Speed-scare them to resolve disputes

By declaring the acquisition of Bhushan Power and Steel by JSW Steel as illegal, last week the Supreme Court turned the spotlight on procedural lapses in India's insolvency resolution machinery. Insolvency and Bankruptcy Code (IBC) has been displaying signs of stress at many points. Key to resolving insolvency is timely resolution, which is not delivering on its original promise. The IBC framework needs to build more capacity to be able to process a rising throughput on time. Incidental bottlenecks - such as inadequate information-sharing between borrowers and lenders, and tactical legal challenges to delay the resolution process - need to be addressed.

By design, insolvency resolution puts creditors in charge of the process. This creates a situation for debtors to benefit from delayed resolution. To remove the incentive for obstruction, IBC should take a more balanced approach where it serves both creditors and borrowers to arrive at speedy resolution. A process that puts debtors in charge should not run into strong objections from creditors. There is the additional benefit of debtors not having to relinquish control of their companies after a successful debt resolution. Stress in the IBC pipeline can be eased in the bargain, allowing the regime to handle a bigger caseload at current capacity.

A more evolutionary approach to improving IBC outcomes could look at increasing the deterrence value of admission to insolvency resolution. Threat of loss of corporate control is likely to bring creditors and borrowers quicker into arbitration proceedings, thereby reducing pressure on insolvency resolution professionals. A credible threat of insolvency widens the ambit of the resolution process into business decision-making. The IBC mechanism should ideally be addressing equally the moral hazard of inadequate risk management by lenders and borrowers. A process that delivers something close to these twin outcomes will be more efficient and less prone to abuse. Legal remedies for design or implementation inadequacy are bound to be costly.