While improving NCLT infrastructure is a welcome move, the lack of adequate information utilities have handicapped the bankruptcy law.
Its three years since the Parliament passed the Insolvency and Bankruptcy Code, but its implementation is fraught with teething troubles. Endless delays in the resolution process under the code appear to be its Achilles heel. A recent report released by Crisil and Assocham has quoted Insolvency & Bankruptcy Board of India data which says for one-third of the 1143 cases under the corporate insolvency resolution process pending as on March 31, 2019, resolution has been ongoing for over 270 days. The fact that 94 cases resolved under the code took an average resolution time of 324 days highlights the work required to reduce this timeline.
The appointment of an additional 14 judicial members (technical members alone cannot constitute a bench as per the code) offers a sliver of hope in improving the efficiency of the National Company Law Tribunal (NCLT). According to its website, there are 12 benches across India with 16 judicial members. However, not all the cases are fresh cases; some pertain to amalgamation and winding up and are transferred from the high courts.
That’s not all. In the Swiss Ribbons Judgement (Swiss Ribbons Pvt Ltd. & Anr vs Union of India & Ors), the Supreme Court directed the central government to set up circuit benches of the National Company Law Appellate Tribunal (NCLAT) within six months from the date of the judgement (i.e January 25, 2019). In a response to an RTI query, the ministry of corporate affairs said that 6 additional posts of members of NCLAT have been created. It is still not clear where these circuit benches will be set up. It is also not known whether the ministry carried out a study to determine which areas require these circuit benches the most.
While these are welcome additions to the IBC infrastructure, the lack of adequate information utilities has handicapped the bankruptcy law. An information utility is a repository of financial information, such as records of debt, record of liabilities when a person is solvent, record of assets over which security interest has been created, and records of balance sheet and cash flow statement.
A report by four working groups set up by the ministry of corporate affairs to provide recommendations on the regulation of information utilities (IUs) highlighted the importance of this institution from a public policy perspective due to the “high-quality authenticated information” on debts and defaults they are to provide. Further, the members were convinced that this being a new industry, would create unanticipated innovations.
The Swiss Ribbons Judgement too notes that IUs not only reduce the information asymmetry but also may be treated as a prima facie evidence in proceedings under the code thereby “improving the timelines” in the resolution process. This judgement is otherwise silent on the procedural hassles that plague the system of information utilities.
That begs the question: In 3 years of the bankruptcy code, why hasn’t there been enough impetus to push through more utilities? The code makes it mandatory for financial creditors to submit information to information utilities. One of the tribunal benches in fact required this procedure to be followed and later decided to dispense with the requirement at its discretion for certain financial creditors, possibly due to the lack of support infrastructure. There is much ambiguity that needs to be resolved.
Earlier this month, IBBI issued a discussion paper on information utility regulations. The paper clearly states that National e-Governance Services Ltd, the sole unit registered as an information utility, has expressed difficulties in the process of authenticating and verifying the information supplied to it. In order to remove this issue, the regulation is expected to change, based on the inputs received from stakeholders.
If one were to go back to the drawing board, two important issues need to be highlighted:
(a) It is practically not possible to get obtain information from all classes of financial creditors. It is perhaps easiest to receive such information from banks since such data may not be maintained by some other financial creditors. Therefore, it may be prudent to restrict the obligation to banks alone for the time being and revisit the obligation for other types of financial creditors as and when the financial markets mature.
(b) In some sense, the information utility appears to have a quasi-adjudicating role since the code obligates it to get concerned parties to authenticate the information. Information utilities should be free from such obligations.
No doubt any law, especially with multiple facets, takes its own time to bear results, but it would bode well to remember that endless delays can also result in pessimism derailing the value of a well-intentioned law.The author is an independent legal counsel. Views are personal and she tweets @subramaniharini