 (8).png)
3 weeks ago
6
ARTICLE AD BOX
Summary
India’s bankruptcy law is making space for creditor-supervised resolutions without a shift in control of insolvent companies. This is the most welcome of a set of changes aimed at improving recovery, preserving value and making the process more effective.
India is amending its Insolvency and Bankruptcy Code (IBC). The revised law will include a new provision for corporate revival under the incumbent management but supervised by its financial creditors, authorize the government to frame rules for group and overseas insolvencies subject to some conditions, limit the arbitrary power of liquidators and grant creditors greater say in cases of liquidation.
It also aims to tie up loose ends that were being used to subvert conservation of the value of an insolvent firm’s assets.
The highlight of this exercise is the novel path it lays out for cases where a company defaults on debt for reasons unrelated to managerial incompetence or ill-intent. Management control need not be taken by a panel of creditors, as with a regular IBC process, if those in charge (and clued in) work out a revival plan with lenders.
In the US, companies can file for Chapter 11 bankruptcy to get a court order that holds off debt servicing for a specified period, during which they must turn the business around with or without the same managers.
India’s IBC has a provision for voluntary bankruptcy filing, but it has not quite worked. The new Creditor Initiated Insolvency Resolution Process (CIIRP) gives promoters a chance to fix things under the supervision of creditors without first having to go through any court proceedings. This is welcome.
However, the government retains the right to notify classes of debtors and creditors who would be eligible for CIIRP. Barring some creditor classes could stop firms from rigging their debt in favour of friendly lenders, whose votes count in decisions on how to resolve insolvency—via the harsh old process or softer new path.
But why restrict the scope of debtors who qualify for CIIRP?
It could have been left to qualified lenders to decide if a debtor is fit for CIIRP or not. For timeline clarity, the amended IBC will clearly identify an initial application—not, say, the last of many—as the starting point; this matters for defining the lookback period of a case, the span within which the debtor’s actions can be put to scrutiny.
It is puzzling, though, why the law has still not made space for a Swiss Challenge, which would have let fresh entities join the bidding process for an asset with higher bids that existing bidders could match.
Restricting bids for an entire company to qualified bidders is justified, as lenders might not want an asset stripper to enter the fray, but why not let asset values be settled in a wide open field to maximize recovery in case of liquidation?
The IBC Amendment Bill passed by the Lok Sabha on Monday bears the imprint of a select committee to which it was referred last year. The Centre has accepted all the tweaks suggested by the panel, which formulated them on the basis of wider consultations with experts. It received 30 memoranda of expert opinion, an impressive seven of them from its own members.
On group insolvency, the committee went along with the Bill’s restriction of the IBC to voluntary arrangements among firms under common control, with binding rules expected to crystallize later from case law and resolution experience.
On cross-border mergers, it amended the government’s open-ended latitude to frame rules by specifying areas for rule-making and defining a ‘corporate debtor’ for IBC purposes as an entity incorporated with limited liability, whether in India or abroad. The panel also set a time limit for appellate decisions on insolvency cases. All considered, the select committee did a commendable job.
English (US) ·