Rajshri Rai (RR): What was the aim of the Insolvency and Bankruptcy Code (IBC) and why was it created?
Santosh Shukla (SS): IBC was created in 2016, and the reason for its creation was the increase in non-performing assets (NPAs) due to which the recovery of debt was very difficult. A new act was drafted, the Recovery of Debts and Bankruptcy (RDB) Act, under which the Debt Recovery Tribunal was created. In 2002, another law was codified, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, which allows banks to sell secured assets or properties after acquiring them to settle the debt by liquidation. This was also unsuccessful. Thereafter in 2015, a committee was formed called the Bankruptcy Law Reforms Committee (BLRC). Earlier, the model was non-payment of debt deliberately or accidentally. The concept of debtor in possession was in existence. Then the creditor-in-control model was created where the older management was out of the process and an independent person took over. The concept of resolution was created vis-a-vis recovery. So, the main objectives were—time-bound resolution; maximise value and resolve the company’s debt crisis.
RR: If we talk about the performance of IBC, recovery rate is a mere 17.6% and debtors face a loss of up to 82%; 75% of the firms have been liquidated which means only 25% of the total number have got a conclusive solution to their problems. Haven’t the objectives of the IBC failed? Most of the filing of cases is when the companies declare bankruptcy and escape the resolution process. Where does the problem lie?
SS: Firstly, let me correct the data. This data has appeared in newspapers and is incorrect. The actual recovery is 34%. It may be true that the liquidation is more, but then, loan defaulters have a fear that they cannot escape liability. So, there has been a behavioural change with the help of this Code. Around Rs 20,000 crore has been recovered. The resolution versus liquidation had legacy issues with the companies which were in the Board for Industrial and Financial Reconstruction. There were a large number of legal issues. Apart from this, liquidation was done on the basis of growing concerns, for example, the failure of the Corporate Insolvency Resolution Process. The recovery percentage is as high as 65%. Around 690 companies have been given the resolution. Only 3% recovery is from lok adalats, 18% from Debts Recovery Tribunals, 33% from SARFAESI and 54% from IBC. We should not forget that this law is not a law for recovery, it is law for resolution.
RR: You are connected with various organisations and institutions that are involved in arbitration and different kinds of litigation related to IBC. In these cases, what role do you play, especially in arbitration matters, to ensure speedy justice to the aggrieved parties?
Dr Subir Bikas Mitra (SBM): If you look at the public and private sectors, they are commercial entities whose cornerstone is to pursue commercial interests. When the organisations are entering into a large number of contracts, it is quite likely there will be commercial disputes. You can’t approach the court of law in such issues because it is already overburdened with social cases. Therefore, the disputes have to be resolved by the Alternative Dispute Resolution mechanism, the most popular of which is arbitration.
Unfortunately, in the 1996 Act when conciliation was added in Part 3, we couldn’t fully realise its potential because conciliation brings more advantage to the parties of the dispute. The parties have three things in mind—the dispute should be resolved in a time-bound manner, it must be very cost effective and it shouldn’t be concluded in a way that arbitration becomes a pre-litigation process. Instead, it should be concluded with finality as well as be a win-win situation instead of a win-lose one because the same parties will be required to work with the same organisation down the line. This is the main objective of resolution of commercial disputes that should be borne in mind by the parties.
In arbitration, the arbitrator has the power to grant the award, which automatically creates a win-lose situation. When the aggrieved party loses, the award is generally challenged in court by them, and still if the award is not set aside, they can appeal to higher courts till the Supreme Court. The point is that it takes a long time to reach finality on the issue. For this, in 1996, conciliation was added in Part 3. Conciliation is when parties in a dispute agree to a point of settlement by themselves. In this way, it becomes a final understanding by them on the dispute and in this process there is no further legal recourse available to either party. It brings finality and creates a win-win solution. So, it should be a settlement process through conciliation, rather than arbitration or court of law in commercial disputes.
RR: Usually the cost of arbitration is more than a court case. In many cases, the awards are challenged in a court of law. This makes the process counter-productive. Unlike Singapore, which is an international arbitration hub, why is India lagging behind?
