Transforming India’s Insolvency System
Advising the Government of India on the conceptualisation, design, drafting and implementation of the Insolvency and Bankruptcy Code, 2016 (IBC)
Efficient allocation of resources requires strong insolvency laws that allow failing businesses to close efficiently and encourage new ventures. Business failures in a market-driven economic system cannot be avoided. However, they need to be managed in a way that causes the least disruption to the affected stakeholders and the economy. Strong insolvency laws are also important for ensuring the availability of credit for households and businesses.
Despite being an essential requirement for a well-functioning economy, India lacked a robust insolvency regime until 2016. This led to several inefficiencies and contributed to the worsening of the ‘non-performing loans crisis’ or the ‘NPA crisis’ in the Indian banking sector. The NPA crisis exerted significant pressure on bank lending, increased the cost of capital and made it considerably difficult for small businesses and individuals to obtain loans. Given this gap, the need to reform the insolvency regime in India was among the first projects Vidhi undertook post inception.
As a result of Vidhi’s sustained research and engagement, starting with a concept note and briefing book in 2014 – both of which suggested a combination of substantive and institutional reforms for both corporate and individuals to address the failure of the Indian corporate insolvency regime – the Insolvency and Bankruptcy Code was eventually enacted in 2016.
Supporting the government from ideation through enactment of the IBC
- Following on Vidhi’s concept note and the public release of its briefing book in July, 2014, the Ministry of Finance constituted a reforms committee – the Bankruptcy Law Reform Committee or BLRC – to examine India’s insolvency laws and suggest changes for making the system effective in August, 2014. The Ministry appointed Vidhi to provide technical and drafting assistance to the committee.
- Between April 2015 and August 2015, Vidhi worked with the core group of BLRC members to shape some of the core features of the Code and its interaction with other legislations. In particular, Vidhi was instrumental in integrating the National Company Law Tribunal (set up under the Companies Act, 2013) into the IBC, to ensure its swift implementation.
- In November 2015, the government released theBLRC’s draft of the IBC for public consultations, before which the final leg of the drafting team’s work was carried out at Vidhi’s Delhi office under the guidance of the BLRC Chairman, Dr T. K. Viswanathan.
- Even after the drafting was completed, Vidhi continued to advise the Finance Ministry until the IBC Bill was tabled in the Lok Sabha in December 2015. Debanshu Mukherjee and Shreya Garg from Vidhi were present at the Lok Sabha during the time, and later deposed before a Joint Committee of the Parliament that examined the Bill.
Assisting the government in implementing the new law in record time (six months)
While the IBC was enacted under the aegis of the Ministry of Finance, it was transferred to the Ministry of Corporate Affairs (MCA) for implementation. Vidhi advised the MCA during this transition, conducting several information sessions for its officials.
- July – September 2016: Vidhi advised the MCA in preparing the first draft of the sub-ordinate legislation for operationalising the IBC.
- October 2016: Vidhi was appointed by the newly set up insolvency regulator, the Insolvency and Bankruptcy Board of India (IBBI), to finalise regulations pertaining to insolvency professionals as well as the core insolvency resolution and liquidation processes under the Code.
- December 2016: With Vidhi’s help, the MCA and IBBI were able to notify substantial provisions of the new law by December, 2016, just six months after it was enacted.
- January – April 2017: Vidhi advised IBBI on designing regulations for voluntary liquidation of solvent debtors and information utilities, which came into force soon thereafter.
Ironing-out implementation issues through ongoing support
A year after the IBC came into force, the government set up the Insolvency Law Committee (ILC) to monitor its implementation and suggest appropriate changes to ensure its continued smooth operationalisation.
Between November, 2017 and March, 2020, Vidhi advised the ILC and the MCA on making several amendments to the IBC in response to market practices and judicial developments to ensure that the law continued to be implemented in accordance with its original objectives. In addition to these amendments, Vidhi also advised the government on next-generation reforms which included issues relating to cross-border insolvency, resolution of financial service providers and group insolvency, among others.
Further, Vidhi advised the government on implementation of personal insolvency provisions of the Code, parts of which were enforced in November 2019, a hundred years after the enactment of India’s previous personal insolvency system under the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920. Many of these reforms are ongoing and Vidhi continues to engage with the government on their design and implementation.
On the ground impact
‘The World Bank’s Doing Business project, which ranks economies on the basis of the business friendliness of their legal systems, ranked India’s insolvency system at the 52nd position (out of 190 countries) in its 2019 survey. In addition to the strength of the legal framework, the report also measures outcomes, recovery rates and cost of proceedings for the purpose of assigning the rankings. The recovery rate reported in the survey (about 71 cents on the dollar) is better than the average recoveries in the OECD high-income countries. When Vidhi started work on this reform in 2014, India was at the 137th position and the reported recovery rate was around 26 cents on the dollar. This transformative reform has brought about several structural changes to the economy which are likely to have far-reaching impact on India’s growth and development in the coming years.’Debanshu Mukherjee, Co-founder & Lead, Corporate Law and Financial Regulation, Vidhi Centre for Legal Policy
In addition to promoting the availability of credit and promoting entrepreneurship, the IBC has helped in the preservation of millions of jobs by facilitating the rescue of several viable businesses. It has also helped in creation of new jobs through the development of an entirely new ecosystem of insolvency professionals, turn-around experts, accountants, lawyers and investment professionals who support the IBC processes.
The IBC is seen as one of India’s most successful economic reforms since independence. Vidhi takes great pride in having contributed to it.