Procedural clarity: Proposed changes will make IBC more effective

In a modern and dynamic market economy, laws and regulations must be regularly evaluated to improve outcomes. It is likely that changing market conditions require adjustment, or the experience of implementation could itself show gaps in regulation. The implementation of the Insolvency and Bankruptcy Code (IBC), 2016, is considered to be one of the biggest reforms in recent years, and it is worth noting that the government and the regulator, the Insolvency and Bankruptcy Board of India (IBBI), have consistently worked to improve the bankruptcy framework over the years. In this regard, the IBBI this week published a discussion paper on the various aspects of the workings of the committee of creditors (CoCs), with the broader objective of improving procedural clarity. Implementing the proposals will improve transparency and reduce friction in resolution. 

As the discussion paper notes, the depth and detail of recording CoC meetings vary significantly, and the deliberations are not appropriately reflected in the record. The basis of commercial decisions is not always clear. This may lead to litigation and delays at later stages. The bankruptcy framework requires CoCs to objectively evaluate resolution plans. The paper, therefore, proposes measures to improve clarity. In addition to the present requirements, CoCs will be expected to record their deliberations on expected recovery compared to the fair and liquidation value. Further, it needs to record the adequacy of market discovery undertaken during the resolution process. CoCs will also be expected to record the credibility of the resolution applicant and the certainty of the implementation of the resolution plan. The basic idea is to ensure that “... the CoC’s approval of a resolution plan is demonstrably conscious, informed, and supported by recorded rationale”. Such improvement in the process will make the framework more robust. 

The paper further reinforces that continuing operations during the corporate insolvency resolution process (CIRP) must be guided by the expected value of outcomes and commercial prudence. The proposed changes have also sought to clarify the position with regard to delayed claims. Such claims categorised as acceptable by the resolution professional must be placed before the adjudicating authority (AA) within a week and before the CoC for its recommendation in terms of their treatment in the resolution plan. It has been observed that, in some cases, such claims have not been presented before the AA because of the absence of the recommendation of the CoC. The paper further proposes the exclusion of related operational creditors from CoCs. 

The proposed changes will impart greater transparency and operational clarity to the insolvency resolution process, which in turn is expected to reduce delays. However, such changes will not be enough to make the desired level of difference. The idea behind the IBC was that it would enable bankruptcy resolution at the earliest, which would help protect value in firms undergoing the process. However, that’s not been the case. As the latest quarterly newsletter of the IBBI showed, of the 1,376 CIRPs that had resulted in resolution plans by December last year, the average time taken was 619 days, against the envisaged maximum time frame of 330 days. The basic problem with the framework, as also highlighted by experts on these pages, is capacity constraint at the National Company Law Tribunal and National Company Law Appellate Tribunal. Thus, in addition to improving the law, the government must also address the capacity issue. A reasonably smooth exit path will not only reallocate capital efficiently but also encourage investment in general.