04th October, 2024 Annual Publication 2024: IBC के आठ वर्ष: शोध एवं विश्लेषण (20.9 MB)

Insolvency and Bankruptcy Board of India 7th Floor, Mayur Bhawan, Connaught Circus, New Delhi - 110001 www.ibbi.gov.in IBC ds vkB o"kZ 'kks/k ,oa fo'ys"k.k 2024

ii Title: IBC ds vkB o"kZ % 'kks/k ,oa fo'ys"k.k Copyright © Insolvency and Bankruptcy Board of India and contributors severally 2024 The IBBI and contributors have asserted their right under the Copyright, Design and Patents Act, 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise, without prior permission of the publishers. Published by: Insolvency and Bankruptcy Board of India 7th Floor, Mayur Bhawan, Connaught Circus, New Delhi - 110001 Email: research@ibbi.gov.in ISBN: 978-81-947537-9-7 Designed, Printed and Bound by: M/s. Indu Cards & Graphics New Delhi - 110006

Disclaimer: The views expressed in this publication are those of the authors and not of the IBBI. The IBBI bears no responsibility for any actions taken or decisions made on the basis of the viewpoints expressed by the authors in this publication. This Publication is designed for the sole purpose of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise.

on. This Publication is designed for the sole purpose of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. A reader must do his own research and / or seek professional advice if he intends to take any action or decision in the matters covered in this Publication. Any views and feedback on the publication may be mailed at research@ibbi.gov.in 978-81-947537-9-7

iii CONTENTS Preface .......................................................................................................................... v 1 A Reflection on the Role & Effectiveness of Stakeholders under the IBC Framework in India ...................................................................................................... 1 Sunil Mehta 2 Streamlining India’s CIRP for a Win-Win Outcome .................................................... 15 Atul Kumar Goel 3 Taxation and Insolvency: Towards a Foundational Understanding............................ 21 M P Ram Mohan and Sai Muralidhar K 4 Increasing Resolutions is Key to IBC’s Success ......................................................... 41 Sidharth Sharma 5 Evolving Insolvency Regime and Legal Obligations under International Conventions .... 47 Sudhaker Shukla and Raghav Maheshwari 6 Treatment of Dues to any Workman and Employee from the Provident Fund, Pension Fund and Gratuity Fund under IBC .............................................................

a and Raghav Maheshwari 6 Treatment of Dues to any Workman and Employee from the Provident Fund, Pension Fund and Gratuity Fund under IBC ............................................................. 55 Sandip Garg, Anshul Agrawal and Vishal Rajpurohit 7 Strengthening Valuation Framework under IBC: Enhancing Credibility, Consistency and Competence..................................................................................... 73 Satish Sethi and Archana Sharma 8 Leveraging the Digital Transformation with AI, Digital tools, and Blockchain Towards Insolvency Processes .................................................................................... 87 Pihu M. Shukla and Sushanta Kumar Das 9 Walking a Legal Tightrope: An International Perspective on “Creditor Duty” during “Twilight Zone” ................................................................................................ 99 Mayank Mehta and Nitika 10 Balancing Transparency and Privacy: Navigating Data Protection in Indian Insolvency Proceedings ................................................................................. 107 Asit Behera and Namisha Singh 11 The Status Quo of Homebuyers: A Complex Web of Uncertainty and Concerns ...... 121 Nainshree Goyal and Shalini Shah 12 The Case for Allowing Direct Dissolution during CIRP: A Needed Evolution in IBC ........................................................................................................ 131 Surbhi Gupta

Case for Allowing Direct Dissolution during CIRP: A Needed Evolution in IBC ........................................................................................................ 131 Surbhi Gupta

iv IIMA Annual Research Workshop on Insolvency and Bankruptcy 13 Tweaking IBC to Resolve Airline Insolvencies .......................................................... 139 Kumar Saurabh Singh, Ashwij Ramaiah and Rohitesh Tak 14 Evaluating the Archaic Nature of the ‘Gibbs Rule’ in Cross-Border Insolvency: A Case for Embracing Modified Universalism........................................................... 171 Avinash Subramanian and Aashirwa Baburaj 15 Rescuing Lenders: Lifting of the Related Party and Controlling Party Veil ............ 189 Saloni Thakkar, Urmika Tripathi and Simrann Venkkatesan 16 Comprehending Bank Insolvency Resolution vis-à-vis Analysis of Banking Regulations under the Umbrella of UNIDROIT Legislative Guide on Bank Insolvency ................................................................................................................. 203 Vivek Saurav, Richa Kashyap and Bhanu Saxena 17 Exploring the Journey of Operational Creditors from Admittance to Compromise .. 231 Sunit Shah and Yashree Dixit 18 Litigation Funding: Maximising Value ..................................................................... 247 Shiv Anant Shanker, Ajanta Gupta and Ansh Gupta 19 From Moratorium to Security Interest: Decoding the Intricacies of Government Dues in IBC Proceedings ..........................................................................................

upta 19 From Moratorium to Security Interest: Decoding the Intricacies of Government Dues in IBC Proceedings .......................................................................................... 273 Pooja Singla and Romit Nandan Sahai 20 A Study on the Untapped Potential of Pre-Insolvency Resolution Procedures ......... 293 Archana Sharma and Anchita Sood 21 Exploring the Synergy between ESG Principles and Corporate Restructuring: Lessons from Global Jurisdictions and A Road Map for India .................................. 317 Anchal Raj and Diksha Sarma About the Authors ..................................................................................................... 337

v PREFACE The Insolvency and Bankruptcy Code, 2016 (IBC/Code) signifies a major shift in India’s legal and economic landscape. Enacted to remedy the shortcomings and fragmentation that plagued the country’s insolvency and bankruptcy regime, the Code established a comprehensive and unified framework designed to facilitate timely resolution of distressed entities. Unlike earlier approaches that focused primarily on recovery, the IBC prioritizes maximizing the value of assets and maintaining businesses as going concern in alignment with international best practices.

e earlier approaches that focused primarily on recovery, the IBC prioritizes maximizing the value of assets and maintaining businesses as going concern in alignment with international best practices. This shift from a debtor-in-possession to a creditor-in-control model introduced strict timelines for each step of the resolution process, which is crucial for preserving assets. The new framework was designed to tackle ‘Chakravyuha Challenge’ as emphasized in the Economic Survey of 2015-16 (i.e., the ability to enter but not exit the market) thus, giving them an opportunity to exit honorably from genuine failed business ventures, thereby promoting ease of doing business and encouraging entrepreneurship. The Code aims to address financial distress promptly by mandating that an Insolvency Professional oversees the insolvency process and manages the operations of the distressed corporate debtor. Simultaneously, a committee of creditors drives the resolution process and makes all significant decisions, thus, minimizing further value erosion during the process. The process finally concludes by the judicial approval of the Adjudicating Authority. Through its design and implementation, the Code seeks to balance the interests of all stakeholders. The establishment of the Insolvency and Bankruptcy Board of India (IBBI/ Board) on October 1, 2016, further strengthened the regulatory framework.

