Differential Treatment Among Creditors Under India's Insolvency and Bankruptcy Code

Abstract

This paper represents the results of an examination of the implementation of India’s Insolvency and Bankruptcy Code, 2016 (IBC). This project included purposive sampling as well as interviews with resolution professionals, representatives of India’s Insolvency Professional Agencies, and officials of the Insolvency and Bankruptcy Board of India.

Analysis of this data identified three problems:

1. Vesting near-plenary control of the Corporate Resolution Insolvency Process (CIRP) with a Committee of Creditors made up of financial creditors has led to a perception of inequitable distributions between the classes of creditors.
2. The CIRP provisions of the IBC are inconsistent with public policy to the extent that they were construed to fail to protect vested charges of secured creditors.
3. The CIRP provisions and the accompanying Insolvency Resolution Regulations fall short of the standards of procedural fairness.

To resolve these problems this paper suggests that the Insolvency Resolution Regulations be revised to: (i) define “net liquidation value” as the value of the assets of the corporate debtor less the value of those assets subject to secured claims of holders of registered charges; (ii) require any resolution plan to account for the value of the secured claims of holders of registered charges in assets of the corporate debtor; (iii) require any resolution plan to disclose information substantiating the allocation of value within the class of financial creditors and between the classes of financial and operational creditors; and (iv) require the Committee of Creditors to provide reasons for any deviation from the norm of equitable distribution of any residual enterprise value between the classes of financial and operational creditors.

In Part I of what follows there is a brief introduction to salient features of the corporate insolvency resolution process under the IBC. Part II describes the research underlying this project while Part III elaborates on certain aspects of that research. Part IV situates the conclusions of that research in the larger framework of Indian law and international practices. Finally, Part V lays out proposed changes to the CIRP Regulations and a defense of their efficacy in this context.

Keywords: insolvency, bankruptcy, India, security, creditor, IBC