India’s Insolvency and Bankruptcy Code (IBC) was designed as a sector-agnostic law, and was implemented with the aim that it would help companies resolve their stress in a timely manner. Since the Code provides for both substantive and procedural aspects of insolvency, it is worth considering whether the insolvency resolution framework needs to be made uniform across sectors.
A study of cases in India found that resolution delays occur across all sectors, with the wholesale and retail trade sectors taking 236 days to obtain approval for a resolution plan, the construction sector 279 days and the electricity and other sectors takes about 197 days. The same study suggested that corporate debtors from the service industry are subject to higher delays than those from the non-service/manufacturing industry. Thus, the timelines provided under the Code may not suit all sectors.
The new proposals to amend the IBC seek a special mechanism for the real estate sector, allowing individual projects to be dealt with separately. However, there is a growing consensus among experts that India, like the UK, needs separate insolvency procedures for many other industries, such as power utilities. It is argued that a separate process for core/critical sectors would enhance value maximization and protection of corporate debtors.
The current IBC of the country is not compatible with all sectors. This is for two reasons. Firstly, its general provisions need not be suitable for every sector as some may be counterproductive to value maximisation. Second, some sectors are highly globalized, such as aviation, finance, etc., and there is an international framework that India aims to harmonize with national legislation, which would also require sector specificities.
For example, take the banking sector in India. The IBC is not applicable to financial service providers who are authorized or registered by the Reserve Bank of India (RBI), the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority, as these service providers include banks, financial institutions, non-banking . Financial companies and insurance companies. The regulatory framework for such institutions must deal not only with the pre-emptive problem of preventing their failure, but also with those that are failing or headed towards failure.
Next, consider India’s energy sector. The report of the 40th Standing Committee on Energy tabled in the Lok Sabha in August 2018 addressed the RBI’s revised framework, which introduced a new harmonized and simplified common procedure for resolution of stressed assets in the energy sector. It advocated a sector-specific approach to energy because of its particularities as a sector.
Telecom sector is yet another sector in which insolvency proceedings have taken place and it has been found that the treatment of dues here may not be the same as in other sectors. The National Company Law Appellate Tribunal (NCLAT) ruled in a case that supplier telecom spectrum can be sold under the insolvency process, but only after clearing government dues. This triggered bankruptcy proceedings of defunct telecom companies like Aircel and Reliance Communications. In the UK, following privatization in the early 1980s, the telecommunications sector has included non-state suppliers who would be subject to normal bankruptcy proceedings in the event of their insolvency.
Aviation sector is another sector which is not IBC friendly. Airline bankruptcy differs from bankruptcy of companies in other business sectors. The financing arrangements for the manufacture and purchase of aircraft, and the associated ownership and lease arrangements, are typically complex and often vary greatly from case-to-case. It should not be forgotten that this sector is highly regulated globally and the regulations to which airlines are subject can place limits on the way they operate and the ease with which enforcement action can be taken.
Insolvency proceedings usually focus only on the interests of creditors, which gives rise to tensions if operations must continue in the interests of customers. In general, given our increased dependence on non-state companies as a result of privatization and the growth of non-state players in the digital services industry, there is an increased risk of bankruptcy, which could have wider public implications. This should prompt consideration of whether bankruptcy requires a more nuanced approach if there is a wider public interest involved.
As India proposes to reform its insolvency framework and the experience of the past six years with the IBC shows that the latter has not proven to be truly sector-agnostic, it would be worth considering an approach that addresses regional challenges. Resolves and helps in harmonizing internal conflicts. stakeholders and international best practices in each sector.
The amendments to the Code that the Government of India is currently considering, the main emphasis seems to be on ensuring that the country’s law meets the various challenges arising out of market dynamics, which were not predicted, but have been foreseen in the past. It was identified in the half-decade plus of its operation.
Frequent changes in policy are never ideal. The need is to draft a law that is in tune with the changing times without the need for periodic changes. It assures a sense of stability to the stakeholders. Finally, we need to re-imagine the basic design of the country’s insolvency framework. Until this is done, amendments to the IBC that address symptoms will not cure the disease.
Neeti Shikha and Rebecca Parry are Lecturer at the University of Bradford and Professor of Law at Nottingham Trent University, UK, respectively.
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