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Business News/ Opinion / Views/  Opinion | IBC is neither expedient nor appropriate in the Indian context

Opinion | IBC is neither expedient nor appropriate in the Indian context

The Insolvency and Bankruptcy Code (IBC) will only hasten the demise of entrepreneurship in India

The Insolvency and Bankruptcy Code (IBC) in its present form was never a cure for the NPA problem. It has only caused distress for Indian promoters.

Law is incoherent without appreciating the realities of life in the society and cannot be alienated from societal habits. If a dissociation is deemed pertinent, then the most non-destructive manner of departure should be applied. A systemic change brought out abruptly, therefore, only sinks the objective.

Law is incoherent without appreciating the realities of life in the society and cannot be alienated from societal habits. If a dissociation is deemed pertinent, then the most non-destructive manner of departure should be applied. A systemic change brought out abruptly, therefore, only sinks the objective.

In the Indian context, the non-performing asset (NPA) quandary would have been substantially different in the absence of public ownership of lenders, absence of responsibility/performance de-linked matrix for credit disbursal and control, and the government playing bankers to businesses. This being the fountainhead of the massive NPAs in our system, attributing it solely to a failed promoter, is an outcome of a convoluted and contrived logic.

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The Insolvency and Bankruptcy Code (IBC) in its present form was never a cure for this problem. It has only caused acute distress and discomfort among Indian promoters. The constantly looming threat of losing the ownership and, thereby the entire promoter capital in an uncontrolled quick span, does not provide an environment conducive to sustained entrepreneurship. India’s high cost of capital, seasonality of large businesses, severe government interference and control, and other unique complexities are compounded by this additional hazard.

In IBC, there exists a (singular) nemesis, the failed promoter; and a sheep to be saved, the corporate debtor; and an Emmanuel in the creditor. The environment prior to IBC was sympathetic to the nemesis.

IBC is that paradigm shift which places the Emmanuel in control of the sheep casting out the nemesis in one clear cut. According to IBC, a default of 10 and 90 days in satisfying an operational or financial creditor, respectively, debars this nemesis from shearing the sheep (read resolution process). He is cast out. Now, this Emmanuel, incompetent to run his own house, wholly remiss in credit sanctions and management, which in the first place fattened the sheep to immobility, appoints a resolution professional, who doesn’t know a sheep from a goat, to assist in shearing. In this process, the promoter dies first and then the sheep, which by now is scrawny.

IBC’s validity has now been fully affirmed by the Supreme Court in the Swiss Ribbons case (January 29, 2019). The justices avoided interfering in this “economic" legislation, following a hands-off approach.

Eugen Ehrlich (1862-1922), a proponent of the sociological jurisprudence practised widely in America from where the justices borrowed extensively to keep their hands off IBC, postulates that law cannot be understood apart from the social norms, which he calls the “living law", and which he claims, is the inner order of associations, i.e., the law practised by society, as opposed to the law enforced by the state. Ehrlich holds a court trial to be an exceptional occurrence in comparison with the innumerable contracts and transactions, which are consummated in the daily life of the community, and that the centre of gravity of legal development lies not in legislation, nor in juristic science, nor in judicial decision, but in society itself.

Society, in reference, is the society in context and the context of it, therefore, is not be imported. Comparative assessments like a quick resolution in London or Singapore contrasted in our context—as observed by the justices in the Swiss Ribbons (supra) case, are simplistic.

Social and corporate life are an output of habituated acts produced by norms of personal and environmental forces rather than conscious practice of law. Indian entrepreneurship is a unique and complex space. There is no measured design. Comparing it with the space in London and Singapore does disservice to the thought and practice. In India, an entrepreneur is rarely distinct from their corporate establishment. The latter does not survive without the former. Our problems are different. We cannot do with an imported solution, or even a customized one. We need an entirely new solution.

IBC was neither expedient nor appropriate in the Indian context. If mere resolution of disputes were the solitary aim and objective of the IBC, then there is reasonable success, whereas if its preamble had any guiding relevance, then objectives are missed by far and, in the circumstances ensuing, will possibly never be met. Benjamin N. Cardozo, the best of American judges, held way back that the life of the law has not been logic: It has been experience. IBC will only hasten the cold demise of entrepreneurship and promotership in India.

Sajid Mohamed is founding partner, Agrud Partners, a Mumbai-based corporate law advisory firm.

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