Evolution Of Law Of Corporate Insolvency "A Balance Sheet Of Working Of IBC 2016" [Part-I]

This Article traces implementation of IBC and progress achieved over the past one year and the challenges faced by each of the of the Pillars during their one year of journey.

For the sake of convenience and better understanding, the article is divided into four parts.

Part-I Captures Criticality of IBC as a piece of legislation and challenges & achievements of IBBI.

Part-II - Traces Formation of NCLTs and evolution of insolvency jurisprudence,

Part-III- Deals with the role of two other critical pillars under IBC- Information Utilities and Committee of Creditors and issues faced by Banks; and finally

Part-IV- While dealing dimension of role of the Resolution Professionals, try to present a balance sheet of the issues resolved /unresolved/evolving.

PART-I – CRITICALITY OF IBC AS A LEGISLATION - CHALLENGES & ACHIEVEMENTS OF IBBI

"The government's efforts to make business and commerce easy have been widely acknowledged. The next frontier on the ease of doing business is addressing pendency, delays and backlogs in the appellate and judicial arenas. These are hampering dispute resolution and contract enforcement, discouraging investment, stalling projects, hampering tax collections but also stressing tax payers, and escalating legal costs. Coordinated action between government and the judiciary-- a kind of horizontal Cooperative Separation of Powers to complement vertical Cooperative Federalism between the central and state governments-- would address the "Law's delay" and boost economic activity".[1]

 The above beginning passage from the newly released Economic Survey 2017-18 says it all. It also shows the determination with which Government is addressing the issues that hamper ease of doing business in India. A country needs a stable and cohesive legal system to support its economy. As quoted in the Economic Survey Report in Chapter 09 ibid, "the importance of an effective, efficient and expeditious contract enforcement regime to economic growth and development cannot be overstated. A clear and certain legislative and executive regime backed by an efficient judiciary that fairly and punctually protects property rights, preserves sanctity of contracts, and enforces the rights and liabilities of parties is a prerequisite for business and commerce".

Legislative approach is critical part of any Government agenda to push reforms and effect fundamental changes in the economy and approach towards business. However, India stands very poorly at 164 on this benchmark behind countries like Pakistan, Congo and Sudan. This also shows that our dispute settlement mechanism and approach of judiciary does not evoke the kind of confidence with foreign players as they have in the economy. The changes effected by the Government through Arbitration and Conciliation Act, 2015, the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 and efforts made to reduced intra-government litigation have not helped much in improving this impression. The Economic Survey points out that "there are currently one million Writ Petitions pending at the 6 High Courts studied, constituting between 50-60%. The higher judiciary has transformed into Courts of first rather than last resort, and have consistently fused constitutional law and tort law, dissolving traditional distinctions between public and private law".

Insolvency and Bankruptcy Code, 2016 (IBC) which is primarily an "economic legislation", was expected to address many critical issues affecting Indian economy and also the judicial process and to tackle issues hampering business. As we look back through "Economic Survey" and braces for new fiscal year, it is time that we also have a look at how the jurisprudence evolved and the different stake holders performed under IBC through a macro view of its "Balance Sheet" which this write up try to evaluate.

THE BEGINNING: IBC came into force w.e.f. Ist of December 2016 and started with the first case of ICICI Bank against Innoventive Industries Ltd. As expected there were skepticism about its effectiveness given the mess which we created with the system under BIFR and SICA and relative failure of Corporate Debt Restructuring (CDR) mechanism. Judicial over activism in fiscal and economic matter was another challenge which IBC was expected to face in its journey. However, the most critical aspect of this journey was time schedule. The strict time line laid down for completion of entire resolution process (barring liquidation) was also considered to be unrealistic especially in a country where systems are never known to work as per schedule and delay is the norm, judiciary takes on an average 5-6 years to decide a case, Government machinery moves at its own pace and litigants ever eager to prolong the proceedings through forum hunting. However, fortunately, barring few hic-ups, the system started off well and is on its course to change the way business and economic issues are tacked, through a mix of a mechanism which is founded on very innovative approach of "separation of power". IBC has also shown the way how delay in judicial process could be curtailed through use of innovative approach and use of technology.

Statistic pertaining to proceeding under IBC show that "Public announcement of corporate insolvency process" was done in 515 cases till Jan 25, 2018 and it was 485 till December 2017 out of which around 158 cases were initiated by the Financial Creditors (FC).  In addition to that "Voluntary Liquidation Process" was imitated in 114 cases up to Jan 25, 2018 this figure was 103 in December 2017. Liquidation Process Commenced in 37 cases till Jan 25^th 2018 which was 28 till December 2017 out of this 3 cases were initiated by FC. Total Insolvency Professional registered with IBBI are 1410.

This, by any yard stick, are very impressive figures and show that during later half of the year the activity picked up putting the system to full use. As per the written reply submitted by the Hon'ble Minister of State for Finance Shri Shiv Pratap Shukla  to the Lok Sabha, 2,434 fresh cases  were filed before NCLT till November 30, 2017 and 2,304 cases of winding up of companies were transferred from various High Courts," Of these, 2,750 cases have been disposed of and 1,988 cases were pending during the period under review. As per the information received from public sector banks, Rs 39.63 crore had been realized till the end of last month, after filing cases with NCLT, and Rs 2.89 crore had been borne by the banks as haircut. Given the quantum of Non-Performing Assets (NPA) the banking sector is grappling with, the above figure does not come anywhere near that. But, the fact is IBC was never intended as a recovery mechanism.  A complete understating of the Code would show that it is not only intended to provide robust resolution mechanism to address insolvency but the time bound mechanism and threat of liquidation would help in creating a climate of compliance and financial discipline which would improve overall financial culture of payment and recovery in the country.

