At the beginning of 2016, the law of insolvency and bankruptcy in India could be found in a bric-a-brac of statutes.[1] They related to differing legal entities and drove parties to varying forums for their enforcement. In its seminal report, the Government appointed Bankruptcy Law Reforms Committee criticised this “highly fragmented framework”. It called for a “deeper redesign” of the entire insolvency resolution process, rather than working on strengthening any single piece of it.[2] The Insolvency and Bankruptcy Code, 2016[3] the result of the Committee’s recommendations, was, by any standards, a unique and remarkable piece of legislation.
The Code’s showpiece mechanism was the corporate insolvency resolution process (immediately reduced by lawyers to its acronym “CIRP”). The CIRP was originally intended as a direct attack on the country’s massive corporate non-performing assets (NPAs). The way it worked was simple – bids would be called for a bankrupt company, and the person making the “best” bid (invariably the largest monetarily) would, after getting the nod from the company’s creditors and the NCLT, take over its affairs, and the old management would be ousted.
One would think, given the centrality of bidders and their deep pockets to the success of the new law, that they would be lavished and fawned upon at every turn, have their every need attended to with alacrity and swiftness, and veritably sped to the point where they would open their purse strings and pay up. One would be triply wrong. Not only do resolution applicants (IBC legalese for bidders) have no legal rights till their plan for the company is approved, they also cannot leave the process once they enter it, and may in some instances even be forced into a “fight to the death” with other bidders. What follows is an appraisal of the indelicate and short-sighted handling of resolution applicants since the Code was enacted.
The enactment of Section 29-A
One of the main prejudices that the Bankruptcy Law Reforms Committee wanted to dispel was that all default involves malfeasance. The Committee thought that this thinking was the hallmark of a “weak insolvency regime”, and the new law ought to recognise that some business plans will always go wrong, and this was no reason to disincentivise risk-taking. “If default is equated to malfeasance, then this can hamper risk-taking by firms”, said the Committee, in a section titled “Drawing the line between malfeasance and business failure”.[4]
The Code was structured to give the company’s earlier management inducement to share its knowledge of the company, with the promise that if it could convince the company’s creditors, it might resolve the company’s loan default and jump back in the saddle and run its business anew.
Section 29-A[5] changed all that. In his speech to the Lok Sabha, the Finance Minister railed against the fact that “the man who created the insolvency pays a fraction of the amount and comes back into management”.[6] This, he said, was “morally unacceptable”, and so we needed Section 29-A, which disqualifies inter alia any person who has an account which is classified as an NPA from submitting a resolution plan to the committee of creditors. With the legislation of Section 29-A, the line between malfeasance and business failure was obliterated. A host of potential resolution applicants were turned away at the doorstep.
An added shortcoming of Section 29-A is that ever since it was introduced, it has been the source of torrential litigation between rival resolution applicants. In their eagerness to eliminate competitive bids, bidders spiritedly term each other as being in violation of Section 29-A. “Like wolves in long winters,” wrote Dr Samuel Johnson in an 18th-century essay, “they are forced to prey upon one another.”[7]
The long winter of the IBC began with Section 29-A.
The elimination of legal rights
In Essar Steel case,[8] the Supreme Court upheld the principle that a resolution applicant has no vested right that its plan be considered. Elaborating on the consequence of such a principle, the court observed that a resolution applicant had no right to challenge the rejection of its plan by a resolution professional, or even by the Committee of Creditors when the plan does not receive 66% of the Committee’s votes.[9] This was a reasonable interpretation, and obviously intended to slice away some of the cancerous litigation that has afflicted the Code.
But in Bank of Baroda v. MBL Infrastructures Ltd.,[10] even this salutary principle was taken to an extreme. The issue was the applicability of Section 29-A to a bidder that had submitted its bid before the provision had been introduced. The Court held that this did not matter, “the concern of the Court is only from the point of view of two entities viz. corporate creditors and corporate debtors”. The bidder, the Court observed, “has no role except to facilitate the process”. “No role except to facilitate the process” is, like George Orwell’s “All animals are equal, but some are more equal than others,” a paradox that reveals more than it intends to. Surely, the entity tasked with facilitating the process has the largest role in it?
The sealing of escape routes
When a resolution applicant submits its bid, it should ordinarily expect a quick, two-step appraisal – first by the Committee of Creditors and then by the NCLT. Instead, the CIRP often gets derailed by side issues for unreasonable lengths of time, and the bidders find themselves having to pay last year’s price for a company that has depreciated rapidly since.
In Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd.[11] the Supreme Court simultaneously considered three cases, in each of which the resolution applicants sought to withdraw their bids after waiting for the NCLT’s consent for over a year after the Committee of Creditors granted its approval. (Incidentally, the IBC prescribes a limit of 330 days for the completion of the entire CIRP.)[12] One of the resolution plans even came with a self-imposed validity period of six months.[13] But the Supreme Court refused to release the resolution applicants, however, long they may have languished in the waiting room, maintaining that the IBC did not provide for such a procedure.[14]
The result of such a coercive process is that the resolution applicants will naturally discount the costs of delay and uncertainty when making their bids. Who would bid the full price for a company that may wither and decay for conceivably over a year before its management gets transferred? Worse still, an unascertainable number of potential resolution applicants may decide that the IBC process is not worth the bother, and never bid at all.
In conclusion
The corporate insolvency resolution process is like a Roman galley – it depends upon several arms rowing in the same direction as one. Resolution applicants sit perched at the head of the ship; on them rests the success of the journey. They cannot be made into castaways.
It is in everybody’s interest that the bidders are given every incentive to put in their bids, that their rights are respected, and that they are not made to pay for an unreasonably delayed process. As things stand, they can be forgiven for giving the IBC a pass.
† Advocate, Bombay High Court. Author can be reached at adityasbapat@gmail.com.
[1] For the resolution of insolvencies in companies, the law provided two alternatives: “winding up” under the Companies Act, 1956 and reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
[2] The Report of the Bankruptcy Law Reforms Committee, Para 3.3.1.
[3] Insolvency and Bankruptcy Code, 2016.
[4] The Report of the Bankruptcy Law Reforms Committee, Para 3.2.3.
[5] Insolvency and Bankruptcy Code, 2016, S. 29-A.
[6] <https://www.youtube.com/watch?v=5Yujf1DJRUo> accessed on 10-5-2022.
[7] Samuel Johnson, “A Project for the Employment of Authors” in The Works of Samuel Johnson, LLD, 200, 206 (1788), Vol. XIV.
[8] Arcelormittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.
[9] (2019) 2 SCC 1, pp. 86 and 87.
[12] Insolvency and Bankruptcy Code, 2016, S. 12. The Supreme Court later held that this time limit was merely directory, but that the process must ordinarily be completed in this time. See Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, 628.
