No level playing field

The Insolvency and Bankruptcy Code has loopholes to close down businesses instead of assisting entrepreneurs

The Insolvency and Bankruptcy Code, 2016 was enacted with the intention of improving the ease of doing business in India, a country perceived to have a weak insolvency framework and where defaulting debtors abuse the law. At the outset, the Code appears to have the interests of business at heart: it aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals; attempts to ease the process of recovery of money by operational and financial creditors in a timely manner; and places the onus on professionals to put forth resolution plans within 180 days. It seeks to ensure that there is neither scope for any further claims by the creditors, except through the Code’s mechanisms, nor for the corporate debtor to challenge the claims made by the creditor.

In reality, however, the Code has enough loopholes to close down businesses instead of assisting entrepreneurs. As explained subsequently, it fails to provide adequate safeguards to protect the rights of the company before handing over the management in its entirety to the resolution professional. The entourage of appeals before the National Company Law Appellate Tribunal, and writ petitions before numerous High Courts, in a short span begs the question: Is the Code truly poised to meet the ends it proclaims?

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A quick process

In relation to corporate persons, the Code looks to wrap up the game in 180 days. It warrants a notice of dispute to be issued followed by a response period of 10 days for the corporate debtor, failing which the creditor is entitled to file an insolvency application before the National Company Law Tribunal (NCLT). Within 14 days from filing, the application must be admitted. Upon admission, the moratorium period (freezing of bank accounts, prohibition on foreclosures in relation to financial debts, etc.) commences. At this stage, the existing management of the company loses complete control and all powers vest with an interim resolution professional, who has merely 30 days to put together all the relevant information and call for a meeting of the financial creditors.

Once the financial creditors meet, they must appoint a resolution professional who will put together an information memorandum of the company that forms the basis for a resolution applicant to propose a resolution plan for the company. The Code fails to define a resolution applicant. All such resolution plans are placed before the financial creditors. When at least 75% of the financial creditors approve, the plan is implemented by way of an order by the NCLT. If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.

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The flaws

The Code rides substantially on the unquestionable word of the creditors. Neither does the corporate debtor have an opportunity to put forth his/her case nor is there any scope of discretion provided to the adjudicating authority itself. At various stages — of admission of the insolvency proceedings, of appointing the insolvency professional, of finalising the resolution plan — the Code fails to provide any opportunity to the corporate debtor to make a representation, at the very least. In this manner, the Code ignores rights enshrined in the Constitution. (In Maneka Gandhi v. Union of India, 1978, the Supreme Court observed that it is the duty of the authority to give reasonable opportunity to be heard, even where there is no specific provision for showing cause when a proposed action affects the rights of the individual.)

The Code is also deficient in providing a yardstick for the qualification of the interim and of the final insolvency resolution professionals. It allows for any person to access the information memorandum put together by the insolvency professional without restricting competitors or imposing any confidentiality obligations. This allows for any person to access proprietary information of the corporate debtor and misuse the same, given that there is no law protecting confidentiality and vitiates the fundamental right to business under Article 19(1)(g).

It is also shocking that the Code prohibits withdrawal of the application once the same has been admitted. This means that there is no scope whatsoever for settlement. This is despite the recent ruling of the Supreme Court in Lokhandwala Kataria Construction (P) Ltd. V. Nisus Finance and Investment Managers LLP (2017), wherein a settlement proposal was taken on record and the appeal was disposed of. However, this cannot be held as a precedent.

Further, the unrestricted access of any person without mandatory contractual obligations in relation to confidentiality vitiates the fundamental right to business under Article 19(1)(g).

All this shows that the Code still requires a lot of hand-holding by the judiciary to put in place adequate safeguards and guidelines to ensure its smooth, effective, and fair enforcement. The Code may have teething troubles, such as infrastructure, but there is no excuse at all for basic constitutionality flaws.

Goda Raghavan is an advocate of the Karnataka and Madras High Courts and a company secretary. E-mail: goda@aklawchambers.com