Bereft of cross-border insolvency, the significant developments on the insolvency landscape, emanated from Supreme Court judgements of Vidarbha Industries Power and Rainbow Papers: the first, stated that the adjudicating authority should exercise discretion whilst admitting an application of financial creditor, despite a default, and gave birth to the concept of temporary insolvency; the second pronounced that the security interest created by operation of law, irrespective of the class of creditors, in this case state tax authorities, stands on equal footing as that of secured financial creditors.
The decision of Rainbow may be palatable to the legislature, due to fiscal and other considerations, as was the case with the spectrum dues earlier. The Draft Indian Telecommunications Bill 2022 (DTB) reflects Government’s view, as it not only provides for reversion of spectrum to government in case of default but also escrows revenues in case the usage is allowed with subsisting default; implying that DTB will override the moratorium of The Insolvency and Bankruptcy Code (IBC).
Nevertheless, intervention is required in the matters arising out of Vidarbha. Insolvency armoury has a weapon for such situations i.e., preventive restructuring frameworks (Prepacks) and to be effective the framework should address pre-default stress in conjunction with moratorium. Also, such a framework will be able to handle exceptional default situations like Covid, Ukraine war, extreme climatic events etc. and thus would preclude the need for frequent legislative interventions.
Most jurisdictions are moving towards a preventive restructuring framework and India should not be an exception. Also, since such frameworks require more vigilance vis-à-vis treatment of all stakeholders, the legislature may do well to revisit issues that were the subject of litigation in the past, for example, rights of charge holders especially when the creditors have security interest on different assets; an aspect considered by the Supreme Court in the case of Amit Metaliks.
As the objective of IBC is quick resolution, failing which a swift liquidation, it may be prudent for the legislature to clarify on inter-se rights of creditors with differing security interest not only in insolvency / Prepacks but also in liquidation. Similarly, clarity should be provided for quantification of disputed and contingent tax claims, especially the ones, where a security interest is created by the operation of law.
Moreover, matters of oft-repeated litigation namely, unsolicited resolution plans, timelines, methodology for revision of resolution plans, times an expression of interest can be called, etc. need to have a stronger legal footing. Also, at least two areas described below may lead to complications in future; legislature should take proactive actions in the budget for these.The first of financial service providers (FSPs). IBC when introduced, had excluded FSPs from the ambit of insolvency, with an overriding provision that the process for such insolvencies will be notified. Thereafter, FSPs with an asset size of 500 crores or more were notified for resolution under IBC. However, whilst IBC was maturing as a legislation, another set of FSPs have appeared on the horizon, i.e., Fintech.
According to IBC, FSP means, a person providing financial services, under an authorisation issued or registration granted by a financial sector regulator. With the spate of payment aggregator, payment gateway and Bharat Bill Pay operator licenses, an authorisation is being granted to Fintechs by a regulator.
Financial services as per IBC, includes soliciting for: buying or subscribing to a financial product; availing a financial service; or exercising any right associated with financial product or financial service. It also involves maintaining records of ownership of a financial product; as well as selling, providing, or issuing stored value or payment instruments or providing payment services. Several Fintechs may be providing one or more of the aforesaid services.
The Reserve Bank of India has been proactive in regulating the Fintechs. Given that most of the Fintechs are not generating profits, it is inevitable that in a downturn the sector will undergo churn and consolidate. Thus, a well thought out insolvency process for FSPs, both the traditional institutions as well as Fintechs, in contrast to the current jugaad, will obviate litigations and delays later.
The second area is at the other end of spectrum, far from the world of technology, that of sugarcane farmers. Punjab and Haryana High court recently stayed an insolvency proceeding at a sugar company fearing farmers’ unrest. A public interest litigation is currently pending in the Supreme Court on payment of dues to sugarcane farmers. It is to be noted, that in 2014 in the case of Rashtriya Kisan Mazdoor Sangathan (Regd.) Thru’ Convenor vs State of U.P. & Others, the Supreme Court had given primacy to rights of cane growers over that of financial creditors.
Finally, apart from the abovementioned matters of law, an individual insolvency professional’s wish list for the budget would be, increase in number of judges and benches of National Company Law Tribunal, or at the very minimum, full utilization of the current capacity; an appellate authority for disciplinary rulings handed to insolvency professionals; and mandatory appointment of registered professionals for all insolvency cases; currently, cases of FSPs are handled by professionals outside of IBBI’s jurisdiction, and DTB too proposes such appointments.