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August 16, 2023The Unsolved Questions in the Insolvency and Bankruptcy Code
Since its enactment seven years ago, the Insolvency and Bankruptcy Code 2016 has encountered several unresolved issues that have impacted its effectiveness in achieving the intended objectives. The primary aim of introducing the IBC in 2016 was to streamline the previously fragmented and complex insolvency process, which was governed by various institutions under different laws. The Code sought to bring uniformity and structure to the insolvency and resolution procedures for individuals, partnerships, and companies.
Under the IBC, individuals and partnerships facing financial distress and potential bankruptcy can approach the Debt Recovery Tribunal to initiate insolvency proceedings. On the other hand, the resolution of bankruptcy cases for companies falls under the jurisdiction of the National Company Law Tribunal (NCLT). By centralising these processes, the Code aimed to make the insolvency system more efficient and accessible for all stakeholders involved.
The process of insolvency can be initiated by the corporate debtor, a financial creditor, or an operational creditor by filing an insolvency petition before the relevant adjudicating authority. The adjudication authority appoints the interim resolution professional, who gathers the data pertaining to the credits and assets of the entity undergoing insolvency and feeds it into the information utility (NESL Limited). The interim resolution professional then constitutes the Committee of Creditors (CoC), who then take over the proceedings. The CoC can appoint a resolution professional who will control the management of the entity, suspending the control of the board of directors. The resolution plan can be submitted to the Committee of Creditors by a resolution professional, who in turn can accept or reject the resolution plan. If the resolution plan is rejected, the liquidation process starts. The timeline for the entire process is 180 days, which can be extended to 270 days. The Code succeeded in bringing down the delay in the exit proceedings of a company in India to two to three years from more than seven years under the previous systems in place.
From an earlier regime where the “debtor was in possession,” the insolvency process under IBC can be described as “a process where the creditor is in control.” Even though there is a streamlined and uniform process in place, some problems remain.
First of all, there is still ambiguity regarding the secured creditors’ inter-se priorities in the liquidation process. The NCLT and Supreme Court have issued numerous contradictory rulings on this matter. In the Oriental Bank of Commerce v. Anil Anchalia case, the NCLT ruled that, if the secured creditor has released the security interest, the value realised from the sale of the assets will be divided pro rata among the creditors in accordance with Section 53 of the IBC. The insolvency committee report brought out in 2018 relied on the rationale held in ICICI Bank Limited v. SIDCO Leathers Limited by the Supreme Court. The Court held that
“The claim of the chargeholder over secured assets stems from Section 48 of the Transfer of Property Act, and this right exists even when the debtor is undergoing liquidation. Since the Companies Act, 1956, does not contain any provision dealing with statutory and contractual rights among secured creditors, the general provisions creating a statutory right would prevail in the event of liquidation.”
The Supreme Court further clarified that inter se priorities under Section 53 are also covered by this rule. The report reaffirmed the same, stating that the credit market would suffer if secured financial creditors’ inter-se priorities were ignored during liquidation. Since their security interests will not be protected in liquidation, banks and other financial institutions will be deterred from making loans secured by real estate and other types of collateral.
Another issue pertains to the calculation of the liquidation value. Registered valuers are responsible for providing both the fair value and the liquidation value. The fair value is determined as the realisable value of the corporate debtor’s assets if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, following appropriate marketing, and with knowledgeable, prudent, and unforced actions from the parties involved. On the other hand, the liquidation value represents the estimated realisable value of the corporate debtor’s assets if they were to be liquidated on the insolvency commencement date.
These definitions, however, suffer from ambiguity as the valuation of assets can vary under different scenarios. The success of a liquidation plan, which aims to safeguard the interests of stakeholders, relies on the accurate determination of the liquidation value. Unfortunately, there is a lack of clarity in these concepts, and many court judgements surprisingly contradict each other, further complicating the matter.
Even after its approval, the final resolution plan is subjected to challenges, which results in significant delays and can prove detrimental to the corporate debtor’s value.
The IBC 2016 isn’t a total flop, but it needs some fixing to make the business scene smoother. They have to make sure those resolution plans are put into action at the right time, so things run more efficiently.
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.
Anu Maria Francis is an Associate, Research at Centre for Public Policy Research (CPPR). She completed her graduation in Law from National University of Advanced Legal Studies, Kochi. She has worked as UPSC exam trainer and mentor with many coaching institutions in Kerala. She has also interned with a couple of organisations like Kerala State Information Commission, ACTIONAID India, Ceat Tyres Ltd, Biocon Pharma Ltd, Khaitan and Co Law Firm etc. Her academic interests pertain to legal and governance issues and education. She also has experience in handling business ventures.
