The Bankruptcy Law Reforms Committee (BLRC), set up by the finance ministry, recently submitted its report with a draft Bill called the Insolvency and Bankruptcy Code (IBC). One aspect of IBC called into doubt is the feasibility of enforcing time limits to resolve insolvency and bankruptcy. An example is the 180-day time limit to resolve insolvency. But while it is true that other laws also have had similarly strict time limits, IBC is different in that the law explicitly provides for supporting infrastructure to facilitate implementation of the law. One critical input for better outcomes in resolving insolvency and bankruptcy is access to clear and indisputable information about the debtor. IBC provides for the creation of an industry of Information Utilities (IUs)—regulated entities that ensure access to information to all parties involved in resolving distressed firms.
A rapid and efficient insolvency resolution requires clear rules to trigger the legal process, establish viability or bankruptcy, and to establish and implement the resolution outcome. At each step, access to undisputed information about the debtor is critical. For example, in order to trigger insolvency, the adjudicator has to determine whether the applicant is eligible to trigger, and if the application complies with conditions required in the law. In both cases, the adjudicator needs ready access to debtor information. Furthermore, the information must be undisputed. Since stakeholders in a stressed enterprise have an adversarial relationship, disputes about claims or assets can be used to delay the process to their benefit. Since the debtor often has more information about the enterprise, the asymmetry is typically tipped in favour of the debtor, and adversely affects decisions by all other parties, be they the creditors, new financiers or the judiciary. The link of information asymmetry to delays becomes visible when examining the process in detail.
An illustration is the requirement of the directors of an eligible industrial firm that has become sick, to make a referral to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985. The referral provides an immediate stay on all legal claims and actions against the firm, which remains in place till BIFR confirms that the firm is sick. Management at the firm can follow dilatory tactics to successfully delay confirmation by delaying access to relevant information. The adverse effects of such asymmetry is exacerbated for decisions in the later stages of assessing viability, because these require additional information about the assets and operational details about the firm.
Analysis using data from the BIFR website substantiates the link between asymmetric information and delays. The analysis shows that about 50% of the cases referred to BIFR between 1987 and 2014 took 5.1 years on average to proceed, while the remaining 50% did not proceed at all. Similarly, it shows that BIFR takes more than 5 years on average to decide on winding-up a firm, and more than 7 years to decide on rehabilitation schemes.
BLRC recognises the importance of ensuring information symmetrically during the resolution process. This includes both access to information about the assets, liabilities, business and operations of the debtor, as well as ensuring as little scope of disputes arising between the debtor and the creditor about this information during resolution.
Traditionally, this information has been made available through paper-based sources. The draft IBC contains provisions for the creation of an industry of entities called IUs. An IU is a data warehouse where information about assets and liabilities of a debtor, along with defaults and discharges, will be stored. IBC incentivises creditors to file this information by providing that the insolvency resolution process can only be triggered with information that is filed in an IU. The government may also consider eliminating the option of submitting other proofs of debt or default as the basis to trigger the insolvency resolution process. BLRC recommends that both creditor and debtor co-sign the information when it is filed, for the adjudicator to accept it as a irrefutable claim.
In the case of a listed firm, the information in the IUs will be public at all times owing to the large number of stakeholders involved. For unlisted companies that are solvent, it will only be available to all the existing creditors of the firm. But once insolvency is trigged, this information for unlisted companies will be publicly available. Privacy of the identities are protected. Creditor identities will not be available while the debtor is solvent. These identities will only be available to stakeholders and the adjudicators once insolvency is triggered.
For this proposal to enable quick insolvency and bankruptcy resolution, it is critical for IUs to have the reach to capture such information across all types of debtors and creditors. BLRC makes a conscious decision to move towards a competitive industry of information storage systems, rather than the monopoly of single public-sector utility. BLRC suggests only two requirements to increase competition. The first is an upper threshold on cost of access to telecom charges, and the second is to have open Application Program Interfaces (APIs). The first will limit the revenues of the IUs to arise from volumes of filings. The second will allow third-parties to design innovative interfaces to provide access to information at the click of a button.
Such requirement enables existing information repositories such as equity market depositories, Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), and credit bureaus, which already have the infrastructure to store and manage sensitive information, to become eligible as IUs for IBC. Once they are registered by the regulator provided in IBC, they can become the pioneers of a competitive industry of information utilities. Such an entrenched industry will enable more rapid decisions in resolving insolvency, and create a more efficient working environment for stressed enterprises.
Anjali Sharma works with IGIDR Finance Research Group; Shivangi Tyagi with NIPFP Macro/Finance Group;
and Shreya Garg with Vidhi Centre For Legal Policy