seeks to balance the interests of all stakeholders. The establishment of the Insolvency and Bankruptcy Board of India (IBBI/ Board) on October 1, 2016, further strengthened the regulatory framework. Although the IBC is still in its early stages, its impact has already been transformative, marking a significant departure from the shortcomings of the previous insolvency regime.This is evident from the fact that as of June 2024, a total of 7,813 cases have been admitted, with 5,840 reaching closure. Of these closed cases, 3,293 companies—accounting for 56% of the closures—were successfully rescued, while 2,547 resulted in liquidation. Among the rescued companies, 1,192 cases were closed due to appeal, review, or settlement; 1,096 were withdrawn; and 1,005 concluded with the approval of resolution plans. Notably, 40% of the cases that ended with resolution plans had previously been with the Board for Industrial and Financial Reconstruction or were defunct. While the Code’s immediate advantage lies in enhancing the recovery process, its broader and more significant impact comes from the behavioural change it has induced—particularly the shift in the relationship between creditors and borrowers. Notably, even before formal admission, over 28,818 cases having underlying debt of 10.22 lakh crore were withdrawn as on March, 2024. When combined with the 3.40 lakh crore recovered through resolutions, the IBC has effectively recouped 13.62 lakh crore into the economy.

ng debt of 10.22 lakh crore were withdrawn as on March, 2024. When combined with the 3.40 lakh crore recovered through resolutions, the IBC has effectively recouped 13.62 lakh crore into the economy. This shift in behaviour has fundamentally changed the narrative around non-performing assets (NPAs) or defaults; it is no longer solely a burden on banks but has become a critical concern for borrowers as well. As per RBI’s Financial Stability Report, June 2024, the gross-NPA ratio of scheduled commercial banks fell to multi-year lows of 2.8% in March, 2024. The Code was recognized as an effective solution to the twin balance sheet problem, where banks were weighed down by NPAs and corporations were overleveraged and struggling to repay their debts. The Indian Institute of Management, Ahmedabad conducted a study to review the functioning of firms that had undergone resolution under the Code. This Report analysed the performance

vi of the firms both before and after the resolution process and finds that the IBC framework has yielded, for the resolved firms (i) increased sales, (ii) increased employee expense which could be attributed to increased employment generation, (iii) increase in assets, (iv) increased CAPEX, (v) threefold increase in market valuation of resolved firms, and (vi) significant improvement in liquidity of these resolved firms. The IBC has emerged as an unprecedented piece of legislation, fundamentally transforming India’s insolvency landscape. Its evolution has been marked by ongoing learning and adaptation to changing economic and market conditions.

precedented piece of legislation, fundamentally transforming India’s insolvency landscape. Its evolution has been marked by ongoing learning and adaptation to changing economic and market conditions. Research is crucial for advancing the IBC’s goals, as rigorous data analysis helps uncover new trends and patterns that can guide policymakers in developing evidence-based policies under the Code. This publication marks the sixth consecutive annual release of the IBBI’s Annual Publication, coinciding with the completion of eight years since the Code’s inception. It delves into the intricate dynamics of IBC, examining the roles and effectiveness of key stakeholders within the framework. It provides an analysis of the evolving insolvency regime, explores the intersection of taxation and insolvency, evolving legal obligations under international conventions, examines the treatment of dues payable to workmen and employees under IBC, highlights the potential of digital transformation tools like AI and blockchain in streamlining insolvency processes, and the need for a stronger valuation framework. Through an international lens, one of the articles discusses the legal obligations of creditors, while others highlight the privacy concerns in data protection, the complexities faced by homebuyers and explore the possibility of direct dissolution during CIRP. This publication also features nine research papers which were presented at the IIM Ahmedabad Annual Research Workshop on Insolvency and Bankruptcy, in March, 2024.

of direct dissolution during CIRP. This publication also features nine research papers which were presented at the IIM Ahmedabad Annual Research Workshop on Insolvency and Bankruptcy, in March, 2024. The papers explore the need for tailored solutions to airline insolvencies and questions the relevance of the ‘Gibbs Rule’ in today’s cross-border insolvency landscape. It examines the intricacies of lifting of corporate veil in related party transactions and analyses the bank insolvency resolution through the lens of the UNIDROIT Legislative Guide on Bank Insolvency. Additionally, it explores the evolving journey of operational creditors, the impact of litigation funding, deciphers the complex relationship between government dues and security interests under IBC, uncovers the untapped potential of pre-insolvency resolution procedures and offers a deep dive into the intersection of Environmental, Social, and Governance (ESG) principles with corporate restructuring, drawing lessons from global jurisdictions. The Code’s evolution, marked by numerous unexpected developments, has demonstrated a steady and forward-moving progress over the years. The key to its continued success lies in its ability to adapt to and address future challenges effectively. Looking ahead, the aim is to surpass the achievements of the past, bringing even greater efficiencies and outcomes. The IBBI extends its sincere thanks to all the authors for generously contributing their valuable insights and expertise to this publication.

he past, bringing even greater efficiencies and outcomes. The IBBI extends its sincere thanks to all the authors for generously contributing their valuable insights and expertise to this publication. We also acknowledge and appreciate the ongoing efforts of the Research Division in making this publication possible. (Jayanti Prasad) Whole Time Member Insolvency and Bankruptcy Board of India

1 INTRODUCTION The Insolvency and Bankruptcy Code, 2016 (IBC/Code) in its eight years of journey has evolved to be ever-relevant and responding to meet the emerging expectations and needs of the financial ecosystem from time to time. The legislation, in its continuous evolution, has been fulfilling the aspirations of the stakeholders and the journey is promising. In terms of its design and architecture, the Code strived to maximise the value of assets of the corporate debtor (CD) while balancing the interests of all stakeholders during the process. A few watershed moments in the exciting and eventful journey of the Code, so far, include the introduction of section 29A making defaulting promoters ineligible to re-enter as resolution applicants, recognising homebuyers as financial creditors (FCs), introduction of insolvency resolution process for financial service providers and pre-packaged insolvency resolution process etc., the constant endeavour of the Government and the Insolvency and Bankruptcy Board of India (IBBI) in addressing the upcoming challenges, has transformed IBC into a future ready and relevant in time, legislation.

t endeavour of the Government and the Insolvency and Bankruptcy Board of India (IBBI) in addressing the upcoming challenges, has transformed IBC into a future ready and relevant in time, legislation. A CASE FOR REFLECTING ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA The Code has created an ecosystem where multiple stakeholders are involved, mainly as the FCs, operational creditors (OCs), workmen and employees, Government, the directors of the CD and prospective resolution applicants. As the ecosystem is maturing, there is a need for certain confidence building measures for each of the stakeholders that would enable them to support such an ecosystem more meaningfully and constructively. While the deliverables of the Code continue to be promising, the expectation on outcomes from the IBC ecosystem also kept raising requiring a close and deeper understanding of the current effectiveness of stakeholders in discharging the expectations from each of them. Before taking a deep dive into the stakeholder ecosystem, we need to acknowledge and appreciate the pious role each one of these pillars have played over the years and the fruits of their labour enjoyed by the economy. By saying so, the author deeply appreciates and compliments the performance of each of the stakeholders in shaping the IBC today, they deserve the best of the compliments indeed. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA Sunil Mehta 01

f the stakeholders in shaping the IBC today, they deserve the best of the compliments indeed. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA Sunil Mehta 01

