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Business News/ Opinion / Views/  Don’t expect much from insolvency code tweaks
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Don’t expect much from insolvency code tweaks

The IBC does need fixing but process efficiency would be served better by human capacity expansion than a raft of proposed changes which include two that could hamper its efficacy

Photo: iStockPremium
Photo: iStock

The vexed phenomenon of sickness, bankruptcy and recovery of industrial units has dogged the government and regulators for over 40 years now. India’s promulgation of the Insolvency and Bankruptcy Code (IBC) in 2016 was meant as a magic bullet for a sustainable, legally-sound, democratic and utilitarian solution to a persistent problem that had defied resolution. The Code was hailed as an example of the Centre’s resolve to craft meaningful policy and untangle knotty problems that had eluded us for long. What the Code did not envisage and then fell prey to was India Inc’s ingenuity in not only influencing policy but also subverting due process through legal means. India’s flawed campaign finance system has also allowed wilful defaulters and interlopers to bend and game the system. Add to it India’s capacity problems at the administrative and judicial levels. It is not surprising that the ministry of corporate affairs has proposed a raft of changes to the IBC. Two shortcomings, however, still threaten to stymie it from becoming an effective piece of legislation.

A major anxiety seems to imbue the ministry’s note: a capacity deficit in the IBC process that leads to delays and results in sub-optimal outcomes. But it also seems like an attempt to improve the efficiency and speed of the resolution process without addressing head-on the issue of vacant benches or better-qualified adjudicators. As a second-best option, it instead proposes rule changes so that lenders—mostly commercial banks—can recover their dues, or at least part of it, and get on with the job of fresh credit creation, a task vital for economic growth. But in trying to do so, the proposals leave wide gaps for creative interpretation by all parties. For example, the suggestion that adjudicators should be “empowered" to penalize those filing “frivolous" applications before the bench fails to define what would qualify as such. This would grant excessive power to adjudicators, and, going by recent examples, could even result in miscarriage of justice. Even the suggestion to redesign the fast-track corporate insolvency resolution process looks like a slippery slope that could be twisted to favour one set of applicants over another.

The second flaw lies in the way IBC proposals try to recast the adjudication process to reduce the legal agency of operational creditors, especially individuals. This is visible in a suggestion for resolving real-estate insolvencies; the logic of ring-fencing a real estate company’s ongoing projects from the resolution process initiated by families in another beleaguered project betrays an institutional bias towards the sector. It is bizarre if a builder is allowed to plead insolvency for a specific realty project, but has a legal okay to deploy funds on other projects. It also illustrates the bureaucracy’s yen for an extreme form of utilitarianism, one in which some homebuyers can be allowed to suffer so that a larger cohort is relieved. Even the ministry’s recommendation that operational creditors must forage for complete information on the defaulter from institutions—which can be like rolling a boulder uphill—before filing for resolution seems retrograde, shifting the onus on the wronged rather than the wrongdoer. In the final analysis, there is no getting away from the fact that resolving bankruptcy cases efficiently will require us to tackle the system’s human capacity deficit to bring about the step-change that administrators appear bent on achieving through proxy methods.

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Published: 22 Jan 2023, 10:15 PM IST
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