In the ever-evolving landscape of corporate governance and insolvency regulation, the Ministry of Corporate Affairs (MCA) stands at the forefront, orchestrating strategic reforms to fortify the framework governing businesses in India. The idea for seeking reforms in the Insolvency and Bankruptcy Code (IBC) are the dual imperatives of enhancing corporate governance standards and streamlining insolvency processes to foster economic resilience and growth.
At the heart of the MCA's initiatives lies a comprehensive review of existing rules and regulations, driven by a commitment to solicit inputs from stakeholders and experts. In response to the imperatives outlined in the Budget Speech (2023-2024), the MCA has embarked on a journey of regulatory introspection, seeking to revamp the Insolvency and Bankruptcy Code (IBC) rules to better address the evolving needs of the business landscape.1
Need for change in the existing framework of IBC
The existing Insolvency and Bankruptcy Code (IBC) framework in India, while marking a significant stride in the realm of corporate governance and insolvency regulation, is not without its limitations. These downsides have prompted the Ministry of Corporate Affairs (MCA) to seek reforms aimed at addressing the following issues:2
Complexity and delays in the insolvency resolution process:
The current framework, although intended to streamline insolvency proceedings, often encounters procedural bottlenecks and legal complexities, leading to delays in resolution. This hampers the efficient resolution of distressed assets and undermines investor confidence.
Limited applicability and effectiveness for certain entities:
The one-size-fits-all approach of the IBC may not adequately cater to the diverse needs and challenges faced by different categories of businesses, especially Micro, Small, and Medium Enterprises (MSMEs). These entities may require more tailored and expedited resolution mechanisms to navigate insolvency effectively.
Ambiguity regarding personal guarantors and financial services providers:
The rules surrounding personal guarantors and financial services providers under the IBC lack clarity and consistency, posing challenges in enforcement and resolution proceedings. This ambiguity hampers the effectiveness of insolvency proceedings and contributes to legal uncertainties.
These shortcomings underscore the need for reforms in the IBC framework to enhance its efficacy, broaden its applicability, and streamline the insolvency resolution process. By addressing these issues, the MCA aims to fortify the regulatory landscape, foster economic resilience, and uphold the highest standards of corporate governance in India.3
Objectives behind seeking reforms in the IBC
In the midst of its regulatory endeavors, the MCA meticulously considers and seeks stakeholders' feedback for various factors to ensure the efficacy and relevance of the rules prescribed under the Insolvency and Bankruptcy Code, 2016. These considerations include:
- Necessity of a robust corporate governance framework
- Ease of doing business and ease of compliance
- Economic environment in the country as well as internationally
- Levels of various thresholds in respect of class or classes of companies for the purpose of various governance and compliance requirements
- Pronouncement of various Courts/NCLT/NCLAT & other quasi-judicial bodies
- Legal & Technologies developments taking place across the globe
- Ease of Exit
These factors serve as guiding principles, for the MCA's rule-making process and ensuring that the regulatory framework remains responsive to the evolving dynamics of the business landscape.4
Brief comparison with other jurisdictions:5
| India | USA6 | UK7 | Germany8 | |
| Framework | The IBC, introduced in 2016, consolidates the insolvency and bankruptcy processes for companies, partnership firms, and individuals. | Chapter 11 of the Bankruptcy Code is the primary bankruptcy law for corporate insolvency. | The Insolvency Act 1986, supplemented by the Companies Act 2006, governs corporate insolvency. | The Insolvenzordnung (InsO), introduced in 1999, is the main legislation for insolvency. |
| Objective | To ensure a time-bound resolution of insolvency, improve ease of doing business, and protect the interests of stakeholders. | To provide businesses with an opportunity to restructure and reorganize while continuing operations. | To provide a balanced approach between creditor recovery and company rescue. | To balance the interests of creditors and debtors while enabling the restructuring of viable businesses. |
| Process | The IBC provides a structured and time-bound insolvency resolution process (180 to 270 days) managed by insolvency professionals, with the National Company Law Tribunal (NCLT) serving as the adjudicating authority. | Debtors retain control as "debtor-in-possession" and propose a reorganization plan subject to creditor approval and court confirmation. | Includes administration (similar to Chapter 11), liquidation, and Company Voluntary Arrangements (CVAs). | Debtor-in-possession proceedings and protective shield proceedings (Schutzschirmverfahren) allow companies to reorganize. |
| Focus | Emphasizes the revival of distressed companies and maximization of asset value. | Encourages restructuring rather than liquidation, with the goal of allowing the business to continue operations. | Emphasizes administration and restructuring to keep businesses operational while repaying creditors. | Strong emphasis on restructuring and recovery, with insolvency plans requiring court and creditor approval. |