As per the figures released in Economic Survey 2017-18[2] resolution process is under way in 442 cases and resolution plan were approved in 10 cases, Liquidation Order passed in 30 cases, 36 cases were closed by appeal/review.  In the first ten cases for which resolution plans were approved under the Insolvency and Bankruptcy Code (IBC) between August and December 2017, financial creditors were able to recover 33.53 per cent of total claims outstanding from the defaulting borrowers. Economic Survey has presented following status of recovery under 10 cases where resolution plan was approved:

  The above figures show that the financial creditors may recover  Rs 1,854.40 crore out of the total claims of Rs 5,530.30 crore involved. The lowest recovery rate of 6 per cent was in the case of Synergies Doorey Automotive (since stayed by NCLAT) in that case actual recovery for Financial Creditor (FC) was pegged at only Rs 54.7 crore out of total claims of Rs 972.2 crore. In the case of Prowess International Pvt Ltd, FC recovered 100 per cent of the outstanding claims of Rs 3.4 crore.

The Survey also shows that out of the said 12 cases which were filed before NCLT after RBI instructions, 11 cases involving amount of Rs 3.13 lakh crore have been admitted. In those cases, no resolution is reached so far and in some of the cases application for extension of the resolution process have been filed. In Bhushan Steel, which involves highest claims outstanding of Rs 55,989 crore, the resolution is in process.

Given with this background let's have a look at the performance of various stake holders and authorities connected with IBC.

1] Insolvency and Bankruptcy Board of India (IBBI):

IBBI was set up on 1st October 2016. It works as a unique regulator which regulates a profession i.e. Insolvency Professionals, Insolvency Professional Agencies and Information Utilities as well as transactions of corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code. It is the key pillar of the ecosystem set up under IBC. One must give credit to the Government and the Board for laying down the entire eco-system and the framework for insolvency resolution in a record time which is unparalleled in the legislative history. Under Dr M. S. Sahoo, the Board has moved in professional manner to address the issues that came in the way of implementation of the system.

The Board is entrusted with enormous responsibilities. Under section 196 of IBC, its responsibilities ranges from registration of insolvency professional, Information Utilities and laying down of regulation, inspections and investigations on insolvency professional agencies, insolvency professionals and information utilities, monitoring of the performance of insolvency professional agencies, insolvency professionals and information utilities, collection and maintenance of records relating to insolvency and bankruptcy cases, repositories of electronic information, make regulations and guidelines on matters relating to insolvency and bankruptcy.

The Board also enjoys the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of (a) The discovery and production of books of account and other documents, at such place and such time as may be specified by the Board, (b) Summoning and enforcing the attendance of persons and examining them on oath, (c) Inspection of any books, registers and other documents of any person at any place, and (d) Issuing of commissions for the examination of witnesses or documents.

The Board has set up various committee to undertake its responsibilities under the Code, this include a Disciplinary Committee under section 220(1) of IBC, Advisory Committee on Service Providers, Advisory Committee on Corporate Insolvency and Liquidation, Advisory Committee on Individual Insolvency and Bankruptcy, Technical Committee in accordance with Regulation 14 of the IBBI (Information Utilities) Regulations, 2017. The Board came out with its various reports such as the Report of the Technical Committee on Information Utilities (August 2017), Report of the Working Group on Information Utilities (Jan 2017).

In a short span of time, IBBI has laid down more than 30 Regulations/amendments governing entire gamut of IBC, ranging from regulations governing resolution process, IPs, IUs, inspection, valuation, fast tract process and so on.

IBBI has also acted fast on IPs and passed about 8 orders related to disciplinary issues. The efforts of the Board and its officials in spreading awareness about the Code is also commendable.

IBBI has also started inspection/audit of records of IRPs/RPs. It has also issued following circulars:

Dr. Sahoo, who has tremendous experience behind him and is credited with implementing reforms in securities markets, dematerialization of securities, trading of derivatives, setting up National Institute of Securities Markets, trading of currency derivatives, settlement of securities market infractions, has lead from the front with zeal which has enabled the Board to have successfully implemented the Code on practically war footing.

There are demands from various sectors to address issues concerning income tax, valuation, automatic approval and compliance under Companies Act, Competition Act and SEBI Regulations in respect of merger and amalgamation, capital restructuring, listing requirement, takeover code. Provisions relating to squeeze out, approval of shareholders, creditors provisioning norms for NPA cases of Bank under resolution process, filing of information with IUs by Banks and other parties Compliance of the requirements under the Companies (Share Capital and Debenture) Rules 2014 for any new issuance of shares on a preferential basis by an unlisted company also requirement of assessment of fair market value of the shares through a registered valuer / authorization under articles of association of the company/ and approval by shareholders by way of a special resolution /as also by the Board, are some of the issues which would keep up pressure of the Board.

However, these issues are not very difficult to resolve because NCLT also exercises jurisdiction over most of the issues under the Companies Act, issues relating to SEBI and CCI could also be addressed by suitable amendments. With various committees already working on the remaining issues such as valuation, insolvency of non-corporate persons and group insolvency etc., IBBI deserve full marks for its efforts.

[1] Ease of Doing Business' Next Frontier: Timely Justice- Economic Survey-2018- Chapter 09

[2] Economic Survey 2017-18 Volume 2- Page 50