Insolvency And Bankruptcy Code Could Be A Double-Edged Sword For Corporate Restructuring, Recovery. Here’s How
The IBC has the potential to strengthen India's economic fabric, but its misuse as a tool for corporate vengeance risks undermining its credibility.
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By Vibhav Mishra
The Insolvency and Bankruptcy Code (IBC), introduced to address deficiencies in earlier laws like the Sick Industrial Companies Act and the Companies Act, promised a revolutionary framework for company revival, reorganization, and debt resolution. However, eight years since its inception, the IBC faces significant implementation challenges, raising questions about whether it is a corporate tool or a corporate challenge.
Challenges In Implementation
While the IBC aims to balance the interests of stakeholders and promote entrepreneurship, issues such as judicial delays, slow repayment rates, significant haircuts, and regulatory ambiguities have hindered its effectiveness. Alarmingly, creditors have increasingly misused the code as a weapon for corporate vengeance rather than as a tool for debt restructuring. The practice of "credit capture," where powerful creditors exploit the code to initiate insolvency against functioning entities, undermines its sanctity.
Notable cases like Mobilox Innovations vs. Kirusa Software and Binani Cement highlight the misuse of the code, with creditors prioritizing their own interests over fair resolution. For instance, in the Odisha Slurry Pipeline (OSPIL) case, common creditors of OSPIL and Essar Steel allegedly colluded to force OSPIL into insolvency, despite the company being operationally sound.
Role Of Resolution Professionals
A critical component of the IBC framework is the role of the Resolution Professional (RP), who is tasked with overseeing the Corporate Insolvency Resolution Process (CIRP). The RP is the first to be appointed and the last to be relieved, acting as a key intermediary. Despite legislative safeguards and judicial precedents mandating impartiality, concerns persist regarding the discretionary powers exercised by RPs.
Instances of bias and external influence are evident in cases like Metenere Limited, where the RP was an ex-employee of a financial creditor, and the Essar Steel insolvency saga, marked by allegations of favoritism. These cases raise questions about whether RPs are acting as neutral functionaries or are influenced by powerful stakeholders. The lack of accountability, despite the presence of the Insolvency and Bankruptcy Board, exacerbates these concerns.
In the case of Shree Ram Urban Infrastructure Limited, the RP's failure to adhere to timelines and convene meetings of the Committee of Creditors (CoC) led to their removal, further highlighting the need for stricter oversight. Courts have limited their intervention to ensuring compliance under Section 30(2) of the Code, leaving stakeholders apprehensive about transparency and fairness.
Corporate Challenges And Stakeholder Impact
The plight of companies like Srei Infrastructure Finance Limited underscores the misuse of the IBC framework. Srei, a pioneer in infrastructure and equipment financing with a three-decade track record, faced insolvency not because of financial instability or defaults but due to a sudden and controversial move by the Reserve Bank of India (RBI) to replace its management and initiate insolvency.
Srei had proactively addressed financial challenges arising from the COVID-19 pandemic, offering a full repayment plan under Section 230 of the Companies Act. Despite this, insolvency proceedings were initiated, raising questions about fairness and transparency. The selection of a state-backed entity, the National Asset Reconstruction Company Limited (NARCL), over higher offers, including one from Srei’s previous management, suggested conflicts of interest within the resolution process.
Restoring Faith In IBC Framework
To ensure the IBC fulfils its intended purpose, greater scrutiny and supervision of RPs are essential. Transparency, impartiality, and adherence to due process must be non-negotiable principles. The code's triumph lies in its ability to strike a balance between creditor interests and corporate survival, ensuring it serves as a restructuring tool rather than a means of exploitation.
One of the fundamental challenges that the system continues to face is the shortage of judicial capacity. The strain on tribunals and a scarcity of judges have contributed to the delayed resolution of insolvency cases, causing further distress to creditors and corporate entities alike. Finance Minister Nirmala Sitharaman, in the 2023 Union Budget, acknowledged these challenges, promising that the government would take steps to make necessary changes to the IBC and strengthen the functioning of tribunals. She emphasized the importance of making the insolvency process more efficient and ensuring that justice is delivered on time.
The IBC has the potential to strengthen India's economic fabric, but its misuse as a tool for corporate vengeance risks undermining its credibility. By enforcing strict accountability for RPs and promoting fair, transparent processes, the IBC can evolve into a true enabler of corporate revival and economic resilience. The challenge lies in ensuring that the code remains a mechanism for equitable resolution, fostering entrepreneurship and protecting the interests of all stakeholders.
(The author is an Advocate-on-Record, Supreme Court)
Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd.
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