2 A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA Having said so and looking forward, there will always be expectations of and room for improvements as we traverse through the learning curve. Continued efforts are needed to empower the stakeholders for effective functioning in the IBC ecosystem. This article examines and reflects on the current role of critical stakeholders in the IBC universe and brings out the areas of improvement for enhancing their effectiveness for the outcomes in harmony with the objectives of the Code. The case of each of the key stakeholders is narrated in the following paragraphs: CORPORATE DEBTOR The entity undergoing insolvency proceedings is referred to as the CD. The CDs role would be to cooperate with the Resolution Professional (RP), provide the necessary information, and comply with the decisions of the National Company Law Tribunal (NCLT) throughout the resolution process. Major activities expected from a CD are: Compliance and cooperation CD is required to adhere to the provisions of the IBC and cooperate fully with the insolvency resolution process. This involves providing accurate and timely financial information, cooperating with the appointed RP, and participating in the proceedings of the committee of creditors (CoC) to facilitate a transparent resolution process.

accurate and timely financial information, cooperating with the appointed RP, and participating in the proceedings of the committee of creditors (CoC) to facilitate a transparent resolution process.

3 SUNIL MEHTA Financial disclosure and transparency Transparency plays a crucial role in the insolvency resolution process. The CD undergoing financial distress is required to maintain a standard of openness by providing comprehensive financial details. This entails sharing information on assets, debts, dues to lenders, and other pertinent financial data to ensure informed decision-making by creditors and potential resolution buyers. Participation in CoC meetings CDs can participate in CoC meetings, where important decisions related to insolvency resolution are discussed and determined. Through constructive engagement in these meetings, CDs can express their viewpoints, suggest viable resolution strategies, and cooperate with creditors to reach a mutually beneficial outcome for all stakeholders. Submission of resolution plans If the CD initiates insolvency, the CD can ensure that it puts the business up for resolution before it is too late. This encourages the CD to propose viable resolution plans for the approval of the CoC.

he CD initiates insolvency, the CD can ensure that it puts the business up for resolution before it is too late. This encourages the CD to propose viable resolution plans for the approval of the CoC. These plans should demonstrate a clear strategy for restructuring debts, reviving the business, and maximizing value for creditors, thereby showcasing the debtor’s commitment to sustainably resolving financial distress. Adherence to timelines CDs are expected to adhere to the timelines prescribed under the IBC for various stages of the insolvency resolution process. This includes submitting necessary documents and information within specified deadlines, attending hearings and meetings as required, and complying with directives issued by the RP and Adjudicating Authority (AA). In essence, CDs play a vital role in the insolvency resolution process under the IBC by actively engaging with stakeholders, demonstrating transparency and cooperation, and working towards a consensual resolution of financial distress. By fulfilling their responsibilities diligently and proactively participating in the resolution process, CDs contribute to the effectiveness and success of insolvency proceedings, ultimately facilitating the revival and rehabilitation of distressed businesses in a structured and time-bound manner. It is gratifying to observe that, today the perception and outlook of business entities have shifted to more responsible and positive entrepreneurship focussing on building the intrinsic value of the enterprise.

ying to observe that, today the perception and outlook of business entities have shifted to more responsible and positive entrepreneurship focussing on building the intrinsic value of the enterprise. The attitudinal shift is largely attributable to the existence of the Code. Knowing that there is a robust mechanism in place, business owners are prompted to better manage their finances in better ways and avoid insolvency proceedings. This is evident from the fact that till May 2023, about 25,565 corporate insolvency resolution processes, having underlying default of 8.23 lakh crore were resolved before their admission. IBC has thus brought about credit discipline amongst businesses and there is a positive behavioural change amongst promoters. There is a need to continuously strive to promote awareness about the Code in the business circles to maintain/sustain the appreciation in this regard.

4 FINANCIAL CREDITORS FCs are entities to whom the CD owes financial debts. They exercise significant influence and responsibility within the insolvency resolution framework established by the Code. As key stakeholders in the insolvency process, the FC plays a pivotal role in initiating insolvency proceedings, forming the CoC, and making critical decisions that impact the outcome of insolvency resolution efforts. Initiating insolvency proceedings FCs, including banks, financial institutions, and other entities to whom financial debt is owed, initiate insolvency proceedings against defaulting CDs under the IBC.

nitiating insolvency proceedings FCs, including banks, financial institutions, and other entities to whom financial debt is owed, initiate insolvency proceedings against defaulting CDs under the IBC. By filing a petition with the NCLT, FCs trigger the insolvency resolution process and set the stage for the resolution of financial distress. Forming the CoC It shall be the duty of FCs to form the CoC – the key stakeholder playing a pivotal role in guiding the insolvency resolution process. The CoC is constituted of the FCs who have the authority to vote on important issues like selecting RPs, examining and endorsing resolution plans, and making other crucial decisions that influence the direction of insolvency proceedings. Voting on resolution plans FCs play a critical role in evaluating and voting on resolution plans submitted by resolution applicants to revive the distressed entity. The CoC’s approval of a resolution plan is instrumental in determining the fate of the insolvent company, with FCs exercising their voting rights based on the merits of the proposed plan and its alignment with their economic interests. Distribution of proceeds In the event of a successful resolution, FCs play a critical role in determining the distribution of proceeds from the sale of assets of the insolvent company.

mic interests. Distribution of proceeds In the event of a successful resolution, FCs play a critical role in determining the distribution of proceeds from the sale of assets of the insolvent company. The CoC deliberates on the allocation of funds among creditors, prioritizing claims based on the waterfall mechanism prescribed under the IBC to ensure equitable distribution of proceeds. Overseeing insolvency proceedings FCs actively participate in insolvency proceedings, attending CoC meetings, engaging with RPs, and promoting resolutions that maximize recovery of dues owed to them. Their proactive involvement is essential in safeguarding their interests, promoting transparency, and facilitating a swift and efficient resolution of financial distress. In essence, FCs being key stakeholders hold a responsibility towards other stakeholders in the IBC ecosystem. Upholding the principles and objectives of the Code shall be the highest A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

stakeholders in the IBC ecosystem. Upholding the principles and objectives of the Code shall be the highest A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

5 priority for the FC. The essential objective of the Code being to facilitate the CD as a going concern, the FC shall always endeavour to work towards enhancing the value of the CD. The Code casts on FC a responsibility to facilitate the resolution of the stress rather than merely looking at the Code for recovery of its dues. Addressing the needs of CD for interim finance is one such important aspect an FC shall be concerned with along with the RP. OPERATIONAL CREDITORS OCs are entities that provide goods or services to the CD. Their role is similar to FCs in terms of filing claims, participating in CoC meetings, and voting on resolution plans. Declaring claims and participating in insolvency proceedings OCs have the right to declare their claims for outstanding dues owed to them by the CD and participate in insolvency proceedings under the IBC. By submitting details of their claims to the RP, OCs ensure their interests are represented in the resolution process and have a say in the distribution of proceeds from asset sales. Representation in the CoC While FCs typically play a major role in the CoC, OCs also have a presence in the CoC and play a role in decision-making processes that impact the insolvency resolution.

