Bankruptcy, which is termed as insolvency in the corporate framework is a nightmare situation for any company. The profit generation mechanism fails and the company is crushed under the debts.
For a long time in India, corporate insolvency was a bigger nightmare for the creditors of a company. All the people who gave their money, resources or manpower to a working company, were stuck with very meager hope of getting compensation for their inputs.
Then in 2016, came a remarkable turnaround for insolvency resolution, called the Indian Insolvency and Bankruptcy Code. The new process allows better addressing of creditors’ grievances and also offers a practical method for resolving the debts owed by the company, before ultimately giving way to the liquidation of the company.
Poor Debt Recovery Process
Just to state, the Non Performing Assets (NPA) of Indian banks stood at Rs 8.40 lakh crore (~$111 billion) in September 2017. The primary reason for which was an ineffective legal system of debt recovery from corporate debtors and large companies. In fact, the loan recovery rate was laughable 4% for Indian banks between 2014 to 2017.
Before IBC 2016, the SARFAESI Act, Debt Recovery Tribunal, and Lok Adalats were placed to deal with debt disputes, which all heavily faltered in any debt recovery.
Cases worth of nearly 2,86,000 crores of NPA came to these authorities in all, and the recovery of only 28,000 crores was made possible. This is indicative of the freedom that big corporate debtors enjoyed, without judicial crackdown; the 6000 crore loan failure of Vijay Mallya being an example.
IBC 2016 to Rescue
IBC came in as a recommendation after RBI expressed worries on the growing NPA debt across the country and slow resolution. The key new changes incorporated in the new framework are as follows.
- Companies, after they are declared insolvent, go through a legal process wherein the debtors are removed from operational or managerial power.
- The company goes into moratorium of 180 days (extensible to 270 days), wherein
- An Insolvency Professional is posted to look over the company in this period.
- Resolution plans are invited from various Investors and Resolution Planners, that are presented before all the creditors unanimously in a body called Committee of Creditors (CoC).
- The CoC then votes on the best resolution plan. If the plan is passed by the majority confidence vote, the plan is implemented.
- If no majority vote takes place, or no credible resolution plans are put forward, the company goes into liquidation.
IBC Effectiveness by Numbers
Since inception, The National Companies Law Tribunal, the appellate court for insolvency cases, has received about 5774 cases, out of which 1322 were admitted and 4452 were disposed of without admission.
The amount recovered in the aforementioned 4452 cases was nearly 2.02 lakh crores INR (~30 billion USD), while resolved cases fetched 80,000 crores (~12 billion USD) in recoveries.
On a larger front, the IBC has been successful in empowering the creditors and making the borrowing-lending market a level playing field for both the parties.
The corporate debtors have become increasingly wary of being dragged into NCLT because once declared insolvent, the debtors lose all kinds of rights over the company in concern. Something the debtors would want to avoid in all circumstances.
Need for Technological Intervention
One of the primary reasons for the failure of Acts that existed before Insolvency and Bankruptcy Code 2016 was the complications involved in settling insolvency cases.
There is a complex quagmire of creditors, debtors, claims, and who-owes-what that has to be dealt with. In a country like India, where judicial processes tend to be pushed into uncertainty more often than not, a system robust enough to encapsulate various legal nuances was required.
IBC 2016, quite favorably delivers on this expectation by providing a framework which offers either one of the two possible outcomes - liquidation or resolution in most, if not all cases.
For this to go as planned, a comprehensive system of information exchange, and at places, automation is needed. We have a few suggestive ideas on the same regard, that would considerably help in making ends meet in the whole process.
Communication is one of the biggest hassles when it comes to legal resolution.
When a company is declared insolvent, there is a large number of stakeholders who need to maintain proper communication amongst themselves.
The creditors of the company need to be informed about their claims, the Insolvency Professional appointed by the NCLT needs to communicate with the Committee of Creditors on various aspects and so forth.
The problem is that all of the above people can be in different states across India, and might have no knowledge of what’s going on with each other. This only goes complexify things further, and the case slows down.
Using modern tools and a centralized knowledge sharing mechanism, everyone can log in to a webpage and get the latest updates for each case. Furthermore, VoIP and Video Conferencing can be set up intrinsically to enable all these parties to each other.
A claim is basically a legal application that demands the money or resources given to the debtor company by an individual. The individual can be an operational creditor, financial creditor or any other kind of investor.
To file a claim, you have to fill the relevant claims form, which is to be submitted to the Insolvency Professional for his records, in order to get your claim amount listed.
Various claim forms for resolution process.
To a layman, the claim filing form can be hard to comprehend, while, contacting the IP appointed to the case would be another challenge.
Resolution Bazaar has automated this process, where the claimants can directly fill their claim form using a webpage. They can then download the form in PDF format and also mail it directly to the IP in concern. Hence reducing the hassle to a matter of few clicks on the webpage.
Insolvency Professionals need to collate a number of parameters while the resolution process is being made. The company’s financial records, legal cases, creditor list and of the sort, which all requires a smart information gathering mechanism.
Such advanced data research tools are already employed by professionals, to assimilate large data sets and then study them carefully. Vertica and Actian are two such tools that can be optimized for the use case, which will make it easier for IPs to collect data, and speed up the resolution process.
Information intelligence is of paramount importance to all the stakeholders in the case of insolvency.
IPs can use collected information to make better resolution plans and offer better options to the CoC, and thereby increase the chances of the resolution, over liquidation.
The CoC needs simplified information on the current status of the company’s resources, their claims, and the effectiveness of the resolution plans submitted by the IP. This can be done by fulfilling their information needs in a centralized way, making their decision-making process easier.
The investors also need specific information on the assets present in the company, their debts, and the profitability, before they make their investment decision, in the insolvent company.
Most of this information can be found on the web or with the people dedicated to the process. Resolution Bazaar aims to connect the dots by collecting all this information.
Certain databases such as the list of Insolvent Companies, list of IPs in India, and liquidated assets are already provided for a subscription on Resolution Bazaar.
One good thing about the IBC 2016 is that it’s quite procedural in nature. The cases are primarily handled with respect to a given procedure, without much subjective intervention.
Procedural laws have a high tendency for automation. There are several aspects to IBC that can be simply automated using technological tools. For instance, submitting creditor claims is one such menial task that Resolution Bazaar has automated.
Similarly, there are many other simple tasks that technology can handle with ease. Suggestions for these would be
- Informing all the stakeholders as a new update is received in the case
- Verifying the eligibility of the claim using PAN and Aadhar information
- Sending and receiving documentation between the court and company
- Inviting potential investors using e-auction technologies
Consensus management is an integral part of the CoC meetings, where all the members have to vote towards the confidence of the resolution plan or other decisions to be made.
Many a time, the members are not physically present at the same place for the meeting to be held. Using online voting techniques and secure discussion rooms, the roadblock of physical presence can be eradicated from the picture.
The members can view resolution plans, communicate their thoughts, vote unanimously, and reach a consensus while sitting anywhere in the world. This would ultimately decrease the time required for resolution, saving effort and time consequently.
Online Dispute Resolution
As stated earlier, the inception of IBC 2016 has given rise to anxiety among the corporate defaulters regarding the legal inhibition of their rights on the company, once the company is declared insolvent.
Due to which, a number of corporates are trying to resolve their cases outside the court. While no substantial non-legal resolution mechanism currently exists for this purpose, one can be devised.
Certain Online Dispute Resolution Platforms exist that can act as the medium for resolving pre-insolvency conflicts and help people get speedy resolution without losing rights over the company. It would be a win-win situation for both the defaulter and the creditor.