FALL OF ‘DEFAULTER’S PARADISE’: HOW THREE YEARS LATER, IBC IS INDIA’S MOST AGILE ECONOMIC REFORM.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated by the President on December 28, 2019.  This is the fourth amendment to the Insolvency and Bankruptcy Code, 2016 (“Code” or “IBC”) ever since it was enacted three years ago in December 2016. Never in the legislative history of India, an economic law has been that agile to demands of economy, industry and stakeholders alike. For example, the very first amendments – disallowed defaulting promoters to take back control of their company as a resolution applicant. It’s been curative of pre-IBC regimes that failed at resolution of promoter-controlled insolvent companies. The code had none of the provisions that allowed for withdrawal of case after triggering insolvency. Now, upon approval of the Committee of Creditors by a voting share of ninety per cent, such cases can be withdrawn. Seeing the disaster of DHFL, the Central Government responded by using its power under the code to allow for insolvency resolution of financial service providers using the framework provided by the code. When homebuyers had no forum to avail except for filing writ petitions in the Supreme Court; the code empowered them as financial creditors. Now, the current ordinance discharges the corporate debtor for offences committed prior to insolvency action. Such incentive is necessary to provide a fresh-slate to the resolution applicant and boost investments in stressed assets.

 

It will not be a surprise that much of these amendments have been challenged in the apex court. Recently blamed as a precursor for economic slowdown, the Supreme Court (SC) has otherwise consistently upheld the constitutional sanctity of this economic legislation. In Swiss Ribbons Case (2019), it says, “The Court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The Court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose or not. It would be wise for the Court not to hazard an opinion where even economists may differ. The Court must while examining the constitutional validity of a legislation of this kind – be resilient, forward-looking, and liberal. It further opines that, “trial and error method is inherent in every legislative effort to deal with an obstinate social or economic issue” thereby being supportive of amendments that arise as the need-of-the-hour.

Given that there is no denying to the progressive intent of IBC, the case-pendency numbers have started to become worrisome. The Government in the parliament acknowledged that, “total 19,771 cases were pending with NCLT benches on 30.09.2019, which include 10,860 cases under IBC.” The proactiveness of the legislature to amend the law as the situation demands, must also be seen towards reducing the pendency of IBC cases. This is an imminent requirement to make this law stand-apart from its predecessors.  As per RBI data, cases amounting to 1415 Billion INR were pending at Debt Recovery Tribunals (DRT) as of 31.03.2014. The NCLT should not have similar fate as that of DRT, otherwise trust of people in IBC and NCLT alike may hit shaky bedrocks. In fact, this concern alone may be sufficient to defeat the preamble of IBC which is based on “time-bound” resolution of corporate debtor and “value maximization of assets”

However, despite the pendency figures, the future of IBC looks bright. Extensive consultations are being taken up at all fronts to notify cross-border insolvency anytime soon. Its need had already arisen when Jet Airways got admitted into insolvency in India and in The Netherlands in the same time period. Group insolvency measures are also being worked around for early enactment. Under it, various companies falling under one group will face one insolvency proceeding alone. Such provisions will help in consolidating operational and financial debt obligations, while also offering a platter of businesses as a single group to a resolution applicant. While the formal measures are yet to be notified, NCLT in August 2019 consolidated 13 entities of Videocon group into single process. As of now, no provision under IBC covers personal insolvency. Nonetheless, the Government is all prepared to launch it within the next 10 months and related petition has been filed at NCLT in Amravati, A.P – this December only.  By-product of personal insolvency will also be a debt-relief framework for insolvent individuals with minute exposures. Such frameworks may put a permanent halt to the demand of farm loan waivers each election.

 

Overall, in the words of SC, with the IBC in place, “the Defaulters’ paradise is lost” This lost paradise is symbolic of a behaviour change. The idea is simple – instead of first taking the loan and then thinking of its repayment; a debtor must plan its repayment first and then take the loan.

Divyansh Dev is currently training as Insolvency Professional under Graduate Insolvency Programme (GIP) at IICA, Ministry of Corporate Affairs, Government of India. By 2021, he will be among the youngest Insolvency Professionals in India - who would be duly recognised by Insolvency and Bankruptcy Board of India (IBBI) Additionally, he is an accomplished member of the Youth Advisory Council at Child Helpline International, The Netherlands. He is also the Global Schools Ambassador for the United Nations and promotes Sustainable Development Goals (SDGs) in education. He undertakes international youth-leadership consultation and has participated in similar capacities in New York, Washington D.C, Boston, Nairobi, Bangkok, Toronto and Amsterdam. Divyansh holds a Bachelor of Laws as well as a Bachelor of Arts degree in Humanities and Social Sciences (specialising in Journalism) both from the University of Delhi. He has been a media panel delegate at Harvard Project for Asian and International Relations and even interned with Harvard University’s South Asia Institute. He has graduated as Anubhav Fellow with Harris School of Public Policy, University of Chicago and was accorded as Global Young Leader at the Global Young Leaders’ Conference in the United States. His tryst with national-media includes writing for The Hindu newspaper as a features’ writer, writing opinions for The Indian Express, appearing on prime-time debates of National Media. He is empanelled as Mentor-of-Change by NITI Aayog, Government of India to provide mentorship support to school students in leadership and personal-development.