Reform Insolvency Law To Expedite Resolutions And Include Cross-Border & Group Insolvencies

Insolvency and Bankruptcy Law (IBC Code of 2016) was one of the most significant reforms by the Government to help India jump 14 places globally, from 77th to 63rd in World Bank’s Ease of Doing Business. Its primary aim was to establish a legal framework for dealing with entities unable to meet their financial obligations and provide a balanced process to maximize recoveries.

In the 100 days’ agenda of Modi 3.0 regime, included also was an amendment in the IBC Code of 2016 to incorporate mechanisms for cross-border and group insolvencies. While discussing amendments, it would be the appropriate to undertake a mid-term review of implementation and introduce fixes for efficiency in implementation and reduce delays.

Firstly, to explain the proposed amendments, when an insolvent debtor has creditors and/or debtors in multiple jurisdictions, spanning different countries, this situation is known as cross-border insolvency or international insolvency. It ensures efficient and fair handling of insolvency cases involving multiple jurisdictions. By facilitating cooperation between courts and insolvency practitioners worldwide, it minimizes conflicting judgments and asset dissipation, protecting creditors' interests.

Secondly, Group insolvency provisions are crucial due to the interconnected nature of modern business groups. They enable a coordinated approach to insolvency proceedings, preventing asset erosion and reducing litigation costs. Treating the group as a single economic entity maximizes creditor value and enhances restructuring prospects.

Cross – Border Insolvency

The Insolvency and Bankruptcy Code (IBC) includes Sections 234 and 235 to assist in cross-border insolvency disputes. Section 234 empowers the Central Government to enter into bilateral agreements with foreign jurisdictions to resolve cross-border insolvency issues. Section 235 allows the Adjudicating Authority to issue letters of request to courts in countries with which bilateral agreements exist, addressing assets of corporate debtors located outside India.

The Insolvency Law Committee (ILC) acknowledged the inadequacy of Sections 234 and 235 in addressing cross-border insolvency complexities in its March 2018 report, recommending the adoption of the UNCITRAL Model Law. This model, established in 1997, is endorsed by the World Bank and the IMF for its comprehensive approach to cross-border insolvency, promoting cooperation among courts and authorities globally. The Model Law is built on four key principles: access, recognition, cooperation, and coordination.

The absence of specific provisions for addressing cross-border insolvency in the IBC has led to jurisdictional challenges and legal conflicts between Indian and foreign courts. This resulted in delays, increased costs, and uncertainty for creditors and stakeholders, ultimately hindering the efficient resolution of insolvency cases involving multinational entities like in Jet Airways matter.

It may be borne in mind that while the UNCITRAL Model Law on Cross-Border Insolvency provides a comprehensive framework for international cooperation in insolvency matters, it also has some shortcomings. One such limitation is the varying approaches to cross-border insolvency adopted by different jurisdictions. For example, India follows the universalist approach, aiming for a centralised insolvency process, whereas the Netherlands adheres to a territoriality approach, focusing on assets within its borders.

The IBC 2016 currently lacks provisions for dealing with group insolvency as it focuses on individual corporate entities. However, courts have recognised this gap and are beginning to address it.

Similarly, there is a need to recognise that once the Committee of Creditors (CoC) approve a resolution plan, the matter should not get dragged indefinitely. For instance, in Videocon Industries case, a Vedanta Group entity - Twin Star Technologies submitted the resolution plan in November 2020 which was approved by NCLT in June 2021 but the case is still pending before the SC. Take the recent case of SKS Power Generation, where the CoC approved the resolution plan submitted by Sarda Energy and Minerals (SEML) after voting 100 per cent in its favour last year in June 2023. However, the matter is still pending resolution.

There is no doubt that a robust insolvency law in India is imperative to address these challenges and facilitate smoother coordination and cooperation between domestic and foreign courts, insolvency professionals, and stakeholders.

While looking to plug these gaps, there is an urgent need to fix the most significant indicator of IBC’s effectiveness - economic recovery – which has of late been faltering.
A recent report by CRISIL states that the recovery rates under the IBC have fallen from 43 per cent to 32 per cent between March 2019 and September 2023. Average resolution time too has increased from 324 to 653 days.

In February 2024, the Standing Committee on Finance observed in its Sixty Seventh Report that insolvency process has been stymied by long delays far beyond the statutory limits. The Committee found that actual recoveries on ground may be as low as between 25 to 30 percent.

The delay in insolvency resolution can be attributed to several factors. Firstly, the admission of cases before the NCLT at times takes quite long. Secondly, frivolous appeals, result in delays and severe erosion of asset value. This abuse of judicial processes and a lack of finality within the stipulated period defeats the very essence of IBC. Thirdly, there is a long pendency, for example, the NCLT system has a pendency of more than 20,000 cases. Fourthly, it may be helpful to set up a dedicated Bench: IBC being a major economic reform requires dedicated commercial bench to complete the process within a stipulated time, like a dedicated Green bench.

It is well recognised that IBC places the commercial wisdom of the CoC on the highest pedestal. And once plan is approved by CoC and NCLT, there should be minimum judicial intervention, in terms of Supreme Court’s judgements itself. It is therefore crucial that the core essence of IBC is kept in focus in all matters.

(Dhanendra Kumar has been Executive Director at the World Bank for India, Sri Lanka, Bangladesh & Bhutan, and First Chairman Competition Commission of India. He is currently Chairman of Competition Advisory Services LLP, with inputs from Varun Singh)