After the moratorium: Booster dose for the IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) amendment inserted Section 10A, restricting all filings in perpetuity for defaults that occurred for a period of one year due to Covid-19. As this preclusion gets lifted in March 2021, we are likely to see a flood of filings, particularly given prudential and provisioning issues for banks and international creditors. The Reserve Bank of India’s (RBI’s) Financial Stability Report indicates an escalation of gross non-performing assets to 14.8 per cent. This, along with the approaching fifth anniversary of IBC, is an opportunity to build on its success.

A pre-packaged resolution framework could allow swifter resolution. The Insolvency and Bankruptcy Board of India’s draft framework, while timely, requires significant amendment for true efficacy. The credit discipline engendered by the IBC must not be squandered and promoter entrenchment must not be entrenched. Accordingly, creditors should be permitted to trigger prepacks, and while the corporate debtor may be permitted to propose prepacks, the promoter’s plan should not be the default option. A prepack should provide a flexible and consensual process, achieved through resolution professional certification, that the prepack outcome is better than liquidation, has approval of financial creditors, and incorporates safeguards for “cramdown” of creditors. This will ensure completion within 90 days as intended, but unlikely with prescriptive procedures. Resolution through RBI’s Stressed Asset Directions could be green-channelled as prepacks.

The IBC marked a shift to a creditor-in-control model through displacing the incumbent management-upon-default and thereafter Section 29A, which makes a vast swathe of promoters ineligible. However, it is now time to rethink the expanse of restrictions under Section 29A — for prepacks and all processes under IBC. Moderating Section 29A may be in order, particularly for companies classified as NPAs for over a year, and particularly when such defaults may not be directly attributable to promoter mismanagement. There may be fewer bidders on account of the pandemic, and this may push viable companies into liquidation and drive down value for creditors — the existing management should therefore not be precluded from resolving the business. The exceptions for malfeasance and fraud must continue, but “no fault” restrictions should be revisited.

The National Company Law Tribunal’s (NCLT’s) judges are a critical institutional pillar of the IBC, and must be supported through bolstering the infrastructure — the Economic Survey 2021 also highlighted this. Judicial bandwidth is a precious resource and must be preserved. Judicial process reengineering is required to augment the judicial infrastructure. This can be done by creating a separate machinery that can delink the judiciary and administrative functions of the NCLT, allowing judges to focus on legal and judicial issues unburdened by administrative tasks. We could draw from jurisdictions such as the UK, where an executive agency of the Ministry of Justice, to whom responsibility for administration of the courts of England and Wales is outsourced — tasks that include allocation, listing and opining on cases, process compliance, document and record storage and retrieval, access to pleadings and submissions and support in case management, facility and human resource management.

A similar, indigenised framework at the NCLT could significantly enhance judicial capacity. India has a body of legal, managerial and administrative talent which can provide the bedrock for a reimagined, reengineered judicial infrastructure for the NCLT — which could form the template for such reengineering in all courts and tribunals. This will have a measurable impact on economic growth — World Bank figures estimate that judicial delays cost India 0.5 per cent of GDP; other studies show judicial efficiency reduces the cost of credit and fosters entrepreneurship. NCLT efficiency will have a direct correlation to capitalisation of Indian banks.

The IBC transformed India’s credit landscape. Its strong foundation must be enhanced through these reforms to immunise us from the possible impending NPA wave.

The writers are partners at Cyril Amarchand Mangaldas