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As the Narendra Modi government celebrates “Azadi ka Amrit Mahotsav", an initiative to commemorate 75 years of independence, it is worth assessing the success of India’s bankruptcy code, which is arguably one of the most progressive commercial laws brought into force in recent times by the country, providing companies with the “freedom of exit".

This game-changing law made its debut in 2016, in the form of India’s Insolvency and Bankruptcy (IBC) Code, which allowed companies an easy and time-bound exit. The IBC effected a tectonic shift in the way lending was perceived. At the start of its implementation, a default as small as 1 lakh could lead to insolvency proceedings being initiated by the affected creditor. This gave creditors the confidence that borrowers, especially promoters, would take their debt obligations seriously.

However, the law was found wanting. Constant delays were observed. In 2020, the delays and the contribution of each stage to these were mapped, and it was noted that 64% of the average total delay was on account of time taken in obtaining an approval for a resolution plan from the committee of creditors (CoC) and the adjudicating authority, the bankruptcy courts.

In its initial years, the IBC faced teething problems and it was expected that with the passage of time, these will be resolved and its functioning will improve. However, according to the Insolvency and Bankruptcy Board of India (IBBI) newsletter for January-March 2022, 64.7% of all the cases admitted for the corporate insolvency resolution process (CIRP) since 2016 that have been closed, 11% have been withdrawn, about 14 % settled, 30% liquidated and 9% resolved (wherein a resolution plan was approved). Data released by the IBBI shows that the resolution rate of cases under CIRP is rather low and that the number of cases seeing liquidation are three times more than those being resolved.

Thus, it is clear that the CoC and courts have been bottlenecks for the IBC’s success. Banks, especially those in the public sector, are unable to take pragmatic decisions as any risk-taking that could potentially yield a low rate of dues recovery in the short term may be subjected to vigilance inquiries and audits. This deters decisions. We must, therefore, allow banks to take bold decisions and not create an environment where they limit their decisions to choosing the ‘L1’ or lowest possible haircut quote in fear of future trouble. Most importantly, banks need to be freed of this regulatory overhang so that they can take bold measures for restructuring. To achieve this, bankers should be protected for bona fide decision-making during the resolution process, based on a premise like the ‘business judgement’ rule available for board directors in many countries.

Also, given that most of the delay occurs at the stage of case admission, it is worth making applications for admission under sections 7, 9 and 10 of the IBC disposable on a written plea rather than on oral arguments. Further, one could identify provisions under the IBC where courts are mandated not to adjudicate but only administrate. But concerns will remain over the expertise of commercial court judges to decide on such matters. Commercial courts need fresh talent with an understanding of business for proper decision-making.

The insolvency litigation procedure should aim at reducing the duration of the process and also case volumes, so as to reduce uncertainties that result. This can be done by shortening the window within which a party must lodge a claim, whether it is an initial challenge or an appeal, which elsewhere is often shorter than in other civil or criminal litigation. In France, it is usually 10 days; in 2021, through insolvency and restructuring law reforms, it extended this further by providing for the full judicial resolution of certain disputes ahead of the confirmation of a restructuring plan by a court. In the same spirit of limiting insolvency litigation, the reform also limits which parties may initiate certain legal actions. These entail court-appointed insolvency practitioners or parties involved in the restructuring process. Another feature that is worth weighing is to either give some adjudicating power to the case’s insolvency professional or appoint a supervisory judge for each case. In France, such judges have exclusive power to authorize important settlements with the insolvent company, some of which also require insolvency court ratification. They are often the first to decide an issue, and though their decisions are subject to challenge at the insolvency court and the latter’s decision can be challenged before a court of appeal, insolvency courts tend to confirm the orders of supervisory judges. Most litigants expect they would need to escalate their case to a court of appeal to effectively challenge a supervisory judge’s decision, which is not easy.

In conclusion, we need a serious rethink on how to design a suitable insolvency ecosystem for India amid our existing challenges of limited court capacity and high regulatory cholesterol. Whatever the government decides, it is important to act in time before the IBC loses its sheen and stakeholders who looked up to this law as a saviour give up hope and search of a newer regime.

Neeti Shikha is an associate dean, Indian School of Public Policy.

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