The term “structural reform” is at the heart of political debate -- it is the phrase over which lead Opposition speaker in the Rajya Sabha and former Finance Minister P Chidambaram and current Finance Minister Nirmala Sitharaman
sparred after the Budget Speech. Meanwhile, the one piece of structural reform that the NDA government truly executed from scratch — the Insolvency and Bankruptcy Code, 2016 (IBC) — is once again crying for attention.
Lauded and feted by bankers, lawyers and judges as a “game changer”, the IBC is now facing yet another challenge. This law that was essentially meant to enable smooth and non-stigmatised death of corporates. However, it has been transformed into a tool of actually stigmatising business failure, thanks to the scaling up of non-performing assets on banks’ books. Courts have coded into the interpretation of the IBC the Indian social reluctance to embrace business death. Judicial observations about the importance of reincarnation of a moribund business being preferred to an orderly pulling the plug off the ventilator, abound.
The concept of “silences” in the law has a major role to play here. Matters that are so obvious to a society that talking about it would be unnecessary are routinely left to resolution by common sense, justice, equity and good conscience. If something is so evident that one does not need the law to articulate it explicitly is said to have been left out “sub silentio”. The silences in the law can lead to judges filling in the gaps and bringing to bear their judicial sense of how to resolve inequities and iron out ambiguities.
Every trade and operational counter-party in the running of a business (say, the supplier of raw material or distributor of finished goods) may extend credit or avail of credit, and thereby also play a financial function. However, the core cause of providing or availing of such credit is not the provision of finance. Such persons are operational creditors in the eyes of the IBC.
The IBC is substantially a law that works on the premise that financial creditors know best as to whether to let an insolvent business continue in a new avatar or if it is best consigned to the grave. In either decision, other stakeholders such as operational creditors would be affected, and the IBC entails a quasi-judicial oversight of the decision of the Committee of Creditors, the statutory decision-making forum in which financial creditors have an overwhelming and overriding power. This is in sharp contrast to the role envisaged for operational creditors.
When any legal position looks inequitable, intervention follows — at times, politically and therefore legislatively, but often, also judicially, with creative interpretations aimed at doing justice while administering the law. For example, the sensitivity of the roti-kapda-makaan concept led to home buyers being acknowledged as not being mere operational creditors — first judicially, and then legislatively, the constituency of home-buyers kept getting addressed. Arguments can always be found — since builders get substantially funded by those buying the products (homes), it was felt it would be logical for home-buyers to be treated as financial creditors. In much the same way, buyers of soap can be financiers of soap-manufacturing company — but dare compare buying soap with buying homes, and you will find the power of the sub silentio facet in interpreting law.
The latest ironing of such perceived inequity is a ruling of the National Company Law Appellate Tribunal (NCLAT) adjusting equities to make the IBC work for the interests of operational creditors. The principle of law applicable to operational creditors is that when resolving a company, they ought not to get lesser than what they would get in a liquidation. The NCLAT has ruled that this would not mean that operational creditors must get nothing higher than the liquidation value. After a strong push from the bench, the Committee of Creditors came up with a marginal reduction in what the financial creditors would take away and an increase in what operational creditors would get. The Tribunal, dissatisfied with the equity of the proposal, rejected it, and came up with a ratio of distribution that would, in its view, be fair and appropriate.
In appeal, financial creditors would obviously push hard for protecting their right to determine an appropriate distribution, as a sovereign right. Even regulators are disrupting the IBC — now Sebi wants to argue that dues owed to it are not covered by resolution plans. Whatever may happen in legal proceedings, legislative intervention may eventually follow, in the name of structural reform. Newer “crudities” and “inequities” will emerge. While uncertainty over viability of resolutions would go up, one can only hope the ecosystem will learn to embrace impermanence and death with grace.
The author is an advocate and independent counsel. Tweets @SomasekharS