IBC Law – An insight into the Substantive & Procedural aspect of the Code – By M. L. Kabir, Insolvency Professional

on by

IBC Law – An insight into the Substantive & Procedural aspect of the Code

M. L. Kabir
Insolvency Professional

Introduction

Every Law has two wings that help such Law to stay afloat and successfully cover the distance that it is mandated to cover. For IBC these two wings can draw a parallel to the Rules and Regulations that are framed by the Central Government and IBBI respectively. The very words that are used in Section 239 that empowers the Central Government to make rules says “The Central Government, may by notification, make rules for carrying out the provisions of the Code.” Again Section 240 of the Code which empowers the regulating body to make regulations also uses similar vocabulary when it says that “The Board may, by notification, make regulations consistent with this Code and the Rules made thereunder, to carry out the provisions of the Code.” Hence, both the Rules and the Regulations that can be brought in with respect to the Code are truly the two wings of the bird which make a “bird” to be called a bird and hence assumes huge significance for making the Code finally an effective vehicle for serving the purposes for which it was enacted.

Backdrop

The last couple of months and also in this month beginning a barrage of discussion papers on the various draft regulations were floated by IBBI ostensibly with the objective of making the Code more exhaustive as well as effective. These discussion papers on draft regulations when crystalized into actual Regulations after taking into due consideration of the stakeholders’ comments, it becomes an integral part of the Code and are expected to serve its primary objectives that were outlined in its Birth Certificate way back in 2016 when IBC was brought in through the parliamentary process prescribed under the Constitution.

Issues & Challenges

This article attempts to address the following issues and challenges: –

  1. To take a relook into the substantive and procedural laws and its relevance with regard to the IBC;
  2. To assess and evaluate judicial viewpoints and case laws with respect to the treatment of the above in legal parlance;
  3. To explore as to why the IBC is more procedural than judicial when it comes to pleading and court procedures vis-à-vis other codes.
  4. To evaluate whether such prevalence of procedures tend to undermine /overburden the Code itself while turning the space narrower for application of judicial jurisprudence.
  5. Whether the past and current amendments in regulations carried out by IBBI, meet the norms of the framework designed in the Code?
  6. The ‘way-forward’ steps that could make the Code more exhaustive, complete and consequential by resorting to a more balancing act between Rules, Regulations and the Code.
  7. How the framework stands in comparison to international norms and standards as is in vogue in developed nations like UK, USA and European nations in the backdrop of increased globalization and need for cross border insolvency framework in place.

Let’s deliberate on the above points one by one to bring more clarity and transparency of a Code that remains the most talked about legislature of our time clearly making its impact felt on the economy and overall commercial standing of the country globally in a geo-political context of Ease-of-doing-Business and other parameters. And here we go: –

1. The Substantive and Procedural aspect of IBC with its relevance and effectivity

As is understood in common parlance substantive laws primarily provide for the rights and liabilities of the parties in a ‘suit’ whereas the procedural laws lay down the policies and procedures for enforcement of the rights & liabilities provided for in the substantive part. If we take a look at the IIBI Website page on ‘Legal Framework’ it lists down the framework in a hierarchical order of: –

ACT=>RULES=>REGULATIONS=>CIRCULARS=>NOTIFICATIONS=>FACILITATION=>GUIDELINES    

Reading into this hierarchy one would quickly find out that ACT/CODE remains the substantive law whereas RULES & REGULATIONS are Procedural Laws which flow from the Substantive Law/Mother Law. In the hierarchy one must take note that Rules directly follow from Code & Regulations follow from Rules (Section 240 specifies that it has to be consistent with the same). We see a direct linkage of both Rules and Regulations to the Act and hence the same are categorized as Procedural Law but the other items like Circulars, Notifications, Facilitation and Guidelines can’t be categorized as Procedural Law as such. As regards the relevance and effectivity of both, the quality of Procedural Law has a direct bearing on the effectiveness of substantive law. The Procedural Law hence is required to be simple, inexpensive and easy to follow to infuse life into Substantive Law i.e., IBC to handle CIRP, Liquidation & Bankruptcy in an effective manner.

2. Judicial viewpoints and case laws

The Supreme Court in its judgement in Sayaad Bakar El-Edros Vs Abdulhabib Hasan Arab and others (1998) made such observation as that “a procedural law is always subservient to the substantive law. Nothing can be given by a procedural law what is not sought to be given by a substantive law and nothing can be taken away by the procedural law what is given  by the substantive law.” In another case of Memon Abdul Karim Haji Tayyab vs Deputy Custodian General, New Delhi (1964) the Apex Court judgement dealt with the application of procedural amendment on a retrospective basis. However, in both the above judgements the Apex Court held that even being procedural in nature any such law or its amendment must ensure that administration of justice remain the primary concern to ensure that end of justice is met and proceedings must not be dismissed on trivial technicalities of procedures.

