By Bibek Debroy & Aditya Sinha,
A handful of days ago, a lady in Bhopal moved a court simply because her father allegedly cheated in a Ludo game. The court asked them to resolve the family members matter amicably. This could be uncommon. But a lot of civil litigation can be resolved by way of mediation and conciliation, with out approaching the court. The finish-outcome, following going by way of adjudication and incurring fees, is no distinct from what an amicable remedy would have discovered.
Today, insolvency and bankruptcy resolution in India also requirements an informal dispute resolution mechanism that can be triggered a great deal ahead of any crisis precipitates into formal action. The Insolvency and Bankruptcy Code (IBC) has been instrumental in resolving a big proportion of non-performing assets. It has also acted as a deterrent, offered creditors have utilised IBC proceedings as a tool to nudge debtors to restructure and fulfil their obligations to creditors. About 83% of circumstances, with a realisation worth of Rs 5,15,170 crore, have been resolved with out going by way of the complete method.
However, the Corporate Insolvency Resolution Process (CIRP) below IBC is normally not completed inside the stipulated time. The Bankruptcy Law Reforms Committee, which proposed the IBC, noted that “the most important objective in designing a legal framework for dealing with firm failure is the need for speed”. However, the adjudicating and appellate authorities, i.e., National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), that deal with IBC-associated matters have been bogged down by a lot of circumstances. Apart from dealing with IBC-associated circumstances, these tribunals also deal with circumstances associated to Competition Act and Companies Act. Sections 7, 9 and 10 of IBC provide 14 days for the NCLT to admit or reject any application for initiating insolvency proceedings.
Unfortunately, there are more than 9,000 applications that are pending admission ahead of different NCLT benches. Out of this, 5,485 have been pending for more than 180 days. Similarly, the CIRP should really be generally completed inside 180 days, or inside 330 days such as “any extension of the period of corporate insolvency resolution process granted and the time taken in legal proceedings in relation to such resolution process of the corporate debtor”. However, this hardly ever takes place. In JK Jute Mills Company Vs Surendra Trading Company, the NCLAT ruled that timelines pointed out in the Code are “procedural in nature, a tool of aid in the expeditious dispensation of justice and is directory”, i.e., they are not mandatory. Moreover, the date of receipt of application is not treated as the date of filing of the application. The date on which the application is listed for hearing in the registry of NCLT is treated as the date of filing the application. The countdown will not start out even if the application is pending to get admitted for 180 days.
No doubt, a more effective mechanism to deal with the pending caseload ahead of NCLT benches is necessary. However, till that is completed, an informal mechanism is necessary to assure that resolution happens with out resorting to formal action, perhaps ahead of a debtor defaults. For this, a pre-pack insolvency framework could be beneficial. Unlike standard CIRP, a pre-pack is a debtor-driven agreement for the resolution of the debt involving economic creditors and a distressed enterprise. This out-of-court restructuring provides the flexibility to arrive at a strategy most effective suited for consenting economic creditors and corporate debtors. Once all stakeholders agree on a resolution strategy informally, they can seek a nod from the courts—in India’s case, the NCLT. Pre-pack is an revolutionary corporate-rescue tool that incorporates the advantages of each informal and formal insolvency proceedings. In quite a few jurisdictions, such as the US and the UK, there exists a codified framework for pre-packs. Several empirical research have discovered that, compared to standard insolvency proceedings, they generate more worth for all stakeholders.
There are quite a few advantages of pre-packs: (1) they ease the burden on the NCLT and the NCLAT (2) drastically decrease the time for the resolution method (3) there is minimal disruption of the debtor’s enterprise, as the debtor is in possession all through the method (4) there is also greater employee retention in pre-pack insolvency as compared to the standard CIRP and (5) transaction and administrative fees are somewhat low as compared to the conventional CIRP.
The troubles in devising a pre-pack insolvency framework are apparent, but not intractable. The pre-pack insolvency framework should really balance the interests of each the economic and operational creditors. The framework shouldn’t be heavily biased in favour of economic creditors. The framework should really also assure a transparent insolvency resolution method. Unless there is a provision of moratorium if the majority of economic creditors are in talks of pre-pack insolvency with the debtor, pre-packs will not be an eye-catching insolvency resolution tool.
Logically, economic creditors and corporate debtors should really have got into an informal arrangement akin to pre-pack insolvency, as a normal market place practice. However, this does not occur. The absence of a codified framework deters the stakeholders from attempting this tool that is somewhat alien to an evolving Indian insolvency regime. As per reports in the media, the government is weighing proposals to introduce a pre-pack insolvency framework in India. This is a welcome move.
Debroy is chairman, and Sinha is assistant consultant, EAC-PM