Telecom Regulatory Authority of India (TRAI) had conducted a Knowledge Sharing Session on “Insolvency Code and Process in India” in virtual mode under TRAI Centre of Studies and Research (TCSR) for Chairperson, TRAI, Member, TRAI and other senior officers of TRAI. The session was delivered by Dr. M. S. Sahoo, distinguished Professor of National Law University, Delhi on 18th February 2022 (Friday) at 11:00 a.m..
TCSR in its endeavour to create a knowledge sharing hub, had an interactive session with Dr. M.S. Sahoo where he shared his insights comprehensively via an enriching presentation titled as ‘IBC: A journey from Hopeless End to Endless Hope’. Dr. Sahoo, being the former Chairperson of Insolvency and Bankruptcy Board of India (IBBI), had thoughtfully covered the entire journey of the formulation of Insolvency and Bankruptcy Code (IBC), 2016 tracing back to the 1990s when the dynamics of governance and markets were different.
Before delving into the current mechanism of IBC, Dr. Sahoo briefly shared his inputs on the paradigm shift of the mainstream economic and legal thoughts which necessitated the current regime. He discussed that as per Rousseau's Social Contract Theory, loss of certain degree of freedom by the participants of the society is expected. If ‘optimum freedom’ is allowed with ‘recycling of resources’ creating an ‘inclusive society’, it drives the current forces to a market economy. It was discussed that how the dynamics of markets have changed since 1990s when there were entry barriers, to the era of LPG- Liberalization, Privatization and Globalization, fast forward to now, when we are shifting from the merit-based regulations to disclosure-based regulations.
Moving ahead, Dr. Sahoo discussed with the Authority and other officials of TRAI, who had also been contributory to the competition regime of India, about the change in perception in relation to monopoly in the markets. By 2000s, the legislative thought had changed to regulate and statutorily deal with the dominance and abuse in the markets, leading to the adoption of Competition Act, 2002. These insights created a firm backdrop to the formulation of regulations in India, keeping ‘rule of law’ and ‘level-playing field’ in mind.
By 2010s, innovation and competition were driving the businesses. Failure became inherent with ‘zombie firms’ prevalent in the market. The previous legislations like Sick Industrial Companies (Special Provisions) Act, 1985, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 had failed to revive the sick companies. The market was confronted with ‘twin balance sheet problem’. There was skewed credit market and dominance of bank loans in the corporate finances. There was no ease to exit. All these necessitated the formulation of the Insolvency and Bankruptcy Code of India, 2016.
IBC, 2016 is a framework formulated for the Reorganization and Insolvency resolution of inter-alia corporate persons in a time bound manner. As per Dr. Sahoo, the target of the IBC was mainly two-faceted: - Resolution plan in case of financial stress or Liquidation in case of economic distress. He explained that innovation and competition drive the old models to be replaced with the newer models leading to loss of viability in businesses in the extant market environments. This creates economic distress.
The development of the code along with the challenges were also briefly discussed. Dr. Sahoo shared an instance of a resolution plan (2017) for an entity which owed approximately Rs. 900 crores to the banks/financial institutions/creditors. While the entity was revived post its takeover by one of its group entity, repayment of merely 6% of liquidation value could be done to the creditors. This invited criticism of the code as well. The revival of an entity including the defaulting members who could be responsible for the debts, was a concern. Subsequently, with new amendments in the IBC (23.11.2017), defaulter’s paradise was lost. The provision was amended with the implication to either liquidate an unviable business or revive a viable business sans the willful defaulters.
Dr. Sahoo had provided a comparative view of the erstwhile regime with the IBC. He had also presented the statistics and composition of the ecosystem of IBC including the Appellate Authority (NCLAT), Adjudicating Authority (Courts), Regulator (IBBI) and the service providers like Information Utilities, Insolvency Professionals etc. Further, as on 31.05.2021, 1,318 corporate entities have been closed for liquidation with liquidation value of Rs. 49,783 crores.
IBC is a ‘pro-active’ law with ‘no direct liquidation’. The procedurals aspects of Corporate Resolution Process including applications, constitution of CoC, approvals and order of liquidation, were discussed. Dr. Sahoo stated, inter alia, ‘going concern theory’ is a strategy of resolution of Corporate Stress. He mentioned that Section 29A of IBC was an important amendment for resolution applicants. Section 12A is also significant for permissibility of withdrawal post corporate insolvency resolution process (CIRP) application. He also discussed the emerging jurisprudence with few important case laws in this direction.
Amidst Covid-19 times with delays in disposal of cases, added stress etc., he threw light to ‘Pre-pack’ as an alternate Resolution Framework. Pre-pack for corporate MSMEs is a blend of formal and informal processes. This would enable ease of doing business, fair debtor-creditor relationship with limited adjudicating capacity.
It was highlighted that Hon’ble Prime Minister in his address at the centenary celebrations of Kirloskar Group on January 6, 2020 had shared his views on the importance and usefulness of IBC, 2016. Dr. Sahoo stated that as per India’s score in World Bank Ease of Doing Business, the ‘resolving insolvency rank’ of India had jumped from 136 in 2017 to 52 in 2020.
The enriching session concluded with an interactive Q&A round of intriguing questions from the Chairperson, TRAI, Member, TRAI and other senior officers of TRAI.