3. Is the IBC Code more procedural than judicial when it comes to Court procedure and Other judicial matter vis-à-vis other laws

IBC was promulgated in 2016 and it has been now in operation for about 7 years. During this short period of its operation it has handled a very large number of cases of CIRP, Liquidation, Individual Insolvency of PG and also a few cases of PPIRP & Voluntary Liquidations. This enormous load to have been handled within a limited time framework (sometime with half of the NCLT benches remaining vacant) did entail a task on the regulator to lay down detailed procedures so that proper and well-defined framework remains available to the judiciary to decide on the case in a time efficient manner. As regards the court procedures and related judicial matters, IBC is governed by the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules) 2016 which again lays down more of a Form based procedure in contrast to the process of filing a plaint under CPC. Although it is not mandatory to follow basic rules of drafting and pleading but in the absence of any instructions in such forms as to the format of pleading or in the absence of some basic guidelines on drafting, the CPC process comes handy to follow the fundamental principles of pleading where there should be no bar.      

4. Evaluating whether such prevalence of procedure in a way undermines /overburden the Code and provides a narrow space for judicial jurisprudence

Often concerns are raised from different quarters that the continuous promulgation of Regulations by the regulatory body has the potential to converting the Code to a procedural doctrine rather than a judicial legislature. We shall take a look here into these concerns more from an objective viewpoint and assess the same accordingly as detailed herein below: –

  1. Prevalence of procedural laws in the Code may impose strict limitations which could in the process slow down the speed of proceedings.
  2. Any party who are not abreast of such intricate procedures laid down by the Regulator may knowingly or unknowingly breach any of such guidelines since it is not just knowing the Code but also to be aware of its applications in a particular case.
  3. Procedural prevalence may tend to limit the judicial discretions in the matter of rendering natural justice in disposing of the case.

If we take a look into the above three issues with a viewing window open at the primary objectives with which IBC was brought into existence i.e., disposing of the cases in a time bound manner so that the huge idle money blocked in the system gets released at the earliest to strengthen the economy, the evaluation would remain more objectivity driven rather than intuition-based assessment. Hence, strict time frame becomes part and parcel of the Code as a result of which the regulations were also framed with such time restrictions to finally adhere to such stipulations. While addressing the second concern we must be abreast of the much-known legal maxim ‘ignorantia juris non-excusat’ that ignorance of law can’t be an excuse or defense to escape guilt and resultant liability. In the CIRP framework all stakeholders (a slight exceptions could be taken in the case of a home-owner in the Real Estate) are sufficiently equipped to acquire knowledge of such Regulations which are public domain documents and only get crystalized into Regulations after comments by general public and stakeholders. The 3rd issue of limiting judicial discretions do not stand strong enough in the presence of (i) a clearly spelt out judicial framework in IBC empowered to interpret the various provisions of the Code and (ii) have a clear appellate mechanism to reach out to the Apex Court in case of justice not being felt to have been met by any stakeholders in the process. In fact, the reality is that judicial interpretations have played a very significant role in bringing clarity in many of the areas of IBC at its early stages of evolution and maturity i.e., considering the home buyers as FC and thereby making them CoC members, constitutional validity of IBC provisions on individual insolvency and bankruptcy of PG in recent times and many such major judicial interpretations in IBC cases have made the Code clearer and more transparent across all stakeholders.

5. Are the past and current amendments in regulations carried out by IBBI meet the norms of the framework designed in the Code

The Code clearly lays down the framework of promulgation of Rules and Regulations and the gamut of functional areas within which the Central Government would frame the rules and IBBI to frame the regulations respectively. Two dedicated sections i.e., Sec – 239 and 240 deal with the areas and individual items where such Rules and Regulations can be framed. The primacy of the Code is ascertained within the structure and whereas the rules would flow directly from the Code, the regulations must be consistent with the rules. The tests that are applied to ensure this would center round the doctrine of ‘ultra vires’ meaning that an act that requires legal authority or power but is completed without it. This is the litmus test to ascertain the flow as is prescribed in the Code in no uncertain terms.

The floating of the various regulations by IBBI also follows this process with majority of the subject being passed thru’ the stakeholders views and finally put it for public comment in the form of a ‘discussion paper’. It is indeed an onus on the regulator to ensure strict compliance of this process while bringing the regulations into operation to avoid any future ‘writ’ in higher Courts of Jurisdiction.

6. Way-forward steps to make the Code completer and more consequential

It goes without saying that IBC in its 7 years of eventful existence has turned itself into the ‘numero uno’ choice for the lenders. It continues to draw more discussions and comments than any other in its short journey till now as will be evident from the fact that no other Code would have seen as many numbers of amendments as IBC would have undergone in those many years before. However, one issue that comes into prominence are its need to be an ‘exhaustive’ Code which has also been defined through the various amendments to a number of Acts at the time of bringing IBC into operation in 2016/2017. The exhaustive nature of any Code helps it to become stand-alone thereby making the disposal of suits faster and time-efficient. The points to ponder here is to consolidate other Acts (relevant portion of the same) to the extent of its relevance and impact on IBC – just for example SARFAESI Act, RERA ACT or similar. The noble objective could be simple – like the entry & running of the enterprise there is one act and similarly for exit there should be one.  

