The introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) as a consolidated code with provisions for 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 and maximisation of value of assets and the power of commercial decision-making left to an informed committee of creditors, IBC has become the most powerful tool for creditors to achieve time-bound resolution of distressed debts. However, the continued success of IBC will undoubtedly depend on the certainty of implementation of resolution plans.
The 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 payment of dues from distressed companies undergoing insolvency resolution process.
In spite of the strong emphasis in IBC regarding time-bound implementation, there have been several challenges that have mired timely implementation of resolution plans.
Prolonged litigations post-approval of resolution plans by the committee of creditors – either due to objectors to the plan or limited bandwidth of the adjudicating authority in view of paucity 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 provisions of IBC in the context of resolution and settlement of dues under approved resolution plans. With regulators in mining, electricity and telecommunications sectors not providing timely approvals critical for implementing resolution plans on account of insistence for payment of pre-insolvency dues, resolution applicants are increasingly wary of challenges in the implementation of approved plans in companies having government concessions, grants and allotments.
With a resolution professional (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 adjudicating authority to expeditiously provide directions of cooperation and disclosure in applications filed by resolution professionals under section 19 of IBC in instances, where co-operation is not forthcoming.
The IBC does not provide any material consequence for the erring resolution applicants, such as disqualification or exemplary monetary liability. The sole recourse of creditors in such circumstances is seeking the invocation of the performance guarantee and filing a complaint with the Insolvency and Bankruptcy Board of India or the central government to initiate a complaint under section 74 of IBC, which may result in imprisonment and/or penalty up to INR10 million (USD135,000).
The absence of any provision in the IBC regarding the effect of resolution applicant reneging from its commitments in the period between approval by the CoC and approval by the adjudicating authority is a gaping lacuna that has been sought to be exploited by several resolution applicants. Such withdrawal from resolution plan implementation, if allowed, would render the entire resolution process futile. The Supreme Court is seized on several such matters is expected to settle the jurisprudence on this issue soon.
Suggestions on the way forward
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 adjudicating authority to only verify legal compliance of the approved resolution plans without interfering in commercial wisdom, providing a mandatory legislative timeline for adjudication of resolution plans and administrative directions necessary compliance is likely to aid in time-bound resolution. It is equally important for the central government to fill vacancies of adjudicating members so that infrastructural challenges plaguing the adjudicating authority are resolved.
The adjudicating authority under 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.
Saurav Panda is a partner at Shardul Amarchand Mangaldas & Coo
Shardul Amarchand Mangaldas & Co
Express Towers, 23rd Floor,
Nariman Point, Mumbai,
Maharashtra 400 021, India
Tel: +91 22 4933 5555