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Corporate Governance through the Insolvency and Bankruptcy Code, 2016

Corporate governance refers to the commitment of companies to run their businesses in a legal, ethical and transparent manner.[1] It is a relationship between shareholders, creditors, employees and even the general public on one side; and, companies on the other.[2] The nature of corporate governance is all pervasive. Not only does it occupy the legal space in the form of statutory regulations, it is also visible in the ethos of board functioning, investor and employee involvement, policy decisions, as well as the acceptance of businesses by the general society. In this backdrop, it becomes important to understand how different laws provide for one of the defining features of businesses in India i.e. corporate governance.

Insolvency and Bankruptcy Code, 2016 (hereinafter IBC or the Code) was introduced to amend the provisions governing the debt resolution landscape in India. As an all-encompassing Code, this law aims to provide for resolution of businesses (corporate debtor) by shifting control of the company to the creditors, thereby giving them the opportunity to decide on the manner of repayment of their debt; and, at the same time, by providing the corporate debtor the opportunity to sustain as a going concern and eventually even become viable. This is achieved by means of a resolution plan, which aims to revive the corporate debtor through mechanisms such as repayment of debt, change in control and management, waivers of liabilities and other such actions as are approved by the creditors.

According to the Bankruptcy Law Reform Committee, a sound insolvency and bankruptcy law helps in the improved handling of conflict between debtor and creditor. It is all too well known how under the erstwhile regime of insolvency and liquidation, debtors would remain in control of the business, despite them leading to its failure. Moreover, they would comply with the procedural requirements, but that would be in many instances to buy time for asset stripping. Presently, by shifting from the debtor-in-control regime to the creditor-in-control model, the IBC provides for safeguarding value of the business for all stakeholders. Provisions in the Code such as those of moratorium; taking over the control of the affairs of the debtor by the resolution professional which works in consonance with the Committee of Creditors; preventing related parties of the corporate debtor to become members of the Committee of Creditors; and, even prohibiting promoters or persons having control and management of the debtor to get a back door entry in the corporate debtor are testament to this aim of the Code. Furthermore, once the Committee of Creditors agrees on a resolution plan for the corporate debtor, the adjudicatory authorities also have extremely limited scope to intervene in its decision. Time and again, it has been held that the adjudicatory bodies cannot interfere with the commercial wisdom of the Committee of Creditors.[3]

The IBC also provides for removal of information asymmetry. By creating an ecosystem of information utility, insolvency professionals and the Insolvency and Bankruptcy Board of India, the Code ensures that a fair opportunity is made available to the creditors for the resolution of the debtor. The information utilities provide complete, correct and up to date information about the corporate debtor. The utilities which act as repositories of existing credit and collaterals of the debt of the business help in ensuring accurate and timely information being made available to all interested parties. As a result, this framework ensures value maximisation for the stakeholders by helping to establish default, verification of claims, constitution of the Committee of Creditors, as well as preparation of information memorandum.

Similarly, the Code also provides for a timely resolution of the debtor. Such a time bound process ensures that the debtor either runs as a going concern, or, is liquidated. Due to the focus of the Code on strict timelines[4] economic value is preserved for all stakeholders and there is a certainty in the process. The Code also envisions a linear process, by which there is limited to and from in the negotiations that happen regarding the future of the debtor. It also prevents promoters from sabotaging the process of resolution.

By encapsulating such provisions, the Code fosters corporate governance in the country. It provides for a competitive and transparent process of resolution/liquidation (by inviting resolution plans from any entity that is not barred by the law), thereby preventing debtors from destroying the value of the business. The essence of the code is the stakeholder approach[5] where in an identified order of priority, interests of all stakeholders are met with. IBC therefore, determines how companies are governed during the resolution process, and that the outcome of the process should be the rescue of the company; maximising the value of its assets; and promoting entrepreneurship and availability of credit.

[1] Report of the CII Task Force on Corporate Governance: Recommendations for Voluntary Adoptions 2009

[2] Mitra, N.L. Corporate Governance: A Sojourn to find a Yardstick. 56 JILI (2014) 437

[3] CoC of Essar Steel v Satish Kumar Gupta (2020) 8 SCC 531; Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (2021) 5 SCC 624; K Sashidhar v Indian Overseas Bank & Ors (2019) 12 SCC 150

[4] Regulation 40A, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[5] Section 53

Author Shreya Srivastava, Assistant Professor