1. Enabling better judicial outcomes in insolvency

Enabling better judicial outcomes in insolvency

Legislative and judicial reforms needed for easier exit from financial stress

By: and | Published: December 14, 2015 12:13 AM
The Financial Sector Appellate Tribunal Task Force has suggested setting up of a Financial Sector Tribunal Service to provide specialised administrative services to tribunals in the financial sector Such an entity can facilitate the working of NCLT and DRT to enable better judicial outcomes on bankruptcy.

The Financial Sector Appellate Tribunal Task Force has suggested setting up of a Financial Sector Tribunal Service to provide specialised administrative services to tribunals in the financial sector Such an entity can facilitate the working of NCLT and DRT to enable better judicial outcomes on bankruptcy.

Most experts support the broad direction of the draft Insolvency and Bankruptcy Code, which was recently released by the finance ministry. However, there is a fair degree of apprehension about the implementation. A common question is how this Code will coexist with the existing insolvency laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and Sick Industrial Companies Act (SICA).

Other questions involve the jurisdiction of the National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) under the Code. To achieve desired results, having one consolidated Code on insolvency and bankruptcy is essential. The key bottleneck is going to be the working of the judiciary, and this requires a fresh focus on court administration.

The first area of concern is the question of multiple laws versus a consolidated law. A single law is simpler and readily understood, and would involve reduced inconsistencies. Consolidation, backed by clear thinking, gives us an opportunity to do better than the patchwork solutions of the past.

A single law also facilitates better judicial decisions. Such decisions improve clarity by providing the authoritative interpretation of a law. If there is only one statute on a subject, it is easier to judge disputes on that subject. The same argument supports having a single judicial forum.

A single forum deciding disputes under one consolidated statute is less likely to give rise to conflicting judgements. Then, authoritative decisions can be easily navigated in a comprehensible manner which, in turn, helps expertise to develop around the statute. That is why, in India, criminal laws (IPC, CrPC) or direct tax laws (Income Tax Act, 1961) have emerged as specific areas of legal specialisation. A single code with a single judicial forum is preferred whenever possible.

The current Indian bankruptcy legislation has both a multiplicity of statutes as well as judicial fora, and is replete with conflicts. Several examples of these conflicts are discussed in a recent paper, “The Indian insolvency regime in practice—an analysis of insolvency and debt recovery proceedings”, by Aparna Ravi. A single coherent code would minimise these conflicts brought about by multiplicity of laws. Detailed work is now required in refining the draft Code, to clarify all the repeals that have to accompany the new Code, so as to ensure that the final outcome is one integrated law.

The Code recognises the advantages of having one single forum to resolve corporate insolvency and bankruptcy cases. This is especially necessary in light of the experience under SICA, where the Board for Industrial and Financial Reconstruction (BIFR) adjudicates on viability while a separate fora, the high courts, supervise liquidation.

This led to the situation when even where BIFR recommended liquidation of a company, high courts often reassessed the recommendation, even disregarded it. The draft Code provides for a linear process from insolvency resolution to liquidation when insolvency resolution is unsuccessful. Then it is critical to have a single forum for both, in order to make the process effective.

The proposed Code is a consolidated statute. But it proposes to vest jurisdiction on NCLT for corporate insolvency and DRT for individual insolvency. The Code visualises that the geographical presence of DRTs can improve access to justice of personal insolvency litigants. The constitutionality of NCLT has only recently been confirmed by the Supreme Court, and NCLT has yet to be built.

A tricky problem is presented with promoter guarantees, where we see a mix of corporate insolvency (a firm that has defaulted) and personal insolvency (promoters who had given personal guarantees refuse to pay up). Clause 60(2)(a) of the Code provides that the individual insolvency proceedings of personal guarantors will be filed in, or transferred to, NCLT.

We are, then, presented with a scenario where there is only one law, the new Code, where corporate insolvency goes to NCLT and personal insolvency goes to DRT. The story now turns on the operational capabilities of these two judicial forums.

There is universal concern in India about the poor functioning of courts and tribunals. India stands out an outlier in the strategies that have been adopted, when compared with other common law jurisdictions. The world over, there is a recognition that well-functioning courts are a combination of skilled and independent judges, and robust administrative support functions of the judicial institutions. Most countries have separately targeted administrative functions in judicial reforms.

Often, a separate corporate structure has been set up, by agreement or statute, to run the administrative functions.

For example, the UK has, by agreement, set up Her Majesty’s Courts and Tribunals Service. The US has, by statute, set up the Administrative Office of US Courts. Canada has, by statute, set up the Court Administration Service. Australia has, by statute, set up the Court Services Victoria. These are structured as corporations. Judges usually have board-level representation to ensure accountability of the entity to the judiciary, while the executive roles are held by professionals.

These entities provide all necessary non-judicial support services to the judiciary such as personnel recruitment, procurement of goods or services, infrastructural needs of courts. Judges are then freed from administration, and concentrate on the core judicial functions of allocating, listing and deciding matters. This organisational design has helped these countries develop super-specialised court administration skills with improved accountability to the judges. By merging the registries of all courts and tribunals, they offer better career prospects for court officers and staff.

As a consequence, they attract better talent to support the administrative functioning of the judiciary. Such a reforms process for the judiciary is at an early stage in India. The Financial Sector Appellate Tribunal (FSAT) Task Force, set up by the finance ministry, has suggested setting up of a Financial Sector Tribunal Service (FSTS) to provide specialised administrative services to tribunals in the financial sector. Such an entity can facilitate the working of NCLT and DRT to enable better judicial outcomes on insolvency and bankruptcy cases.

Pratik Datta is from NIPFP macro/finance group; Ashika Dabholkar is from AZB Partners

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