es. Representation in the CoC While FCs typically play a major role in the CoC, OCs also have a presence in the CoC and play a role in decision-making processes that impact the insolvency resolution. By participating in CoC meetings, OCs share their concerns, advocate for their rights, and contribute to discussions on matters affecting their economic interests. Approval of resolution plans OCs have a stake in the approval of resolution plans submitted by resolution applicants to revive the distressed entity. The CoC’s decision on the acceptance or rejection of a resolution plan can have significant implications for OCs, as they stand to benefit from resolutions that prioritise the recovery of dues owed to them and ensure the continuity of business relationships. Ensuring operational continuity OCs play a critical role in maintaining operational continuity during the insolvency resolution process, particularly in extending essential goods and services that are vital for the functioning of the CD. By collaborating with the RP and CoC, OCs contribute to the preservation of business operations and the viability of the insolvent entity. Advocating for fair treatment and equitable distribution OCs advocate for fair treatment and equitable distribution of proceeds from the resolution of the CD, ensuring that their dues are given due consideration alongside FCs. By championing SUNIL MEHTA

n OCs advocate for fair treatment and equitable distribution of proceeds from the resolution of the CD, ensuring that their dues are given due consideration alongside FCs. By championing SUNIL MEHTA

6 A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA transparency, accountability, and fairness in insolvency proceedings, OCs uphold the principles of economic justice and stakeholder inclusivity under the IBC. In conclusion, OCs play a vital role in the insolvency resolution ecosystem under the IBC, representing a diverse array of stakeholders who contribute essential goods and services to the CD. Their active participation, advocacy for fair treatment, and commitment to operational continuity are instrumental in fostering a balanced and inclusive approach to insolvency resolution, ultimately aiming to protect the interests of all stakeholders and promote the sustainable revival of distressed businesses. While the jurisprudence emerged over the last few years and acknowledged the need to address the concerns of OCs, OCs also have a responsibility of striving towards resolution of the stress in CD in the interest of all other stakeholders thus rising above the narrow concerns limited to them. RESOLUTION PROFESSIONAL RPs play a crucial part in the insolvency resolution framework established by the IBC, by managing the affairs of distressed entities, facilitating the resolution process, and safeguarding the interests of all stakeholders involved.

solvency resolution framework established by the IBC, by managing the affairs of distressed entities, facilitating the resolution process, and safeguarding the interests of all stakeholders involved. As licensed insolvency practitioners entrusted with overseeing insolvency proceedings, RPs undertake a diverse array of responsibilities that are instrumental in driving the effective and efficient resolution of financial distress. Management of CD’s affairs One of the primary responsibilities of RPs is to take immediate control and management of the affairs of the CD upon their appointment. This involves assuming the reins of the insolvent entity, safeguarding its assets, preserving business operations, and ensuring the continuity of essential services during the insolvency resolution process. Verification and admittance of claims RPs are tasked with the critical duty of verifying and admitting claims submitted by creditors, including FCs, OCs, and other stakeholders. By meticulously scrutinizing claims, resolving disputes, and maintaining a transparent claims verification process, RPs uphold the integrity and accuracy of the insolvency resolution framework. Facilitation of insolvency resolution process RPs play a central role in facilitating the insolvency resolution process, coordinating interactions between stakeholders, convening meetings of the CoC, and overseeing the submission and evaluation of resolution plans.

ole in facilitating the insolvency resolution process, coordinating interactions between stakeholders, convening meetings of the CoC, and overseeing the submission and evaluation of resolution plans. By acting as intermediaries between creditors, CDs, and regulatory authorities, RPs streamline communication and decision-making processes to advance the resolution agenda.

7 SUNIL MEHTA Compliance with timelines and requirements under the Code RPs are responsible for ensuring strict compliance with the timelines and procedural requirements stipulated under the IBC. By adhering to prescribed deadlines for various stages of the insolvency resolution process, submitting requisite reports and documents to regulatory authorities, and upholding the highest standards of professional conduct, RPs uphold the sanctity and efficiency of insolvency proceedings. Negotiation and implementation of resolution plans One of the key mandates of RPs is to facilitate negotiations between stakeholders and assist in the formulation and implementation of viable resolution plans. By engaging with resolution applicants, creditors, and other parties involved in the resolution process, RPs strive to achieve consensus, maximize value for all stakeholders, and drive the successful revival of the insolvent entity. Reporting and disclosure requirements RPs are required to provide accurate and timely reports to the NCLT, CoC, and other relevant authorities regarding the progress of insolvency proceedings.

ntity. Reporting and disclosure requirements RPs are required to provide accurate and timely reports to the NCLT, CoC, and other relevant authorities regarding the progress of insolvency proceedings. By maintaining transparency, providing regular updates on the status of the resolution process, and disclosing pertinent information to stakeholders, RPs foster trust and accountability in the insolvency resolution ecosystem. In essence, RPs serve as catalysts for change and transformation in the insolvency resolution landscape, leveraging their expertise, impartiality, and commitment to drive the resolution of financial distress and promote the rehabilitation of distressed businesses. By upholding the principles of professionalism, transparency, and stakeholder engagement, RPs play a vital role in ensuring the integrity, efficiency, and success of insolvency proceedings under the IBC. The RPs need to adhere to the Code of Conduct expected from them and maintain the highest standards of professionalism while striving to resolve the CD. This can be achieved with the trust and effective coordination with the CoC in the process. It is also important for an RP to understand the nuances of the complex business environment of various sectors.

can be achieved with the trust and effective coordination with the CoC in the process. It is also important for an RP to understand the nuances of the complex business environment of various sectors. An initiative towards specialising RPs to expertise in various sectors and thereby empanelling sector- specific RPs to handle resolution strategies of such sector-specific IBC cases can help the ecosystem to improve the share of resolution cases. COMMITTEE OF CREDITORS The CoC emerges as a central decision-making body within the insolvency resolution framework established by the Code, wielding authority, responsibility, and influence in shaping the outcome of insolvency proceedings. Comprising FCs who hold significant claims against the CD, the CoC plays a crucial role in deliberating on key matters, approving resolution plans, and safeguarding the economic interests of creditors and stakeholders.

