- Aahini Gandhi & Jainam Shah, 3rd year students at Gujarat National Law University.
Introduction
The Indian Government, in 2016, took a bold step towards modernizing its corporate insolvency framework with the introduction of the IBC. It initially showed promising results, successfully tackling high-profile cases and injecting optimism into the system. However, by 2024, this system has faced a lot of challenges. The IBC, once hailed as a game-changer, suffers severe haircuts of up to 73%, has prolonged resolution timelines averaging at 716 days, and is more than double the 330-day limit set by the law, along with a backlog of 4400 cases.
In response to the recent challenges, Finance Minister Nirmala Sitharaman has proposed an Integrated Technology Platform to digitize and streamline the insolvency process. This blog delves into the potential of this platform, exploring how it could revitalize India’s insolvency resolution mechanism. We aim to explore its key features, potential benefits and how it stacks up against similar systems globally. Additionally, we will analyze its potential impact on India’s Ease of Doing Business (‘EODB’) and its ability to attract foreign investment.
Now, the question remains: Can this technological leap truly address IBC’s shortcomings and restore faith in India’s corporate debt resolution process?
The current state of IBC
The adoption of the Insolvency and Bankruptcy Code in 2016 (‘IBC’) marked a pivotal moment in India’s corporate insolvency framework. In its early years, it demonstrated promising results by providing a mechanism for addressing defaults and also successfully resolving several high-profile cases in sectors such as real estate and manufacturing. While resolution times varied, these early resolutions had showed significant improvement.
However, the current situation is worsened by the problem of huge ‘haircut’, which is as high as 73% as compared to 64% in the preceding fiscal year. These severe reductions, along with major delays in resolution, have weakened the original trust in the IBC. On average, resolution of cases under IBC took 716 days at NCLT in 2023-24, considerably exceeding the 330-day maximum set by law and eroding the code’s efficiency.
The challenges that the IBC is facing are more than just low recovery rates and prolonged timelines. Lack of uniform procedure across the cases has resulted in inconsistent outcomes, leaving the stakeholders with almost no foresight in terms of certainty in the resolution. Moreover, the manual nature of many processes in IBC has led to operation inefficiencies in the system. The National Company Law Tribunal (‘NCLT’) has a backlog of over 4,400 pending cases as of March 2024, thereby stretching the resolution process. These concerns mount and need comprehensive reforms to revive the IBC. The proposed integrated technology platform will help reduce inefficiencies and accelerate the resolution process.
The Integrated Platform: A comprehensive solution
The Finance Minister of India, Nirmala Sitharaman, in her budget speech on July 23, 2024, announced a number of changes to the functioning of the IBC. One of the most highlighted changes was an endeavor to introduce an Integrated Technology Platform to ensure end-to-end integration and digitization of all IBC-related processes. At its core, the platform would function as a centralized digital ecosystem and will strive to interconnect all the 5 key pillars of the IBC. It will seamlessly integrate the current disintegrated IT platforms of the National Company Law Tribunal, the Insolvency and Bankruptcy Board of India (‘IBBI’), Insolvency Professional Agencies (‘IPAs’), the Ministry of Corporate Affairs (‘MCA’) and Information Utility (‘IU’) into one cohesive portal.
The main features of the platform will be streamlined processes and AI-assisted tools as envisioned by the chairperson of IBBI, which will help reduce the significant delays in resolution. The insolvency process is deemed to begin with the filing of insolvency applications through NCLT e-courts, which will be equipped with machine-readable applications and data-driven decision-making. The platform will also be equipped with automated validation of applications and AI-driven categorization and prioritization of cases, which will expedite the initial stages of the insolvency process.
The platform will go on to aid the entire insolvency process by providing for the standardization of IPs, incorporating AI for document review and case analysis, and streamlining debt and default management through authenticated claim submission and PDA development. A virtual data room will also be set up for all IBC cases, which will enable secured information sharing for due diligence. Apart from reducing delays, the platform will ensure improvements in transparency, coordination and accessibility of information, ultimately boosting the efficiency of India’s insolvency resolution process.
