By Ameya Gokhale and Kriti Kalyani (Shardul Amarchand Mangaldas)
Introduction
Value maximization is one of the primary objectives of a corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”). While the statutory CIRP process timeline is 330 days, as per the IBBI, the actual average duration of a CIRP is 679 days[1]. Experience demonstrates that there is a direct correlation between a speedy CIRP and consequent recoveries for the stakeholders. However, difficulty in accessing material information by the relevant stakeholders tends to derail the CIRP at various stages. This article explores the merits of a robust and digitally equipped Information Utility set up under the Code (“IU”) and the digital integration of the pillars of insolvency, namely Insolvency and Bankruptcy Board of India (“IBBI”), Adjudicating Authorities (“AA”), Insolvency Professionals (“IP”) and IU, in bridging the gap.
The IBC envisages IU as repositories of financial information about debtors and is a feature unique to the IBC distinguishing it from global insolvency frameworks. The IBC lays down the core services which are to be provided by an IU. Notably, the National e-Governance Services Limited (“NeSL”) is presently India’s sole registered IU. The IU and their database are being utilized only in a limited manner as below:
A) By a circular dated 12 May, 2020, the Adjudicating Authority mandated compulsory inclusion of a Record of Default (“RoD”) issued by the IU for filings under Section 7 of the Code.
B) Section 17(2)(c) of the Code empowers IPs to access electronic records from the IU, a provision vital for validating the books of accounts of the corporate debtor and establishing debt across various creditor classes.
C) For filing of claims, a creditor can demonstrate the existence of debt by relying on the records available with the IU.
Challenges and Recommendations
A) An IU can supplement the CIRP, and truly fulfil its role of the fourth pillar in the insolvency framework, when it is comprehensive and credible with the information it stores. Robust digitization is a probable solution. Therefore, it is imperative that:
(i) It has to be mandatory for financial creditors to submit real time information with the IU in relation to lending, and the information be integrated with the existing MCA master data and NCLT e-filing portals. This may be achieved by bringing in a CIN-based linking module. To further aid and assist financial creditors, modules may be created in IU to integrate records of guarantees and electronic bank guarantee (e-BG), thus, bolstering transparency and liability assessment under CIRP.
(ii) The IU platform is predominantly utilized by financial creditors. Encouraging operational creditors to use the platform is crucial for comprehensive data integration. This may be achieved by integrating IU with the existing GST network thereby creating real time record of transactions based on incidence and payment of tax. This can be utilised by an operational creditor to demonstrate debt, and default, both under Section 9 of the Code and while lodging its claim before the IPs.
(iii) The claim process can be automated and linked to IU, with a view (i) to reduce administrative costs, which thereby add to high CIRP costs; (ii) to expedite the CIRP, by lowering dependence on time consuming manual collation of claims; (iii) to include all creditors in the CIRP for an efficient debt resolution, and ensuring a “clean slate” for the successful resolution applicant.
(iv) Access to digitized and authentic financial health information on a unified platform may attract greater interest from financial institutions / prospective resolution applicants.
B) Governmental authorities, including tax departments and local municipal bodies, often remain unaware of a debtor’s admission into the insolvency process, leading to delayed claim submissions, and litigation. Implementing an API-based interface between the NCLT database and the IU and potentially integrating the information records of the IU with platforms such as GSTN to transmit information on admitted insolvency petitions can mitigate these delays and ensure that debts owed to tax departments, local municipal bodies, public / government bodies such as electricity boards, etc. are not kept out of the resolution process.
C) Practically, the Adjudicating Authority does not consider an RoD a conclusive evidence of debt and default. Other documentary evidence in this regard is considered and detailed hearings are held to establish the existence of debt before admitting debtors to CIRP. Creating a robust digitised information repository would aid the Adjudicating Authorities in adhering to the time limit prescribed for admitting insolvency petitions. The ongoing digital advancements and improvements in the IU framework are crucial steps toward achieving these objectives. By addressing current gaps and leveraging the potential of digitization, CIRP can become a more streamlined, transparent, and efficient process, ultimately, benefiting all stakeholders involved.
*This article was originally published on BW Legal World.
[1] See The Quarterly Newsletter of Insolvency and Bankruptcy Board of India, January - March, 2024, Vol 30.