By Amar Patnaik

The Insolvency and Bankruptcy Code (IBC) overhauled India’s business landscape by streamlining a fragmented legal framework governed by various institutions and rules under one law and one institutional arrangement of the National Company Law Tribunal (NCLT) and its appellate court. While the apex court upheld its constitutional validity in the Swiss Ribbons case (2019), terming it “sacrosanct”, implementation hurdles persist due to conflicting interpretations, unclear provisions, and legislative gaps. The 32nd report of the Parliamentary Standing Committee on Finance highlights low recovery rates (up to 95% haircuts) and long delays (71% cases pending beyond 180 days), contradicting the IBC’s legislative intent of efficient resolution.

Recognising these challenges, the IBC has undergone amendments regularly. The 2017 amendment introduced Section 29A, barring wilful defaulters from bidding for distressed assets and clarifying related party definition. In 2018, homebuyers became financial creditors, voting thresholds were redefined, and a 330-day resolution timeline was set. The 2019 amendment enhanced operational creditors’ rights and clarified voting thresholds. The 2021 amendment introduced the pre-packaged insolvency resolution process for micro, small, and medium enterprises, while 2023 saw stricter NCLT approval timelines, clarified liquidation proceeds distribution, and enhanced accountability of insolvency professionals.

A sacrosanct IBC is unrealistic and somewhat counterproductive because legal frameworks must adapt to the evolving business landscape, thus making ongoing amendments inevitable. The IBC’s lingering ambiguities must be urgently addressed to fully realise its transformative potential.

Issues and recommendations

The 32nd Report identifies incongruencies between the Code and subordinate legislations. For instance, Section 5(26) of the IBC defines a resolution plan as addressing the corporate debtor’s insolvency as a going concern, interpreted as requiring disposal of the entire business under one plan. However, regulation 37 of the corporate insolvency resolution process regulations allows more flexibility, permitting the transfer or sale of assets to multiple parties. This inconsistency limits the resolution professional’s ability to maximise value via multiple bidders.

Similarly, in liquidation proceedings, Section 54 mandates the dissolution of the corporate debtor. However, regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, allows asset sales, creating a discrepancy. This incongruence has led to legal uncertainty as evidenced by the NCLT ruling in Invest Asset Securitisations & Reconstruction Pvt. Ltd vs. Mohan Gems & Jewels Pvt. Ltd. (2020), which deemed regulations permitting liquidation as a going concern ultra vires. These recommendations suggest amending the IBC to align with regulation 37’s flexibility, deletion of 32(e), and amending 32(f). These changes would harmonise the subordinate legislation with the Code, enhancing clarity in liquidation proceedings. The latest report released in February indicates the government’s acceptance of these suggestions, marking a big step towards refining the IBC framework.

Another grey area is the inter-se ranking of different classes of secured creditors in the waterfall, based on the nature of their secured interest. The National Company Law Appellate Tribunal judgment in the Technology Development Board case (2021) undermined the first charge-holder’s preferential claims, by misinterpreting the term “equitable” with its colloquial counterpart “equal” and putting all secured creditors on an equal footing once they relinquish security interest. This contradicts precedents like Essar Steel (India) Ltd. vs. Satish Kumar Gupta (2020) and State Bank of India vs. M/S Adhunik Alloys & Power Ltd (2018). The 2018 Insolvency Committee Report of the ministry of corporate affairs noted that Section 53 acknowledges inter-creditor agreements and subordination arrangements in the context of liquidation proceedings. The committee in 2020 suggested adding an explanation to Section 53(2) to clarify this. Also, the Expert Committee on Company Law advised upholding pre-insolvency creditor rights and priorities to maintain predictability. Globally, the UN Commission on International Trade Law Legislative Guide on Insolvency Laws emphasises protecting debtor-creditor agreements and equitable treatment of creditors based on rankings and interests, acknowledging different and subordinate agreements with the debtor. Section 510 of the US Bankruptcy Code enforces subordination agreements in liquidation, implying that legal (subordination) agreements outside of bankruptcy are followed in cases if they are enforceable under regular non-bankruptcy law. The Technology Board ruling may hinder secured creditors, particularly first charge-holders, by subjecting them to unfair treatment.

The IBC lacks provisions for group insolvency cases leading to inconsistent judicial interpretations. In State Bank of India & Another vs. Videocon Industries Ltd. (2019), the NCLT allowed substantive consolidation of 13 Videocon companies on grounds of common control, directors, assets, and liabilities, among others. This ruling has been reaffirmed in other cases by similarly allowing consolidation of entities. However, in Giriraj Enterprises vs. Regen Powertech Private Limited (2021), NCLT dismissed the consolidation of insolvency proceedings of a holding company with its subsidiary due to the absence of statutory guidelines. Recognising this gap, the Cross Border Insolvency Committee on Group Insolvency (2021) recommended an enabling legal structure for domestic and cross-border group insolvency. Germany and the European Union have detailed group insolvency frameworks focusing on group coordination proceedings. Australia, however, prohibits group proceedings as each entity is treated as separate, but allows for the appointment of a single trustee and consolidated court proceedings for group firms.

The way forward

The IBC, designed to be a mechanism to resolve insolvency and provide investor confidence, requires significant improvements. Key areas for refinement include clarifying provisions, redefining creditor rights and priorities, and developing frameworks for emerging concepts like group insolvency. India’s dynamic approach to ensure the IBC remains responsive and effective is, therefore, welcome.

The author is a lawyer and former MP from Odisha.

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