LITIGATION TURNING OUT TO BE A HURDLE FOR IBC
The Economic Survey has said the Insolvency and Bankruptcy Code (IBC) is facing serious hurdles because of litigation initiated by various parties and said there is a need for efficient legal systems.
The Survey said the court system remains the most important way for ex-post resolution and India’s performance on dispute resolution and contract enforcement remains a concern.
In support of this assertion, the Survey cited the World Bank’s Doing Business report (2020), which said it takes 1,445 days to resolve a commercial contract dispute in India, compared with 589.6 days in OECD (Organisation for Economic Co-operation and Development) high income countries and 120 days in Singapore. The report also shows that the cost of litigation in India is around 31 per cent of the claim value. This is significantly higher than in the OECD countries (21 per cent) and Bhutan (0.1 per cent).
The IBC was introduced in 2016 and the first 12 companies were sent for debt resolution in June 2017. However, some large
accounts like Bhushan Power & Steel are still pending in court due to litigation by former promoters and other government investigating agencies.
The Survey said India’s performance on enforcing contracts was reflected in its ranking in the World Rule of Law Index for 2020, where it stood 69th out of 128 countries. “Our performance is the worst in the category ‘Civil Justice not subject to unreasonable delay’, where we are placed at rank 123,” the Survey said.
Reacting to the Survey, Misha, partner at
Shardul Amarchand Mangaldas & Co, said it justifiably emphasises the need to reduce judicial and procedural delays in matters of insolvency and bankruptcy. “Although the implementation of IBC has already given impetus to this segment, in comparison with the erstwhile winding up regime, it is expected that developments such as more settled jurisprudence under IBC, improved familiarisation with new processes, coupled with efforts towards strengthening of judicial systems and introduction of pre-packs and other non-formal insolvency resolution mechanisms expected in the coming year, will help reduce delays,” she said.
The Survey said further that the legal system is required not to fix ex-ante issues but to be used as an ex-post dispute resolution mechanism. This is just as true for government decision-makers, who may find their decisions questioned later. “An effective enforcement system should be able to distinguish the negative outcomes arising due to uncertainties from outright frauds. There is a need for reforms in the legal system in the country as it has been argued by various Economic Surveys in the past,” the Survey said.