Recent Developments in Indian Insolvency Law (IBC)

This article is authored by Swapneel Kumar Deshpande, an LLB student at Dayanand College of Law- Latur.

The Indian government introduced the Insolvency and Bankruptcy Code (IBC) in 2016 as a unified law for resolving insolvency, covering both companies and individuals. It combined different existing laws into a single framework for managing bankruptcy cases. The IBC was created to provide a comprehensive solution for the growing number of non-performing loans (loans that are not being repaid on time). It aimed to resolve these cases quickly, improving the ease of doing business in India. Under this law, creditors gained control over company operations, while promoters and directors lost their authority during insolvency proceedings. 

The IBC has significantly impacted the economy; since its implementation, the gross non-performing asset (NPA) ratio of banks has decreased from 11.2% in 2017-18 to 2.8% now. Despite these benefits, the IBC still faced many challenges, such as delays in resolving insolvency cases and large "haircuts" (substantial losses for creditors) when companies were in financial distress. 

Challenges arose when large companies, with complex group structures, went bankrupt. Many companies had subsidiaries operating in different countries, leading to cross-border business relationships and overlapping legal systems. There were also issues with individual insolvency for personal guarantors and partnership firms, which needed better solutions. 

Group Insolvency  

In cases where large companies had multiple subsidiaries, these subsidiaries were often interconnected. However, their insolvency was handled separately, causing delays and inefficiencies in resolving the cases. This separate handling could lead to a loss of value for the companies involved because the interconnected nature of their operations was not considered. 

The lack of a legal framework for consolidating insolvency cases of interconnected companies made it challenging to recover debts efficiently. To address these issues, there was a need for legal provisions that would allow the consolidation of insolvency proceedings, resolve intercompany claims, and pool assets for a coordinated resolution plan. 

A landmark case highlighting this issue was the Videocon Group’s insolvency, where the group's companies underwent separate insolvency processes. This complicated the resolution and showed the need for group insolvency laws. 

Other countries, like the European Union (EU) and the United Kingdom (UK), have frameworks that allow group insolvency to resolve claims and assets in a coordinated manner. India's IBC is still evolving in this area, suggesting a phased approach to implementing group insolvency laws. 

Pre-Pack Insolvency for Larger Companies 

For larger companies, resolving debt through the usual legal process can be time-consuming and may reduce the value of the company's assets. There was a need for a faster and more cost-effective method that allowed companies to reach a resolution plan with creditors before formal insolvency proceedings began. 

The Pre-Pack insolvency framework was introduced to address this need. It combines informal negotiations with the formal structure of the IBC. In Pre-Pack arrangements, the company management stays in control while a time-bound resolution process is followed to recover debts. This approach is particularly useful because it allows companies to quickly restructure their debts, reducing asset value erosion. 

The relevant sections in the IBC for Pre-Pack insolvency are: 

·        Sections 54A to 54E, which cover the process. These sections outline: 

·        The declaration of a moratorium (legal pause on debt recovery actions) and public announcements. 

·        The duties of the insolvency professional overseeing the process. 

·        Time limits for starting and completing the resolution. 

In the United Kingdom, Pre-Pack administration is commonly used, allowing debtors to pre-negotiate a resolution plan with creditors before formal insolvency proceedings begin. 

Individual Insolvency Under IBC 

Initially, the IBC mainly focused on companies, leaving a gap in the legal framework for individual insolvency. Many companies took loans that were personally guaranteed by promoters, but there were no clear provisions for handling personal guarantors' insolvency. 

The IBC introduced amendments to address this issue, providing rules for resolving insolvency cases involving personal guarantors to corporate debtors (PGs), as well as partnership firms and proprietorship firms. The amendments are found in Part III of the IBC, which deals with: 

·        The insolvency and bankruptcy of individuals and partnership firms. 

·        A two-stage process, starting with the insolvency resolution process, followed by bankruptcy proceedings if necessary. 

These changes have helped improve the ability to recover debts from personal guarantors and have provided a structured approach for handling individual insolvency cases. 

Cross-border Insolvency 

In today’s global business environment, companies operate across borders, often with subsidiaries in multiple countries. Each country has its own legal rules for handling insolvency, making it difficult to manage debts and assets when a company with international operations goes bankrupt. 

The absence of a structured cross-border insolvency framework in India made it challenging to cooperate with foreign insolvency proceedings and manage assets located overseas. This gap led to delays and inefficiencies in handling insolvency cases involving multiple jurisdictions. 

To tackle these challenges, a new chapter on Cross-border Insolvency is being proposed for the IBC. The amendment aims to: 

·        Provide a framework for the recognition of foreign insolvency proceedings. 

·        Enable cooperation between Indian and foreign courts. 

·        Define the rights of foreign representatives in Indian insolvency cases. 

The proposed sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC) are based on the UNCITRAL Model Law on cross-border insolvency, which is already used in countries like the United States (Chapter 15 of the Bankruptcy Code), the UK, and Singapore. The Model Law provides guidelines for international cooperation, making cross-border insolvency proceedings more predictable and efficient. 

A landmark case illustrating the need for cross-border insolvency laws in India is the Jet Airways (India) Ltd. case. The company faced insolvency proceedings in both India and the Netherlands, but the lack of a formal framework in India meant that the courts had to rely on an informal agreement to coordinate the cases. This case highlighted the necessity of a structured system for handling cross-border insolvency. 

Conclusion  

The Insolvency and Bankruptcy Code has transformed India's insolvency landscape since its introduction in 2016, leading to a significant reduction in non-performing assets. However, certain challenges still needed to be addressed to make the process more effective. The amendments for group insolvency, Pre-Pack insolvency for larger companies, individual insolvency, and cross-border insolvency are steps toward improving the legal framework. These changes aim to ensure faster, coordinated, and more predictable debt recovery, aligning India with international best practices.