8 Constitution and decision-making The CoC is formed following the initiation of insolvency proceedings, with FCs coming together to constitute this pivotal forum. As the primary decision-making body in the insolvency resolution process, the CoC deliberates on critical matters such as the appointment of RPs, evaluation of resolution plans, approval of funding arrangements, and distribution of proceeds from the sale of assets. Voting on resolution plans One of the key responsibilities of the CoC is to evaluate and vote on resolution plans submitted by resolution applicants seeking to revive the distressed entity.

f assets. Voting on resolution plans One of the key responsibilities of the CoC is to evaluate and vote on resolution plans submitted by resolution applicants seeking to revive the distressed entity. The approval of a resolution plan by the CoC is instrumental in determining the future course of the insolvent company, with FCs exercising their voting rights based on the feasibility, viability, and alignment of the proposed plan with their economic interests. Protection of creditor interests The CoC acts as a custodian of creditor interests, ensuring that the resolution process maximizes the recovery of dues owed to creditors, promotes transparency and fairness, and safeguards the economic rights of all stakeholders involved. By advocating for equitable treatment of creditors, adherence to legal norms, and the pursuit of resolutions that optimize value realization, the CoC upholds the principles of creditor protection and economic prudence. Negotiation and consensus-building The CoC serves as a platform for negotiation, consensus-building, and collaborative decision- making among FCs, RPs, and other stakeholders.

and economic prudence. Negotiation and consensus-building The CoC serves as a platform for negotiation, consensus-building, and collaborative decision- making among FCs, RPs, and other stakeholders. By fostering dialogue, resolving conflicts, and striving for consensus on critical issues, the CoC aims to achieve collective agreement on resolution strategies, ensure the smooth progress of insolvency proceedings, and drive the successful revival of the insolvent entity. Oversight and monitoring The CoC assumes a supervisory role in overseeing the insolvency resolution process, monitoring the implementation of approved resolution plans, and ensuring compliance with regulatory requirements. By exercising vigilance, providing guidance to RPs, and upholding the integrity of insolvency proceedings, the CoC contributes to the effective governance and transparency of the resolution framework. Distribution of proceeds In the event of a successful resolution, the CoC plays a pivotal role in determining the distribution of proceeds from the sale of assets of the insolvent company. By deliberating on the allocation of funds among creditors, prioritizing claims based on the waterfall mechanism prescribed under the IBC, and ensuring fair and equitable distribution of proceeds, the CoC upholds principles of economic justice and creditor parity. The Code of Conduct for the CoC is being designed for adoption on a voluntary basis.

g fair and equitable distribution of proceeds, the CoC upholds principles of economic justice and creditor parity. The Code of Conduct for the CoC is being designed for adoption on a voluntary basis. The Code needs to be adhered to without diluting the principles relating to exercising commercial wisdom. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

9 In conclusion, the CoC stands as a cornerstone of the insolvency resolution architecture under the IBC, embodying collaboration, accountability, and economic prudence in driving the resolution of financial distress. By fulfilling its role with diligence, transparency, and stakeholder engagement, the CoC contributes to the integrity, efficiency, and success of insolvency proceedings, ultimately aiming to protect creditor interests and promote economic revival. INVESTORS AND RESOLUTION APPLICANTS Resolution applicants including strategic investors, financial investors, and turnaround specialists, play a vital role in injecting capital, expertise, and resources to support the restructuring and revival of distressed companies. Investors bring financial backing, industry know-how, and operational acumen to the table, driving the turnaround efforts, restructuring initiatives, and growth strategies of insolvent entities.

ies. Investors bring financial backing, industry know-how, and operational acumen to the table, driving the turnaround efforts, restructuring initiatives, and growth strategies of insolvent entities. By identifying opportunities, assessing risks, and making strategic investments in insolvent assets, investors catalyse the revitalization of businesses, create value for stakeholders, and contribute to the economic resurgence of the CD. Capital infusion and turnaround strategies Resolution applicants and investors play a key role in infusing capital, implementing turnaround strategies, and restructuring operations to revitalize distressed companies. By providing financial resources, strategic direction, and operational expertise, these stakeholders enable insolvent entities to overcome financial challenges, enhance operational efficiency, and chart a path towards sustainable growth and profitability. Through prudent investments, innovative solutions, and collaborative efforts, resolution applicants and investors drive the transformation and rejuvenation of insolvent businesses. Value maximization and creditor recovery Resolution applicants and investors focus on maximizing value for creditors, enhancing asset recovery, and ensuring equitable distribution of proceeds from the resolution of distressed companies. By crafting viable resolution plans, optimizing asset utilization, and implementing value-enhancing initiatives, these stakeholders aim to unlock value, generate returns for creditors, and facilitate the successful resolution of insolvency cases.

asset utilization, and implementing value-enhancing initiatives, these stakeholders aim to unlock value, generate returns for creditors, and facilitate the successful resolution of insolvency cases. Through strategic investments, prudent financial management, and effective restructuring measures, resolution applicants and investors contribute to the resolution of financial distress and the restoration of economic viability within the corporate ecosystem. In essence, resolution applicants and investors play instrumental roles in the insolvency resolution process under the IBC, driving the revival, restructuring, and turnaround of distressed companies through capital infusion, strategic vision, and operational expertise. By leveraging their resources, knowledge, and commitment to value creation, these stakeholders can keep the entity as a successful going concern. SUNIL MEHTA

10 ADJUDICATING AUTHORITY / APPELLATE AUTHORITY (NCLT/NCLAT) The NCLT and the National Company Law Appellate Tribunal (NCLAT) act as AA and Appellate Authority respectively in the IBC process. On admission of the applications for insolvency process, the judicial forums oversee the overall insolvency proceedings including approval of the resolution plans. Adjudication of insolvency petitions The NCLT attends to adjudicating insolvency petitions filed by FCs to initiate insolvency proceedings against CDs.

ngs including approval of the resolution plans. Adjudication of insolvency petitions The NCLT attends to adjudicating insolvency petitions filed by FCs to initiate insolvency proceedings against CDs. By scrutinizing the merits of insolvency applications, determining the existence of default, and passing orders to admit or reject insolvency petitions, the NCLT plays a pivotal role in triggering the insolvency resolution process. Supervision of insolvency proceedings The NCLT assumes a supervisory role in overseeing insolvency proceedings, ensuring compliance with the procedural requirements of the IBC, and monitoring the conduct of RPs, CoC, and other stakeholders involved in the resolution process. By providing judicial oversight, resolving disputes, and upholding the rule of law, the NCLT fosters transparency and accountability in insolvency resolution proceedings. Approval of resolution plans The NCLT plays a critical role in approving resolution plans submitted by resolution applicants for the revival of distressed entities. By evaluating the feasibility, viability, and compliance of resolution plans with the provisions of the IBC, the NCLT ensures that approved plans align with the interests of creditors, promote the revival of the CD, and comply with legal requirements. Dispute resolution and adjudication The NCLT and NCLAT serve as forums for resolving disputes, appeals, and legal challenges arising from insolvency proceedings under the IBC.

ith legal requirements. Dispute resolution and adjudication The NCLT and NCLAT serve as forums for resolving disputes, appeals, and legal challenges arising from insolvency proceedings under the IBC. By adjudicating on contentious issues, interpreting legal provisions, and providing redressal mechanisms for aggrieved parties, the NCLT / NCLAT promotes the resolution of disputes in a judicial manner, upholding the principles of natural justice and legal equity. Monitoring and enforcement of resolution plans The NCLT oversees the implementation of approved resolution plans, ensuring that resolution applicants adhere to the terms and conditions prescribed in the plans. By monitoring the progress of insolvency resolution, verifying compliance with regulatory requirements, and enforcing the execution of approved plans, the NCLT safeguards the integrity and efficacy of the resolution process. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

g the execution of approved plans, the NCLT safeguards the integrity and efficacy of the resolution process. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