| Stakeholder involvement | Creditors have a significant role in decision-making through the Committee of Creditors (CoC). | Creditors and other stakeholders participate through committees, and plans require approval by a majority of creditors. | Administrators appointed to manage the process, with creditor involvement in approving proposals. | Creditors' committees play a key role, and insolvency administrators manage the process with court oversight. |
- Increased Flexibility and Debtor Control:
– Adopt Debtor-in-Possession Models: Introducing a debtor-in-possession model, similar to the US Chapter 11, can allow financially distressed companies to retain control during the restructuring process. This can encourage more businesses to opt for reorganization over liquidation and maintain operational stability.9 - Flexible Timelines:
-Adjust Time-bound Resolutions: While the strict 180 to 270 days timeline of the IBC is designed to ensure swift resolutions, incorporating flexibility where justified, similar to the practices in the UK and Germany, can accommodate complex cases that require more defined and structured timeline for a viable restructuring plan.10 - Enhanced Creditor Involvement:
– Strengthen Creditor Committees: The role of creditors is crucial in all jurisdictions. Enhancing the functionality and powers of the Committee of Creditors (CoC) can lead to more effective and inclusive decision-making processes, ensuring that creditor interests are balanced with the need for business recovery. - Improved Pre-Packaged Insolvency Schemes:
-Facilitate Pre-packaged Plans: Following the example of pre-packaged insolvency schemes in the UK, India can improve its framework to expedite resolutions, especially for MSMEs, by allowing faster and more efficient pre-negotiated plans that minimize disruption to businesses. - Clearer Regulations for Personal Guarantors and Financial
Services Providers:
– Clarify Legal Provisions: The ambiguity in rules concerning personal guarantors and financial services providers can be addressed by providing clearer, more consistent regulations. This can enhance predictability and confidence in the insolvency process. - Enhanced Focus on Restructuring and Recovery:
– Promote Restructuring Over Liquidation: Emphasizing restructuring as a preferred outcome, akin to practices in Germany and the US, can help preserve business value and jobs. Encouraging innovative restructuring solutions and providing support for distressed yet viable businesses can strengthen the overall economic resilience.
Conclusion
As these regulatory reforms unfold, it is imperative for stakeholders to actively engage in the consultative process initiated by the MCA. By leveraging their insights and expertise, stakeholders can play a pivotal role in shaping a regulatory framework that not only meets the exigencies of the present but also anticipates and addresses the challenges of the future. In embracing this collaborative approach, stakeholders can contribute to the evolution of a regulatory regime that balances the imperatives of economic dynamism with the imperatives of accountability and transparency.11
In conclusion, the MCA's strategic reforms in the realm of insolvency regulation underscore its proactive stance in addressing the evolving needs of the business landscape. By soliciting stakeholder inputs, revisiting regulatory frameworks, and embracing global best practices, the MCA endeavors to foster an ecosystem where businesses can thrive while upholding the highest standards of integrity and resilience.
Kartikey Maithani, Associate Advocate at S.S.Rana & Co. has assisted in the research of this article.
Footnotes
1 Available at: https://www.indiabudget.gov.in/doc/budget_speech.pdf
2 Available at: https://globalrestructuringreview.com/review/asia-pacific-restructuring-review/2023/article/overview-of-indias-insolvency-and-bankruptcy-code
3 Available at: https://blogs.law.ox.ac.uk/business-law-blog/blog/2021/10/evaluating-indias-insolvency-and-bankruptcy-code
4 Available at: https://ibbi.gov.in/uploads/whatsnew/45711692a135cb163faf4300515d7338.pdf
5 Available at: https://icsiiip.in/doucuments/Articles/Corporate%20Insolvency%20in%20India%20and%20Other%20Countries%20-%20A%20Comparative%20Study.pdf
6 Available at: https://www.scconline.com/blog/post/2023/09/19/insolvency-regime-in-india-and-usa-a-comparative-study/
7 Available at: https://www.gov.uk/government/publications/liquidation-and-insolvency/liquidation-and-insolvency
8 Available at: https://e-justice.europa.eu/447/EN/insolvencybankruptcy?GERMANY&member=1
9 Tiwari, Varendyam Jahnawi. "Efficacy of IBC in Light of Absence of the Cross-Border Insolvency Regime: A Critical Comparison of the United States, the United Kingdom and Singapore Approach to the Model Law." RGNUL Fin. & Mercantile L. Rev. 5 (2018)
10 Farzin, Muhammed Fasal, and N. G. Devaiah. "Examining the Divergence: A Comparative Analysis of IBC, 2016, Resolution Plan Implementation in India and Corporate Rescue in the United Kingdom." (2023).
11 Available at: https://cfo.economictimes.indiatimes.com/news/governance-risk-compliance/mca-seeks-inputs-from-shareholders-to-revamp-ibc-rules/109450279
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