SBM: If you look at the Arbitration and Conciliation Act, we promote ad hoc arbitration. Unfortunately, in India, we couldn’t promote institutional arbitration. Institutional arbitration is very structured where everything will be provided by the institution. For eg, GAIL has entered into a large number of commercial contracts with overseas agencies. In all these contracts, we have gone for institutional arbitration. So in 2015, when the Act was amended, the government planned to shift from ad hoc arbitration to institutional arbitration. The plan was to create an arbitration council of India to identify credible institutions. In India, in the absence of credible institutions, institutional arbitration cannot be properly promoted and encouraged. The eligibility criterion for an arbitrator was to be finalised. It was planned that credible institutions will be assessed and all the arbitration cases will be allocated accordingly. But this programme didn’t take final shape. In the meanwhile, the Indian Arbitration Centre was created with the view of making India an international arbitration hub.
RR: In cases of arbitration involving corporates, is there any difficulty in maintaining a balance between an advocate of a law firm and the arbitrator? If there is any difficulty in maintaining a balance, then should corporates employ their own arbitrators?
SBM: The difficulties are never with arbitrators; in fact, they willfully want to do arbitration. The difficulty is the availability of senior advocates because everybody wants good senior advocates to advance their arguments, but they remain busy in court. With law firms, there are no issues as such and they are doing a good job.
Generally, most of the big corporate houses do not engage law firm partners to argue arbitration cases. For that there is a separate set of senior advocates. As these senior advocates are specialists in arbitration, everyone wants to engage them. Public sector officials and government officials, including general LLBs, the solicitor general or the additional solicitor general of India can also conduct arbitration. But they remain busy during court hours, so it is only post these hours that we can afford to engage them in arbitration.
RR: A major issue is the timeline for settling a commercial dispute through arbitration. Arbitral awards are getting challenged in a court of law. How does it all augur for the Indian arbitration scene?
SBM: Before the amendment to the Arbitration and Conciliation Act in 2015, GAIL had its own fee structure, so we could address the issue closeup in a time bound manner because the fees were linked with the milestones. Arbitrators do not have the liberty or luxury to prolong the arbitration; it is not linked with the number of hearings, but with the milestone itself. Specifically, Section 29 of the Arbitration and Conciliation Act was amended and it held that pleadings shall be completed within six months and six months shall be given for hearings and exchanges between the parties. After that, one must necessarily go to the court to seek extension of time. When you look at Section 34, which was open ended, after the amendment in 2015, in two judgments—ONGC vs Saw Pipes in which patient illegality was introduced and Renusagar judgment, 1993—four conditions were given which had to be satisfied for the Section to be maintainable.
The judiciary has developed a mindset to not interfere much in the award unless there is a question of law. But there is certainly a good change in one regard. Whereas earlier it used to be an automatic stay the moment an application was given in Section 34. Today, that is not the case. For stay, another application is required as per the amendment in 2015. These days, courts give stay, but in exchange for 50% or more of the award depending on the merits of the case. It is a deterrent factor if the award is not in one’s favour; then one cannot seek relief unless the tax money is submitted.
RR: In the arbitration and insolvency process, confidentiality and data security are the main concerns. As artificial intelligence tools like ChatGPT are also in use now, how serious are the security concerns? Our cyber laws are not that strong. What are the challenges before IBC on this front?
SS: The IBC processes haven’t witnessed any such challenge. All our working depends on the documents. We want to go electronic and make the maximum use of technology. The only system which runs on a technology basis is the National e-Governance Services Limited which is an information depository. But in some other systems such as courts, the information flow is not fully electronic. There is no such threat, but still we are conscious about it. Also, the World Bank has recommended us to work on our cyber laws.
RR: Banks give us loans, but there are many private companies which are eyeing the banking segment. Companies like RUPAY and PAYTM are planning to function like digital banks and extend loan facilities. Is IBC prepared for this?
SS: IBC is capable enough of dealing with such companies. The approach for such companies will be similar to other companies. For instance, Zomato is a public listed company with a market capital larger than GAIL, but the company itself has no assets. This is a new challenge confronting us. Valuation systems and training are required to evaluate these new kinds of assets; we are working on them. As for valuation of digital mode companies, the Insolvency and Bankruptcy Board of India is not a full fledged regulator of valuation. It only registers the valuer. However, standard international benchmarks are applied. We are working to rectify it. It is a challenge and we are not ignoring it.