11 Judicial review and appeals The NCLAT functions as an appellate tribunal, providing a forum for challenging the decisions of the NCLT and seeking judicial review of insolvency-related matters. By adjudicating on appeals, clarifying legal interpretations, and ensuring consistency in judicial decisions, the NCLAT upholds the principles of legal certainty, procedural fairness, and appellate justice within the insolvency resolution framework. In essence, the NCLT/NCLAT assumes a pivotal role in the insolvency resolution ecosystem under the IBC, embodying judicial oversight, legal adjudication, and dispute resolution in insolvency proceedings. By strict adherence tothe law of the land, ensuring procedural fairness, and promoting the effective administration of insolvency resolution processes, the NCLT / NCLAT contributes to the integrity, efficiency, and fairness of the insolvency resolution framework, ultimately aiming to protect the interests of stakeholders, uphold legal norms, and foster a conducive environment for economic revival. A few concerns often raised relate to inadequate manpower and infrastructure at these judicial forums to handle the volume of activities. Delays in resolution are often attributed to inadequacies on these aspects.

often raised relate to inadequate manpower and infrastructure at these judicial forums to handle the volume of activities. Delays in resolution are often attributed to inadequacies on these aspects. The Government has seized the status and necessary steps have been initiated to address the concerns in this regard. REGULATORY AUTHORITIES Regulatory bodies such as the IBBI and the Reserve Bank of India constitute the regulatory backbone of the IBC ecosystem, setting forth guidelines, monitoring adherence to regulatory norms, and fostering a conducive environment for insolvency resolution. The vigilance and oversight exercised in the process ensure the integrity and efficacy of the insolvency resolution process. Policy formulation and guideline setting Regulatory authorities such as the IBBI are responsible for formulating policies, rules, and guidelines that govern the insolvency resolution process under the IBC. By establishing regulatory frameworks, procedural norms, and operational guidelines, regulatory authorities provide clarity, consistency, and direction to stakeholders involved in insolvency proceedings. Supervision and monitoring of insolvency proceedings Regulatory authorities play a supervisory role in monitoring insolvency proceedings, ensuring compliance with regulatory requirements, and upholding the principles of transparency, fairness, and accountability in insolvency resolution. By overseeing the conduct of RPs, CoCs, and other stakeholders, regulatory authorities promote adherence to legal norms and procedural standards. SUNIL MEHTA

accountability in insolvency resolution. By overseeing the conduct of RPs, CoCs, and other stakeholders, regulatory authorities promote adherence to legal norms and procedural standards. SUNIL MEHTA

12 Enforcement of compliance and disciplinary action Regulatory authorities have the authority to enforce compliance with the provisions of the IBC and take disciplinary action against entities or individuals found to be in violation of regulatory norms. By imposing penalties, sanctions, or other remedial measures, regulatory authorities deter misconduct, uphold regulatory integrity, and maintain the credibility of the insolvency resolution framework. Education and awareness Regulatory authorities also have a responsibility of educating stakeholders, raising awareness, and disseminating information about the provisions, procedures, and implications of the IBC. By conducting outreach programs, workshops, and capacity-building initiatives, regulatory authorities enhance stakeholder understanding, promote best practices, and foster a culture of compliance within the insolvency ecosystem. Guidance and support for other stakeholders Regulatory authorities offer guidance, support, and assistance to stakeholders involved in insolvency proceedings, clarifying legal interpretations, addressing queries, and providing regulatory guidance on complex issues.

offer guidance, support, and assistance to stakeholders involved in insolvency proceedings, clarifying legal interpretations, addressing queries, and providing regulatory guidance on complex issues. By offering a reliable source of information, regulatory authorities empower stakeholders to navigate the insolvency resolution process with confidence and clarity. In conclusion, regulatory authorities play a critical role in ensuring the integrity, efficiency, and effectiveness of the insolvency resolution framework under the IBC. By setting standards, monitoring compliance, and providing guidance to stakeholders, regulatory authorities contribute to the stability, transparency, and credibility of insolvency proceedings, ultimately aiming to create a platform that helps all the stakeholders to maximise the value of their assets. INFORMATION UTILITIES (IUs) The presence of information asymmetry has been a major obstacle in the smooth functioning of corporate insolvency and bankruptcy procedures in India. Creditors and other interested parties often face difficulties in obtaining accurate financial details of debtors, leading to delays and inefficiencies in the process. Significant time and resources are required to verify debtor defaults and determine the true financial standing of the company in question. In order to address this issue, the IBC implemented the establishment of a regulated information sector through the creation of IUs. An IU is described in section 3(21) of the IBC as an individual registered with the IBBI according to section 210.

ted the establishment of a regulated information sector through the creation of IUs. An IU is described in section 3(21) of the IBC as an individual registered with the IBBI according to section 210. The core functions of IUs include: Information sharing One of the main roles of IUs is to enable the smooth exchange of important financial data among creditors, debtors, and various stakeholders participating in insolvency proceedings. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

13 By offering a centralized platform for the storage and sharing of financial information, IUs play a crucial role in expediting the resolution process and avoiding delays that may arise due to gaps in information. Efficiently managing bankruptcy procedures IUs are essential in efficiently managing bankruptcy procedures by providing stakeholders with reliable and current financial data. This facilitates a quicker resolution process and reduces the likelihood of disagreements stemming from inadequate or inaccurate information. Enhancing transparency and accountability IUs play a significant role in promoting transparency and accountability in insolvency proceedings by offering a secure and trustworthy platform for storing financial information. This allows creditors and stakeholders to access necessary data promptly, ultimately decreasing the chances of fraud and unethical actions in the resolution process. In summary, IUs play a very significant role in enhancing transparency, accountability, and

data promptly, ultimately decreasing the chances of fraud and unethical actions in the resolution process. In summary, IUs play a very significant role in enhancing transparency, accountability, and effectiveness in insolvency procedures governed by the IBC. Through enabling the sharing of vital financial data amongst parties involved, IUs accelerate the resolution process and reduce the chances of disagreements. The existence of IUs is advantageous for all stakeholders, such as creditors and debtors, as they promote well-informed choices and improve the chances of a favorable outcome. As the insolvency environment progresses, IUs will become even more essential in guaranteeing the efficient operation of the IBC framework. So far there is only one IU platform available in India, the National E-Governance Services Limited (NeSL). A need is also envisaged for multiple IUs in the backdrop of the considerable size of stressed assets in India, and the significant increase in the number of cases reported under the Code by the lenders in the recent past. As the Code evolves and encourages smooth adoption of the process, there could be increased reliance on the IU platforms. ROLE OF INDIAN BANKS’ ASSOCIATION (IBA) IN STRENGTHENING THE IBC FRAMEWORK The IBA plays a significant role in fortifying the insolvency resolution framework under the Code, leveraging its expertise, influence, and collaborative efforts to enhance the insolvency regime’s effectiveness, efficiency, and resilience.

