IBC 2016: Time to reboot the Code

An Insolvency Law Committee has been tasked with suggesting legislative changes in the Insolvency and Bankruptcy Code to iron out operational challenges and make its implementation effective. SUDIPTO DEY writes

Barely a year since it became effective, the Insolvency and Bankruptcy Code 2016 is up for a fresh look. A government-appointed Insolvency Law Committee has been tasked with suggesting legislative changes in the Code to iron out operational challenges and make its implementation more effective. The move comes at a time when the ‘Big 12’ corporate debtors are entering the crucial final phase of insolvency resolution. Over 350-odd cases are currently going through the resolution process. On an average 35 cases a month — that is at least one each day — have been admitted by the National Company Law Tribunal (NCLT) over the past 10 months (January-October).

Most experts, including stakeholders such as bankers, lawyers, investors and promoters, feel the time is right for the Code to incorporate the lessons learnt in its year-long journey. However, that is easier said than done. Legal experts point out that it is only over a period of time — spread over years — that jurisprudence in new legislation takes shape. Any amendments to the Code marks a starting point in tackling some of the vexing issues in its implementation, say experts.

Nilang Desai, partner, AZB & Partner, says the pace of operationalisation of the Code in India has been much faster than for similar such legislation in most developed jurisdictions. “The speed of execution has thrown up issues that need to be tackled at the earliest,” says Desai. Shyam Agrawal, president, Institute of Company Secretaries of India (ICSI), one of the members of the review committee, agrees with this assessment. “This shows the intent of the government to make the Code a workable piece of legislation,” he says.

Pavan Kumar Vijay, founder, Corporate Professionals, points out that every law settles down at its own pace. “But the insolvency law is time-bound and less time is available with stakeholderstoforeseeanyactionanddecide the next step,” he says. Resolution of a fewofthelargecaseswillthrowupsome learning that will help to align the Code to the requirements on ground, feels Manish Aggarwal, partner and head of resolutions, special situations group, KPMG in India.

Experience has shown that the treatment of some aspects of the Code should be changed, says Harsh Pais, partner, Trilegal. According to Sumant Batra, managing partner at law firm Kesar Dass B & Associates, some gaps identifiedcanonlybepluggedbywayof amendments to the Code. “Otherwise these deficiencies are likely to impact the efficiency and effectiveness of the insolvency cases,” he adds.

The key concerns that experts and stakeholders want the Code to address include treatment of promoters in the bidding process, need for provisions to deal with withdrawal of applications in case of settlement between parties, clarify the legal position of customer advances, including those of homebuyers, and tax issues faced by buyers of stressed assets.

Most experts are divided on the issue of treatment of defaulting promoters. “Making promoters ineligible in bidding is unduly harsh and unprecedented as nowhere else in the world does such a restriction exist,” says Batra. “This almost renders every default an act of malfeasance,” he adds.

KPMG’s Aggarwal feels the need for some differentiation of genuine cases, which have turned bad on account of economic, sectoral and reasons other than promoter default. “It will be unfair to debar all promoters from participating in the process,” he adds. Some experts feel the need for a defined and standard approach in preparation and finalisation of the resolution plan by financial creditors.

Tax experts point out that in the earlier regime there weremany tax benefits available to sick companies in the form of exemptions. “Such exemptions are yet not available in the Code,” says ICSI’s Agrawal. No prospective buyer of distressed assets will be comfortable with the prospect of open-end liabilities, adds Abizer Diwanji, partner, EY.

One thing most experts agree on is the need to extend the time frame for completion of the resolution process. Diwanji is in favour increasing it by another 90 days, over and above the maximum permissible 270 days.

Many resolution professionals feel the recent ordinance to tighten participation of defaulting promoters in the bidding process may place many foreign bidders in an advantageous position. “This may pose challenges for the resolution applicant in determining eligibility of foreign bidders,” says Batra. Many resolution professionals also see the need for more watertight legal immunity against legal challenges from dissatisfied parties after completion of the resolution process.

Amendment of the NCLT rules to confer inherent powers upon the adjudicating authority to allow withdrawal of an application that has been admitted is another key change in the Code that most stakeholders are batting for.