The Climb Down

Of late, the government has issued several draft rules on the Insolvency and Bankruptcy Code, taking a step closer to firm up the law.

However, the initial response to the draft guidelines seems to be less encouraging compared to what we had witnessed when the Insolvency and Bankruptcy Act was introduced. The Act, according to experts, was a bold statement with intent, while the draft regulations seem to be a toned-down version of the Act. While the Act was brought with the intention of settling bankruptcy issues through a time-bound process and disincentivising any delay in the process of liquidation, the regulations seem to lack that sharpness, say experts.

A case in point is the draft provision involving financial creditors. It says that a financial creditor, who votes against a resolution approved by the committee of creditors, will receive the "dissenting financial creditors' liquidation value". Experts say, though there is still no clarity on the liquidation value, it certainly gives incentive for some creditors to reject the resolution plan.

"When you do a restructuring plan, everybody sits around and says, okay, we take this much hair cut. Even people who do not agree with the plan have to take the hair cut. But this rule suggests that a dissenting creditor will be given the full liquidation value. My concern is, this would give a perverse incentive for every financial creditor to vote against the (resolution) plan, which would defeat the purpose of the law," says Harsh Pais, Partner, Corporate, at law firm Trilegal.

There's more. One of the provisions says that the liquidator should liquidate the corporate debtor within a period of two years. However, if the liquidator is unable to liquidate the debtor within the stipulated time, he can extend the process with the permission of an adjudicating agency. Experts say that if the liquidation process is not over even after two years, the whole purpose of a new bankruptcy law is defeated because the objective was to expedite the process.

There is also lack of clarity on whether only individuals are allowed to act as insolvency professionals or entities like law firms can also act as insolvency professionals. Besides, issues related to remuneration of insolvency professionals and members of the resolution agencies are also fuzzy. "There are many issues, such as remuneration of professionals and the kind of companies who can become insolvency professional agencies, which need more clarity," says Nishit Dhruva, Managing Partner of law firm MDP Partners. Though it may take some more time to read through the lines of the regulations, not everyone seems to be impressed by what they have seen so far. "I was a little underwhelmed by the regulations. The rules seem to be less ambitious than what we thought the Act had set out to achieve," says Pais of Trilegal.

It would be interesting to see how the final law takes shape once the feedback from the public is in.