ifying the insolvency resolution framework under the Code, leveraging its expertise, influence, and collaborative efforts to enhance the insolvency regime’s effectiveness, efficiency, and resilience. As a pivotal industry body representing the banking sector, the IBA contributes to developing, implementing, and refining policies, practices, and mechanisms aimed at streamlining insolvency processes, protecting creditor interests, and fostering a conducive environment for economic revival. IBA played a multifaceted role in strengthening the IBC framework: Policy advocacy and industry engagement The IBA engages in policy advocacy, representing the collective interests of banks and financial institutions in shaping regulatory frameworks, legislative reforms, and industry best practices related to insolvency resolution. By collaborating with regulatory authorities, government agencies, and industry stakeholders, the IBA advocates for practical solutions, regulatory enhancements, and policy interventions that promote creditor rights, streamline insolvency SUNIL MEHTA

ment agencies, and industry stakeholders, the IBA advocates for practical solutions, regulatory enhancements, and policy interventions that promote creditor rights, streamline insolvency SUNIL MEHTA

14 procedures and enhance the operational efficiency of the IBC framework. The Standing Committee on Stressed Assets Management at IBA deliberates the emerging issues in implementation of IBC in detail and provides a collective suggestion to the regulator. Most of the suggestions made by IBA have been duly acknowledged and accepted while considering policy amendments. Capacity building and training initiatives The IBA with the collaboration of IBBI and SBI, undertakes capacity-building initiatives, training programs, and knowledge-sharing sessions to equip banking professionals with the requisite skills, knowledge, and expertise to navigate insolvency proceedings effectively. By conducting workshops, seminars, the IBA facilitates to enhance the competencies of officials handling IBC matters, empowers them to engage proactively in insolvency cases, and fosters a culture of compliance and professionalism within the banking sector. Information sharing and best practice dissemination The IBA facilitates the exchange of information, insights, and best practices among member banks, fostering a collaborative environment for sharing experiences, lessons learned, and success stories in insolvency resolution.

exchange of information, insights, and best practices among member banks, fostering a collaborative environment for sharing experiences, lessons learned, and success stories in insolvency resolution. By disseminating knowledge, and promoting industry standards, the IBA enables banks to adopt best practices, mitigate risks, and optimize outcomes in insolvency cases, thereby enhancing the overall efficiency and effectiveness of the insolvency resolution process. Technology adoption and digital transformation The IBA joins the collaborative initiatives with NeSL, and drives technological innovation, digital transformation, and automation initiatives within the banking sector to streamline insolvency processes and improve operational efficiencies in handling insolvency cases. By promoting the adoption of digital platforms, the IBA facilitates banks to leverage technology to smoothen the IBC procedural aspects. In summary, the IBA plays a pivotal role in fortifying the IBC framework in India by advocating for creditor interests, enhancing industry capabilities, fostering collaboration among stakeholders, and facilitating technological advancements in insolvency resolution practices.

ndia by advocating for creditor interests, enhancing industry capabilities, fostering collaboration among stakeholders, and facilitating technological advancements in insolvency resolution practices. Through its proactive engagement, knowledge-sharing initiatives, and advocacy efforts, the IBA contributes to the resilience, efficiency, and integrity of the insolvency ecosystem, ultimately aiming to protect creditor rights, optimize recovery outcomes, and promote a robust insolvency regime that fosters economic revival and financial stability within the Indian banking sector. CONCLUSION IBC has been a crucial reform that has brought very important changes in the insolvency landscape in the country. It is evolving in the right direction and surely over time, will result in substantial improvement in economic efficiency and economic growth by enhancing the willingness and ability of creditors to lend. The successful implementation of the IBC process in India hinges on the active participation and collaboration of various stakeholders, each fulfilling their unique roles and responsibilities to achieve the primary objective of maximizing value for all parties involved in insolvency resolution. By understanding and fulfilling their roles effectively, stakeholders can contribute to a more efficient and transparent insolvency resolution framework in the country. Source: Reflections from various articles / publications and a collective perspective. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

ework in the country. Source: Reflections from various articles / publications and a collective perspective. A REFLECTION ON THE ROLE & EFFECTIVENESS OF STAKEHOLDERS UNDER THE IBC FRAMEWORK IN INDIA

15 STREAMLINING INDIA’S CIRP FOR A WIN-WIN OUTCOME Atul Kumar Goel 02 The Indian economy, like any other, witnesses its fair share of corporate struggles. Sometimes, these struggles can lead to financial distress, making it difficult for companies to repay their debts. In such scenarios, the Insolvency and Bankruptcy Code, 2016 (IBC/Code) offers a framework for a fair and efficient resolution process known as the corporate insolvency resolution process (CIRP). The IBC, introduced in 2016, has transformed how companies in India deal with insolvency. It provides a mechanism for the insolvency resolution of debtors in a time bound manner to enable maximisation of the value of their assets, with a view to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders and to improve the credit culture and business environment in the country. The Preamble to the Code specifically states that the Code has been enacted to maximise value in the interests of all the stakeholders, and not for some stakeholders at the expense of the others. Thus, the insolvency regime is designed to reduce the possibility of allowing some stakeholders to benefit at the expense of the others. IMPACT OF IBC The Code empower the creditors to examine and inspect the viability of the resolution plans before making decisions during CIRP.

me stakeholders to benefit at the expense of the others. IMPACT OF IBC The Code empower the creditors to examine and inspect the viability of the resolution plans before making decisions during CIRP. Further, the delays in disputes are addressed by formulating a time-bound mechanism for resolutions which further helps in promoting entrepreneurship and availability of credit in the market. The quintessence of the IBC is to balance out the interests of all stakeholders and revive the corporate as a going concern by way of timely resolutions. IBC has significantly changed the resolution landscape in India. Due to the Code, the resolution process of stressed assets of banks has strengthened and banks now have improved asset quality in decades with stronger balance sheets. Impact of the Code can be categorized in three broad areas which are as under: Impact of Code on debtor-creditor relationship The Code has led to behavioural change in the debtor-creditor relationship. Earlier the relationship was debtor oriented. But fear of losing control of the firm on initiation of CIRP, is nudging debtors to settle their dues with the creditors as soon as possible and this relationship is now moving towards a creditor-oriented relationship.

ontrol of the firm on initiation of CIRP, is nudging debtors to settle their dues with the creditors as soon as possible and this relationship is now moving towards a creditor-oriented relationship.

16 In cases of loan default, out-of-court deals are becoming the preference among creditors and debtors as parties look for ways to avoid initiation of the IBC process. This is attributed to the behavioural change effectuated by the Code. Fear of losing control of their company is being developed among the debtors and pushing them towards financial discipline. The ‘threat of insolvency’ ignited by the Code has strengthened the negotiating powers of the creditors, in the absence of which it is most likely that those defaults would have lingered for much longer, resulting in value destruction. Impact of the Code on resolution of accounts The IBC has remarkably altered how distressed and defaulting businesses are handled by their stakeholders. The Preamble to the Code emphasizes its purpose as timely corporate reorganization and insolvency resolution, with the goal of maximizing asset value. Unlike traditional recovery-oriented tools, IBC adopts a resolution-oriented approach i.e., it allows a firm to continue as a going concern, despite the default. It has to be stated here that the IBC should not be seen as merely a loan recovery instrument, it has to be seen as an instrument which facilitates preservation of economic value of assets through effective resolution or unlocking of capital which is stuck in unviable businesses.

