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Since the inception of the Insolvency and Bankruptcy Code, 2016 ("Code"), the debt resolution regime in India has witnessed not only a paradigm shift from the conventional 'debtor in possession' to a progressive 'creditor in control' but has also undergone a significant transformation, marking a departure from its traditional labyrinthine processes to a more streamlined and effective framework.
The structure of the Code was designed by bankruptcy law reforms committee and they had consciously proposed a lean framework to allow the development of ecosystem and market to define the practices around the insolvency resolution processes with the supervision of the regulator, being Insolvency and Bankruptcy Board of India (“IBBI”) and the scrutiny of the Adjudicator, being National Company Law Tribunal (“AA”). The framework has resulted in new practice areas with tremendous scope for experimentation, legislative and judicial brain storming, frequent fine tuning of law and practice, validation of the Code by Supreme Court and allowing the play in the joints for experimentation, ruthless implementation of the Code against delinquent promoters. We continue to witness new challenging and exciting scenarios in the law and practice of Code.
In the early days of the Code, the stakeholders have witnessed prolonged delays in the resolution of a financially stricken entity due to many factors, including but not limited to frequent judicial intervention sought by different set of stakeholders, and low strength of the AA benches. Since the NCLT and NCLAT are one of the cornerstones of the Code, and the timely resolution of a distressed entity is dependent upon their smooth and effective workings, the Government has made timely interventions increasing the strength of the AA benches and also considerably improving the infrastructure of the AA benches. It is also considerable to note that the Code over the last 7 years has been constantly evolving and opening up to different financially stricken entities and individuals. With the changing landscape and established jurisprudence, the Code has enabled the admission into insolvency process of Non-banking finance companies (which include housing finance companies) with asset size of Rs.500 crore, and this enabling mechanism has witnessed resolution of two large groups of NBFCs, Dewan Housing Finance Limited and Srei Infrastructures Finance Limited/Srei Equipment Finance Limited. Considering different business models of NBFCs and their regulatory frameworks, special procedural regime for NBFCs have been introduced by the Government for resolution of insolvent NBFCs in a time-bound manner and with an objective of maximizing the value of assets of such entities.
Real estate insolvency has been a major issue in India, with several factors contributing to distress within the sector. The judiciary and legislature have provided innovative and workable solutions for this sensitive sector where the insolvency has far-reaching implications, impacting not only the developers but also homebuyers, financial institutions, investors, and the broad economy. Some of the innovative measures introduced through judicial intervention include resolution approach limited to the affected project(s). This approach (reverse CIR) has been successfully followed in several real estate insolvency matters and has now been introduced in the proposed amendments to the Code.
The AA have also introduced other innovation for insolvent companies within a group by allowing substantive and procedural consolidation of group companies depending on the nature of the group, the commonality of the business and lenders and other factors. The pioneer case for the substantive consolidation is insolvency resolution process of the Videocon group entities, where AA allowed the substantive consolidation of 13 of the Videocon group entities. Following this precedent, several AA have allowed either substantive ( resolution of Lavasa entities) or procedural (srei group entities) consolidation. Since the provisions of the Code are silent on consolidation, this judicial activism by the AA has given good result to maximise the value for the entities within the group.
The other notable developments around working of Code includes streamlining of claim submission process by the tax authorities. The Central Board of Indirect Taxes and Customs has issued circulars notifying the state tax officer to not only file claim forms before the NCLT in accordance with the provisions of the Code but has also taken cognizance of the benefit of moratorium available to the distressed entity. These collaborative efforts by Central Board of Indirect Taxes and Customs have further strengthened the working and the principles of the Code.
The Code, over a brief span of 7 years, has come as a respite to the withering economy as it has provided a more efficient and effective system for resolving distressed entities. Though the Code has witnessed noteworthy changes, the same has come with its share of challenges and opportunities.
One of the hurdles that the Code is recently facing is limited market interest. Market perceptions about regulatory uncertainties and regulatory non-alignment and delays in the process have contributed to the subdued interest. Also, due to prolonged litigations, potential resolution applicants are reluctant to capitalize in a stressed entity.
Since the Code is still at a nascent stage, the Supreme Court has played a vital role not only in deciding the scope and ambit of the Code but also clarifying the rights and obligations of different stakeholders in a resolution process. However, recently there has been an ambiguity in the treatment of statutory dues under the Code on account of two polar judgements passed by the division bench of the Supreme Court. The Supreme Court in September, 2022 vide its judgment in ‘State Tax Officer v. Rainbow Papers Limited’ held that a statutory authority, in whose favour a charge is created under a statute, would be treated as a ‘secured creditor’ in terms of the Code. However, the aforementioned judgement was distinguished by the Supreme Court in its subsequent judgement of ‘Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited’, which observed that the findings in the Rainbow Papers judgement should be limited to its specific facts and the Rainbow Papers judgement did not consider the priority of claims under Section 53 of the Code. The Supreme Court has further rejected the review petitions against the Rainbow Papers judgement on the basis that the scope and ambit of the review was not met without going into the merits of the Rainbow Papers judgement. As a consequence, the tax authorities have started filing applications seeking directions from AA to insolvency professionals for updating their claims as ‘secured’ on the basis of the Rainbow Papers judgement. Such litigations are not only prolonging the resolution process of financially
distressed entities but are also going against the objectives of the Code, which aims at a time bound resolution.
Insolvent entities in sectors like airline and telecom require an advanced strategy on continuity of operations and their resolutions since the nature of their operations are such that in the absence of the advanced strategies, such companies can potentially suffer immediate halt upon admission of insolvency. Our experiences in these sectoral insolvency cases proves the need for a different mechanism such as creditors led insolvency resolution process as proposed by the expert committee constituted by IBBI (by way of order Board-22/2/2023-IBBI/8864, dated 1 February 2023) coupled with coordination from various sectoral regulators.
Despite the aforementioned hurdles and challenges, Code has witnessed a remarkable transformation in recent years. While significant strides have been made, the journey towards a robust and dynamic insolvency ecosystem is ongoing. By embracing innovation, collaboration, and continuous improvement, India can navigate the new frontiers of insolvency regulation and pave the way for sustainable economic growth and resilience.
