The Government has done a decent job by drafting and enacting the Insolvency and bankruptcy code swiftly. It is now incumbent upon the judiciary to implement it not on the basis of technicalities of the law but rather keeping in mind the intentions of the policy-makers and the spirit of the code
A student of law in India will almost always point out ineffective implementation of the statute, as criticism of that stream of law, for which he/she might be writing an assignment. Non-implementation of the statutory provisions is a consistent thread in the spectrum of criticisms present in the legal structure of our country.
Insolvency laws in India are no exception to it. Before the enactment of the new Insolvency and Bankruptcy Code, 2016, forget implementation, there was not even clarity on what to implement. Indian insolvency law contained five legislations, overlapping each other, which delivered a legal mess instead of a resolution. It is only because of exceptional sincerity of the Narendra Modi led dispensation at the Union level that the IBC was enacted so quickly at a breakneck speed.
An exhaustive law for insolvency would usually include aspects of winding up, recovery and revival and the process can be a continuing one. In India, the IBC is the first such law to include every aspect of insolvency in a single legislation.
For an economy to function smoothly, an effective system of insolvency law is a must. It is because of this reason that the United Nations Commission on International Trade law (UNCITRAl) took it upon itself to frame a model law for the harmonisation of international insolvency law.
Without a proper functioning system of insolvency law, businesses get affected because borrowing gets difficult. This is due to the fact that lending institutions are not legally sure about return of the credit that they are putting out in the market. For the same reason, investment in a country is also impacted in absence of a clear insolvency law and policy.
This has direct relevance to the present Government’s flagship programme, ‘Start-up India’. It is common knowledge in the ecosystems of start-up companies that a much higher number of companies fail than the ones which succeed. Every start-up looks up for funding at their inception; to fund the business idea it seeks to establish.
The investors take an amount of risk when they fund any start-up, having full knowledge of a possibility of that start-up failing. In such a scenario, the start-up is dissolved through a system of insolvency laws. The investor gets whatever minimum return is
possible on it. If there is a delay in this process, then the investor’s money is stuck for a long period of time in a failed start-up. Delays in Indian insolvency resolution were very recently observed and put on record by the Bankruptcy law Reforms committee in 2015.
The primary reason for such delays was the multiplicity of jurisdictions of different authorities and laws, and lack of clarity in their overall implementation mechanisms. A comparative perspective on this issue will shed light on the gravity of the situation. If we compare the average time taken for an insolvency resolution to conclude in India, it takes 4.3 years. Whereas in the UK, it takes one year, in the US it takes 1.5 years, and in South Africa, it stands at two years.
The IBC is one of the better drafted legislations not only in India but across the globe. Its success or failure is now the responsibility of the implementing agencies which are: The Judiciary and the National Company law Tribunal (NClT).
To be fair to the Government, it has done its job rather decently by drafting and enacting the code so swiftly. It is now incumbent upon the judiciary to implement it not on the basis of the technicalities of the law but rather keeping in mind the intentions of the policy-makers and the spirit of the code.
The recent decision of the Supreme Court in the case of lokhandwala Kataria Construction Pvt ltd is a bad example to start with. The code mandates that there can’t be a withdrawal of insolvency application after its admission. This is exactly what the Supreme Court allowed.
Since it couldn’t have been done in a straightforward manner, to do it, the apex court exercised exceptional powers under Article 142 of the Indian Constitution. This is not even a case of non-implementation, it is negative-implementation, where something contrary to the explicit text of the law was implemented by the apex court.
If such measures continue and are not rectified in future, this will be very counterproductive to the aim and spirit of the IBC. The judiciary needs to appreciate the fundamentals of insolvency law and profession for a meaningful outcome. In an era of globalisation, the Indian economy is competing with the world. Therefore, our insolvency system should aspire to compete with the best systems in the world. All stakeholders, especially the judiciary and NClT, have a prominent role to play in this regard in future.
(The writer is a research fellow at the Department of Humanities and Social Science, Indian Institute of Technology Bombay and teaches law at National law University)