

This concept of ‘reverse CIRP’ was propounded in February 2020 by the National Company Law Appellate Tribunal in the matter of Umang

Admitting that in these early years of implementation of the Code, the Judiciary was faced with complex questions that required authoritative and conclusive answers, the Supreme Court Judge said it, however, provided not only the judiciary, but also all the professionals an opportunity to contribute towards laying an infallible foundation.

The Conference highlighted major aspects of insolvency regimes, which are important not just for India, but also globally.

For instance, the insolvency process was highly reliant on the commercial wisdom of the Committee of Creditors, because of which they were expected to perform with the highest standards.

In The Committee of Creditors of Essar Steel Limited vs Satish Kumar Gupta (2019), the Supreme Court reiterated the limited judicial review available with the Adjudicating Authority and discussed the hands-off approach that should be adopted.

The panel discussion on the Code of Conduct for Committee of Creditors in this regard was not only integral, but also timely. Further, he said the Insolvency Law Academy had chosen ‘Diversity and Representation in Insolvency’ as one of the topics for discussion.

The diversity in the society must be reflective in all fields of life, as it brought on the table, varied views/ experiences and wholesome solutions.

Justice Kaul said the main issue in ensuring successful representation was ‘unconscious bias’. This had led to a viscous cycle, where on one hand, newcomers were not given the platform to showcase their talent due to their lack of experience.

On the other hand, these newcomers were not able to gain experience as opportunities were not granted to them. Hence, the discussions on bringing diversity into the process of insolvency along with gender inclusivity were dealt with by the panellists, noted the Judge.

He said that while the NCLT and NCLAT were doing a tremendous job in managing insolvency
disputes, three factors were needed to be considered when dealing with any insolvency dispute- first, insolvency proceedings envisage limited court interference; second, Indian courts and tribunals were overburdened leading to heavy pendency; and third, the commercial parties in such proceedings would want to save time and reputation.

In this context, the efforts made by the Insolvency Law Academy to bring forth the panel discussions on ‘Looking Into the Future: Pre Insolvency Framework’ and ‘Mediation’ were commendable.

The Supreme Court Judge said he had always been an ardent believer in the potential of alternative dispute resolution procedures. As a confidential and voluntary process; mediation in insolvency proceedings offered a distressed business relative protection from public scrutiny at a fraction of the cost of formal insolvency resolution processes.

Mediation may also help reduce the burden on NCLT and NCLAT. In fact, in 2017, Singapore had similarly recommended mediation for insolvency disputes, in an attempt to transform it into an international insolvency resolution hub, noted Justice Kaul.

He said internationally, MF Global and Lehman Brothers were two examples of important cases where mediation played a prominent role in the final resolution.

Alternate Resolution of such disputes not only provided an avenue to the entities without facing an adversarial process, but would also result in speedy and cost-effective solutions for the creditors, he added.

Stating that these were not professional creditors, Justice Kaul said these were people, who
invested their life savings, while to cherishing the dream of their own house. In these cases, it became all the more urgent to ensure that the relief extended to the homebuyers was not only effective, but also quick and least cumbersome.

The suggestion of a ‘Pre-packaged’ insolvency resolution process under the IBC for micro, medium and small enterprises was an interesting step in this direction, noted the Apex Court Judge.

He said that internationally, the ‘pre-pack’ has been regarded as a corporate rescue method that combined formal and informal insolvency proceedings – a hybrid framework that resolves the stress of a corporate debtor as a going concern with minimal State involvement, he said.

Justice Kaul further said that ‘Cross-border insolvency’ as a concept has been in vogue in the insolvency and bankruptcy sphere in India, especially since the Government released a draft chapter on cross-border insolvency in 2018.

The proposed cross-border framework would govern all applications seeking recognition of
foreign insolvency proceedings as well as applications from foreign jurisdictions seeking
cooperation in Indian jurisdiction. This landmark step was expected to redefine India’s relations with
the rest of the world and opened up an interesting avenue to explore during the Conference, he added.

Justice Kaul said the exchange of thoughts and free flow of ideas in any society made it vibrant. This was especially true in the legal fraternity.

He further said that technology, specifically Artificial Intelligence, could be very helpful in analysing, modelling and predicting scenarios based on financial performance. The Government too planned to develop an electronic platform, which could
handle several processes under IBC such as filing applications, delivering notices and storing records, he added.

The Supreme Court Judge said he was certain that the Conference would prove to be an important stepping stone in shaping India’s
insolvency regime in the coming years, as there would be discussions on insolvency’s link with
technology and also the future of insolvency. This would prove to be two invigorating days of intellectual rigour, technical discussions and fruitful engagements, he added.

The conference would certainly benefit all the participants and enrich the field of insolvency, noted the Apex Court Judge, adding that he was certain that the Insolvency Law Academy would continue to contribute towards turning the insolvency regime of India into a globally recognised success story.

Former Judges of the Supreme Court – Justice A.K. Sikri and Justice Ashok Bhushan, President of INSOL Scott Atkins, former CEO of Niti Aayog Amitabh Kant, among others, were present on the occasion.

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