Suggestions on way forward
The introduction of the Insolvency and Bankruptcy Code 2016 (IBC) as a consolidated code with provisions for the reorganisation and insolvency resolution of distressed corporates, partnerships and individuals is one of the most remarkable economic reforms that has led to the resolution of several distressed entities. With its emphasis on time-bound resolutions, the maximisation of the value of assets and the power of commercial decision-making left to an informed committee of creditors, the IBC has become the most powerful tool for creditors to achieve time-bound resolution of distressed debts. However, the continued success of the IBC will undoubtedly depend on the certainty of the implementation of resolution plans.
A resolution plan approved under the IBC for a company by the adjudicating authority has a statutory binding effect on creditors, employees, shareholders and other stakeholders involved in the resolution process, including government bodies seeking the payment of dues from distressed companies undergoing an insolvency resolution process.
In spite of the strong emphasis in the IBC regarding time-bound implementation, there have been several challenges that have held up the timely implementation of resolution plans.
Prolonged litigations post-approval of resolution plans by the committee of creditors – either due to objections to the plan or the limited bandwidth of the adjudicating authority in view of the lack of judicial members – often lead to a significant delay in plan approval and, consequently, implementation. Time is of the essence in commercial transactions.
It is also pertinent to highlight that there has been a reluctance by several sector regulators to accept the primacy of the provisions of the IBC in the context of the resolution and settlement of dues under approved resolution plans. With regulators in mining, electricity and telecoms sectors not providing timely approvals critical for implementing resolution plans on account of the insistence of the payment of pre-insolvency dues, resolution applicants are increasingly wary of challenges in the implementation of approved plans in companies that have government concessions, grants and allotments.
With a resolution professional (ie, an independent person introduced to run the company undergoing insolvency) being dependent on cooperation from the former management and personnel for disclosure of information to prospective resolution applicants, it is critical for the adjudicating authority to expeditiously provide directions with regard to cooperation and disclosure in applications filed by resolution professionals under section 19 of the IBC in instances where cooperation is not forthcoming.
The IBC does not provide any material consequence for erring resolution applicants, such as disqualification or exemplary monetary liability. The only recourses of creditors in such circumstances are to seek the invocation of the performance guarantee and to file a complaint with the Insolvency and Bankruptcy Board of India or the central government to initiate a complaint under section 74 of the IBC, which may result in imprisonment and/or a penalty of up to 10 million rupees ($135,000).
The absence of any provision in the IBC regarding the effect of the resolution applicant reneging on its commitments in the period between approval by the committee of creditors and approval by the adjudicating authority is a gap that has been sought to be exploited by several resolution applicants. Such withdrawal from the implementation of the resolution plan, if allowed, would render the entire resolution process futile. The Supreme Court is deciding on several such matters at the moment and is expected to settle the jurisprudence on this issue soon.
A comprehensive and robust framework regarding the implementation of resolution plans is thus the need of the hour. While the Supreme Court has settled the jurisprudence on the limited role of the adjudicating authority to only verify the legal compliance of the approved resolution plans without interfering in commercial wisdom, providing a mandatory legislative timeline for the adjudication of resolution plans and administrative directions on necessary compliance is likely to aid in time-bound resolution. It is equally important for the central government to fill the adjudicating member vacancies so that infrastructural challenges plaguing the adjudicating authority are resolved.
The adjudicating authority under the IBC may be vested with the power to act as a single-window clearance with powers to direct sector regulators to consider and grant approvals in a time-bound manner during the pendency of the proceedings for approval of the resolution plan. The authority may immediately adjudicate and decide on any issue of withholding of approval by any sector regulator contrary to the scheme and objects of the IBC.
For further information on this topic please contact Saurav Panda at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
This article was first published on Asia Business Law Journal.