India introduced the Insolvency and Bankruptcy Code (‘IBC’) in 2016 with a view to encourage quick and efficient corporate rescue and restructuring. It follows a UK style ‘insolvency professional in possession’ model rather than a US style ‘debtor in possession’ model. Within this model, the IBC has introduced some commendable infrastructure like dedicated company law tribunals, a dedicated regulator and strict timelines. However, the implementation and use of the law in the past two years have exposed a few problems. The main problems arise from directors, who are also controlling shareholders (referred to as promoters in India), refusing to cede control of the company.
In my forthcoming article ‘Corporate Insolvency Resolution Law in India – A Proposal to Overcome the ‘Initiation Problem’’, I examine the problem at the pre-insolvency phase where directors are reluctant to initiate the IBC process and thus lose control of the company. A high profile example of this is the case of Jet Airways where the promoters rejected bids in the early stages of insolvency from two different bidders, Etihad and Tata group, because both bids were conditional upon the promoter, Naresh Goyal, stepping down from his position as chairman of the company. While these negotiations were ongoing, at least 50 aircraft were grounded and employees remained unpaid. Despite this, creditors did not initiate the IBC process. The Chairman of the biggest creditor, the State Bank of India (a state owned bank) explained in an interview that ‘for service industry, resolutions under IBC is near impossible and means grounding the airline’.
To overcome the ‘initiation problem’, the article examines and rejects the Australian model of holding directors personally liable for trading while insolvent. Instead, it proposes the introduction of a ‘modified Revlon duty’ based on the US case Revlon, Inc. v MacAndrews & Forbes Holdings 506 A.2d 173 (1986) which held that directors have a duty to sell to the highest bidder when sale of the company was imminent. In the proposed model, this modified Revlon duty would apply when a near insolvent company is seeking bids and is thus effectively on sale. This duty would require that, when the company is nearing insolvency, directors take measures to either restructure (or make genuine efforts to restructure) the company outside the IBC process or enter the company into the insolvency resolution process under the IBC.
One of the guiding principles of the IBC is to ensure that the company’s viability is determined at the earliest and then the appropriate process be followed. While the IBC did not envisage that the directors of a company would attempt to restructure informally prior to entering a formal process, it is not an entirely negative outcome as long as it is not used as a means to delay initiation of the IBC process. The modified Revlon duty proposed in the article will incentivize promoters to act in the interests of reviving the company rather than retaining control to the point of liquidation.
Akshaya Kamalnath is a Lecturer in Deakin Law School.