A month ago, the Ministry of Corporate Affairs released a list of about 30 changes to the Insolvency and Bankruptcy Code, 2016 (IBC) being considered by the government. Some proposed changes are structural , such as the introduction of the long-awaited “out-of-court” pre-pack for all companies (in contrast to the largely “in-court” pre-packaged insolvency resolution process introduced for MSMEs in 2021) and a comprehensive group insolvency framework.
However, most changes are in the nature of “quick fixes” to address issues that have emerged in the application of the IBC.
While the merits of each individual change can be debated extensively, it is concerning that even seven years after the enactment of the IBC, the government has to introduce changes almost yearly to address issues arising in practice. Why is this the case?
Non-financial creditors
Two reasons come to the fore. One, the IBC has certain structural and design issues that the government has attempted to fix through “quick fix” amendments that do not address the root cause of the issues arising. For example, the IBC confers limited participation and control rights on non-financial creditors. This has given rise to concerns that they are not being treated fairly.
To resolve this, the government has time and again sought to legislatively increase and/or guarantee the recovery they can make from the IBC, and is proposing to do so once again.
However, such an approach not only creates considerable rigidity in the process, it also has the potential to impinge on the legitimate rights of financial creditors. Instead of putting a badly designed band-aid on this bullet wound, the government should debate whether the design choice of excluding non-financial creditors from voting on the resolution plan needs reconsideration.
Unfortunately, Adjudicating Authorities have continued to adopt conflicting and often commercially unviable interpretations of the IBC. In fact, two of the proposed changes being considered by the government seek to mitigate the effects of heavily criticised interpretations adopted by the Supreme Court.
Differing stands
Similarly, government agencies have often not spoken in one voice on the IBC. Taxmen, in particular, have been guilty of pursuing companies whose tax debts have been waived under the IBC process, even after the approval of the resolution plan, even as other government agencies have reassured anxious resolution applicants that they would get a “clean slate” if they put in new monies to rescue a company under IBC.
This explains why the government is again considering proposals to clarify that government agencies cannot continue litigation after the successful approval of a resolution plan. Finally, market participants, such as resolution applicants and creditors, are also guilty of adopting myopic strategies to increase their pay-outs in single cases, at the cost of undermining commercial discipline in the IBC process as well as unsettling settled financial practice. However, these issues do not have a legislative fix. The government, therefore, needs to reconsider its use of these “quick fix” amendments.
Legislative changes should be focussed on bridging the policy gaps in the IBC framework, rethinking those aspects of the IBC’s architecture that have not worked or that are no longer required. However, this yearly succession of quick fixes has prevented the government as well as Parliament from adequately considering and properly designing the second-generation reforms that the IBC desperately needs.
On the other hand, gaps arising due to failures of stakeholders and institutions need sustained investment in capacity-building. Judges, and government agencies need to closely examine their approach to the IBC. However the government as well as market players have a role to play here.
The writer is a lawyer specialising in insolvency. Views expressed are personal