The ripple effect on India’s ease of doing business
Justice Sanjay Kaul recently stated that the “IBC has had a big role to play in India’s new ‘startup culture’ by creating a conducive environment for budding entrepreneurs”. The World Bank last issued the list of EODB in 2019, when India had significantly improved its position by 14 positions to 63rd rank, also being among the ‘top 10 improvers’ among 200 economies for the 3rd consecutive year. Further, in terms of ‘insolvency’, India improved its rank by a whopping 56 positions, ranking 52nd from 108th in the previous year. This was the effect of the mere introduction of the IBC in 2016, wherein complex questions still existed that required authoritative and conclusive answers. Hence, the introduction of an integrated tech platform for the IBC in 2024 is expected to have significant positive implications for the EODB in India.
As claimed by the Government, the platform is set to increase transparency in India’s insolvency processes, which, being a cornerstone of a robust business environment, will further improve the ‘ease of doing business’ in India. As a single source of truth, this platform will eliminate information redundancy and asymmetries across platforms, including NCLT, IBBI, IPA’s, MCA and IU. Information redundancy refers to the unnecessary duplication of data across platforms, which stems from the siloed nature of the ecosystem, where all the institutions mentioned above maintain their separate databases. Thus, by providing a unified platform for data entry and access, it eliminates the need for multiple data submissions and ensures that all the stakeholders have access to the same and up-to-date information.
The resulting transparency from the integrated platform will further boost investor confidence, whereby India can position itself as an attractive destination for FDI. IBC had itself helped in attracting FDI by maintaining the balance of interests of creditors and debtors. By addressing transparency concerns often cited by foreign companies, especially issues of information redundancy, India can further improve the inflow of FDI, which would further improve its standing in global ease of doing business rankings.
Comparison to other countries’ Integrated Platforms
India’s proposed integrated platform is a major advancement towards modernizing its insolvency and bankruptcy ecosystem. While many countries have implemented digital solutions for insolvency processes, India appears to be taking a more comprehensive and ambitious approach.
For example, Singapore’s Insolvency Office Electronic Services (‘IOES’) shares similarities with India’s proposed platform. It is a comprehensive digital platform which supports e-filing, real-time case updates and has stakeholder-specific portals. It also features document management, secure payment systems, and search capabilities. Both IOES and the Indian platform seek to establish a single source of truth and accelerate processes. However, the Indian platform lays a larger emphasis on integrating distinct systems to create a more comprehensive insolvency management framework.
Similarly, the United States’ Electronic Case Filing system allows for the electronic filing of bankruptcy-related documents, streamlining the process. While the US system focuses primarily on case filings and updates, India’s proposed platform goes beyond by integrating multiple stages of the insolvency process, from the filing of defaults to creditor interactions, all within a single platform. India’s platform would also introduce predictive coding and AI-assisted document reviews, enhancing decision-making speed and accuracy.
In the United Kingdom, United Kingdom’s Companies House is the platform that provides information relating companies, including insolvency data. They also provide with a bankruptcy and insolvency register. Their aim is to provide reliable and accurate information. Although the UK system offers transparency and ease of access, India’s proposed system has a larger scope, merging regulatory bodies, insolvency professionals, and creditor management into a single platform.
India’s proposed system stands out in its ambition to integrate all aspects of the insolvency process, coordinate stakeholders in real time and make use of artificial intelligence. The platform’s potential for advanced data analytics and its scale, given India’s size and case volume, further distinguish it from existing systems globally.
Conclusion
India’s aspiring integrated platform is a leap forward in modernizing and streamlining the insolvency resolution process. The proposed platform can potentially solve critical issues hampering the code. It is expected to reduce the resolution timeline, bringing it closer to the statutory 330-day limit. Furthermore, the ripple effects of this initiative extends beyond the immediate ecosystem as India will likely see a boost in its EODB ranking, which would increase foreign direct investment.
The proposed platform stands out, given its scale and innovative use of AI compared to the existing systems in other countries. However, the success of this platform will depend on its effective implementation. It will also be crucial to address data security concerns and systematically deal with other challenges to ensure that this platform achieves its vision. In conclusion, India is boldly moving toward modernizing its insolvency framework. If implemented correctly, it could set a new global standard for insolvency management and potentially influence global best practices.
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