Litigation turning out to be a big hurdle for IBC: Economic Survey

Cites World Bank's Ease of Doing Business report, which said it takes 1,445 days to resolve a commercial contract in India, versus 589.6 days in OECD high income countries, 120 days in Singapore

The Economic Survey has said the Insolvency and Bankruptcy Code (IBC) is facing serious hurdles due to litigation initiated by various parties, adding that there is a need for efficient legal systems. The Survey said the court system remains the single most important way for ex-post resolution and the performance in the area of dispute resolution and contract enforcement in India remains a concern and needs to be focused on. 

The Survey cited the World Bank’s Ease of Doing Business report (2020), which said it takes 1,445 days to resolve a

commercial contract in India as compared to 589.6 days in OECD high income countries and 120 days in Singapore. The report also shows that the cost of litigation in India is around 31 per cent of the claim value. This is significantly higher than in OECD countries (21 per cent) and Bhutan (0.1 per cent).  

Despite the IBC being introduced in 2016 and first 12 companies were sent for debt resolution in June 2017, some of the large accounts like Bhushan Power are still pending in the court due to litigation by former promoters and other government investigating agencies. 

The Survey said the  performance of India is enforcement of contracts is also seen in its ranking in World Rule of Law Index for 2020, where India ranks 69 out of 128 countries. "Our performance is the worst in the category ‘Civil Justice not subject to unreasonable delay’ where we are placed at rank 123 falling," the Survey said.

Reacting to the Survey, Misha, Partner at Shardul Amarchand Mangaldas & Co said the Economic Survey justifiably emphasises the need to reduce judicial and procedural delays in the matters of insolvency and bankruptcy. "Although the implementation of IBC has already given impetus to the segment in comparison to the erstwhile winding up regime, it is expected that developments such as more settled jurisprudence under IBC, improved familiarisation with new processes coupled with efforts towards strengthening of judicial systems and introduction of pre-packs and other non-formal/hybrid insolvency resolution mechanisms expected in the coming year will help us to reduce delays further," she said.

The Survey further said the legal system is required not to fix ex-ante issues in the system but to be used as an

ex-post dispute resolution mechanism. This is just as true for government decision makers who may find their decisions questioned later. ''An effective enforcement system should be able to distinguish the negative outcomes arising due to uncertainties from outright frauds. There is a need for reforms in the legal system in the country as it has been argued by various Economic Surveys in the past," the Survey said.