7. IBC vis-à-vis Insolvency Laws in the developing world and need for internationalization

IBC 2016 being still in its evolutionary stage and undergoing continuous changes to make it more efficient and impactful, it is high time that we should also take a look at the working of the Insolvency regime in the developing economy who stand at the top of the EOB (Ease of Business) Index globally. In UK – the laws of UK form the basis for most of our laws and the Insolvency and Bankruptcy Act is in operation for more than 100 years there whereas for USA it has been in its matured phase to have been in operation for more than 30 years. Hence, the working of the Code in these countries could give us many important clues as regards the remedies to various challenges and problem areas and many best practices that if modified/adapted according to our federal and economic structure could come pretty handy in reforming the Code to cater to the future needs of the industry. For example, Australian Insolvency system would go for an overhaul even after 30 years of its operation not for the reason that it has not functioned efficiently but more for the reason that the rapid changes in business scenario have transpired more faster than ever and that warrants sometimes overhauling of the system since smaller and incremental changes would not do enough to cater to the challenges of such rapid transformation. Taking reference to the BLRC Report it clearly spelt out the need to update as per global standards and advised for taking up the same in the second phase of its implementation. In the words of the committee “the next frontier lies in addressing cross-border issues. This includes Indian financial firms having claims upon defaulting firms which are global, or global financial persons having claims upon Indian defaulting firms. Some important elements of internationalization – foreign holders of corporate bonds issued in India, or borrowing abroad by an Indian firm – are dealt with by the present report. However, there are many other elements of cross-border insolvency which are not addressed by this report. Examples of these problems include thousands of Indian firms have become multinationals, and Indian financial investors that lend to overseas persons.”

Conclusion

On the 6th Anniversary of IBBI last year Mrs. Nirmala Sitharaman, Honourable Finance Minister of India spoke about her vision as regards the future road map of IBC when she said “We must be conscious that we can’t afford IBC to lose its sheen, especially when the Prime Minister is looking at the next 25 years of India (to emerge as a developed country by 2047). We must do whatever it takes to keep IBC as sparkling as it was when it was introduced in 2016. This is a critical area for Indian economy.” She also emphasized on the point for IBC to be future-ready when she said “It is time for us to put in place systems on how to handle current and future challenges. We have to put our ear close to the ground to hear about vibration of global disruptions and see how we can keep our processes and systems efficient.” She was emphatic about the need for upskilling of the IP fraternity when she said “Resolution professionals must be periodically brushed to skills”. If we take a note of the salient points that she addressed in her speech, we can take a clear direction of the road map that the leadership is looking up to in the forms of – ‘continuously updating the legislature in line with the demand of the industry’, ‘keep deeply connected to the grass roots through all its stakeholders and listen to their viewpoints and need’, ‘knowledge update and upskilling of the professionals as a continuous process’. In fact, 6 months later on 2nd April 2023 on the occasion of the inauguration of the renovated court premises of NCLAT, Chennai, she said “The laws require amendments to address the requirements of the industry, this has been well-taken by the opposition as well, and there has never been a question or obstruction in having those amendments come through.”

The floating of the various regulations by IBBI also follows this process with majority of the subject being passed thru’ the stakeholders views and finally put it for public comment in the form of a ‘discussion paper’. It is indeed an onus on the regulator to ensure strict compliance of this process while bringing the regulations into operation to avoid any future ‘writ’ in higher Courts of Jurisdiction.

At the end no discussion on Insolvency legislation could be concluded without taking reference to the BLRC Report submitted in 2015 which still serves as the ‘mother document’ for IBC 2016 today. The report in its conclusion outlines some important aspects that truly summarizes the intent and end goals while working with IBC and is reproduced here as under: –

“The failure of some business plans is integral to the process of the market economy. When business failure takes place, the best outcome for society is to have a rapid re-negotiation between the financiers, to finance the going concern using a new arrangement of liabilities and with a new management team. If this cannot be done, the best outcome for society is a rapid liquidation. When such arrangements can be put into place, the market process of creative destruction will work smoothly, with greater competitive vigor and greater competition.

India is in the process of laying the foundations of a mature market economy. This involves well drafted modern laws, that replace the laws of the preceding 100 years, and high-performance organizations which enforce these new laws. The Committee has endeavored to provide one critical building block of this process, with a modern insolvency and bankruptcy code, and the design of associated institutional infrastructure which reduces delays and transaction costs.

We hope that the implementation of this report will increase GDP growth in India by fostering the emergence of a modern credit market, and particularly the corporate bond market. GDP growth will accelerate when more credit is available to new firms including firms which lack tangible capital. While many other things need to be done in achieving a sound system of finance and firms, this is one critical building block of that edifice.” 

Let’s all participate actively in this journey towards making IBC as the flagship legislation of a New India.

 

 References

  1. BLRC Report dt. 4th November 2015
  2. IBBI publication(various) on framework, processes, rules, regulations, circulars and guidelines.
  3. World Bank, Ease of Doing Business 2019, Training for Reform, A World Bank Group Flagship Project, 16th Edition
  4. The Procedural Foundation of Substantive Law – Thomas O. Main University of Nevada, Las Vegas – William S. Boyd School of Law

                                                                      

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Article Dashboard