y instrument, it has to be seen as an instrument which facilitates preservation of economic value of assets through effective resolution or unlocking of capital which is stuck in unviable businesses. By focusing on the revival and continuity of financially distressed entities, the IBC seeks to preserve jobs, protect investments, and maintain the operational viability of such businesses. Impact of the Code on realization of value to the financial creditors Generally, outcomes of IBC are evaluated on the basis of recovery to the creditors as a result of resolution process. Since inception till the end of FY 2024, 947 resolution plans have been approved. These resolution plans resulted in realization of 32% as against the admitted claims and 162% as against the liquidation value. It needs to be emphasized here that significant value destruction would have already happened in these assets prior to their admission under the IBC and admitted claims includes penal charges for irregularity of account, cost incurred during recovery efforts. Due to the above factors, comparison of realized value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process. Rather, the resolution value may be compared with the liquidation value of stressed assets or the fair value at the time of admission into IBC. When evaluated from the prism of these two parameters, overall realization since inception of IBC, under approved resolution plans (for industry) is as under: No.

e at the time of admission into IBC. When evaluated from the prism of these two parameters, overall realization since inception of IBC, under approved resolution plans (for industry) is as under: No. of Admitted Liquidation Fair Realisation Realized Realized approved claims value of value of value to value as % value as % resolution corporate corporate creditors to admitted to plans debtor debtor claims liquidation value ( in Lakh Crore) Percentage (A) (B) (C) (D) (E) (F=E/B%) (G=E/C%) 947 10.46 2.08 3.20 3.36 32.10% 161.76% Source: IBBI Newsletter March-2024 Quarter STREAMLINING INDIA’S CIRP FOR A WIN-WIN OUTCOME

17 a) Till March 31, 2024, the creditors have realized 3.36 lakh crore in 947 approved resolution plans. b) The fair value and liquidation value of the assets available with these corporate debtors (CDs), when they entered the CIRP was estimated at 3.20 lakh crore and 2.08 lakh crore, respectively, as against the total admitted claims of the creditors worth 10.46 lakh crore. c) The creditors have realized 161.76% of the liquidation value and 84.98% of the fair value (based on 850 cases where fair value was estimated). d) The haircut for creditors relative to the fair value of assets was around 15%, while relative to their admitted claims is around 68%.

air value (based on 850 cases where fair value was estimated). d) The haircut for creditors relative to the fair value of assets was around 15%, while relative to their admitted claims is around 68%. Furthermore, this realization does not include the CIRP cost, and many probable future realizations such as equity, realization from corporate and personal guarantees, and from avoidance applications. As per a study conducted by IIM Ahmedabad, average sales of resolved CDs have shown an increase of 76% in three years since resolution. The resolved firms were operationally able to break even in the post-resolution period (operating margin of 4% as of 3rd year of post-IBC period), which is a significant improvement from the pre-resolution period. The average employee expenses in the three years’ post-resolution increased by around 50 per cent indicating a higher employment intensity in the resolved firms in the post-resolution period. A significant increase of around 50% in the value of average total assets of resolved firms post resolution was also seen along with 130% increase in the CAPEX, which indicates a build-up of tangible assets in the balance sheet of these firms in the post-resolution period. The trends in the market capitalization of listed resolved firms indicate a significant revival in the average market valuations in the post-resolution period, which is expected given the growth opportunities that will accrue to these firms post the resolution with the creditors. The trends also indicate a significant increase in the liquidity of the resolved firms in the

ed given the growth opportunities that will accrue to these firms post the resolution with the creditors. The trends also indicate a significant increase in the liquidity of the resolved firms in the post-resolution period. For instance, the current assets to current liability has improved from 1.01 in the year of bankruptcy to 1.83 in the third year post-resolution. Thus, it is evident that the IBC has certainly played an inevitable role in improving the health of the corporates in India and has led to an increased optimism in the overall business environment. SUGGESTIONS TO FURTHER STREAMLINE THE CIRP CIRP is a mechanism established by the IBC to deal with financial distress in companies. It provides a structured, time-bound approach for reviving a struggling company or recovering dues owed to creditors. If a company is facing mounting debts and struggling to stay afloat, CIRP can be a lifeline. It offers a chance to restructure the company’s finances, find new investors, or even sell it as a going concern, potentially saving jobs and preserving value. However, the CIRP mechanism faces several challenges. First, adherence to strict timelines often falters due to litigation, appeals, and the burden on National Company Law Tribunal (NCLT). Second, the absence of a pre-packaged insolvency resolution framework (PPIRP) for genuine non-MSME CDs delays viable business resolution. Third, the lack of a robust secondary market for stressed assets hinders efficient resolution. Fourth, group insolvency lacks clarity for interlinked companies.

CDs delays viable business resolution. Third, the lack of a robust secondary market for stressed assets hinders efficient resolution. Fourth, group insolvency lacks clarity for interlinked companies. Lastly, cross-border insolvency mechanisms need improvement. ATUL KUMAR GOEL

18 To address these challenges, we have suggested a few measures taking cues from global and bank’s own experience that will further enhance the effectiveness of CIRP and promote a healthier business environment. Below are the suggestions and measures based on bank’s own experience that may be useful in enhancing the working of IBC. To resolve issues related to admission of applications under IBC Firstly, cases took time from couple of months to years for admission under IBC. This delays the resolution process. This is due to limited number of NCLT benches and National Company Law Appellate Tribunal (NCLAT) benches and they are burdened with too many cases. To resolve this issue, number of NCLT and NCLAT benches are required to be increased with adequate resources. Separate benches for IBC cases may be created. Further, for admission of accounts under IBC, only two requirements should be made mandatory i.e. (i) Compliance of the Limitation Act, 1963 and (ii) National E-Governance Services Limited (NeSL) default certificate. If these two things are in order account should be admitted immediately. It is also seen that CDs willingly delay the admission under IBC. IBC can also frame suitable provisions for avoiding instances where CD use the opportunity for delaying the admission.

d immediately. It is also seen that CDs willingly delay the admission under IBC. IBC can also frame suitable provisions for avoiding instances where CD use the opportunity for delaying the admission. If any opportunity is given to CD, it should be only once and reason for rejection of application to be incorporated in the order. Further, reasons for rejections can be predefined in the IBC. Delay in admission of cases also takes place if the default is not registered with the NeSL. In such cases, Credit Information Companies (CICs) reports can be utilized and it is a well established banking practice that will provide additional tool apart from NeSL default certificate. Streamlining the resolution process For further smoothening of the resolution process, few measures are suggested: a) A utility can be provided for uploading of supporting documents for a case at Insolvency and Bankruptcy Board of India (IBBI) portal by all stakeholders that can expedite the claim verification process. b) As per the model timelines for CIRP, committee of creditors (CoC) can change the Interim Resolution Professional (IRP) in 1st meeting of CoC (T+30 days). After CoC decision to change the IRP, NCLT approval is also required. Due to the requirement of NCLT approval, the resolution process slows down.

Professional (IRP) in 1st meeting of CoC (T+30 days). After CoC decision to change the IRP, NCLT approval is also required. Due to the requirement of NCLT approval, the resolution process slows down. Thus, it is suggested that the requirement of NCLT approval for change of IRP/ Resolution Professional (RP) should be dispensed with and instead change of IRP can be informed to NCLT as it will help in expediting the CIRP. c) During the CIRP, it has been observed that interim applications (IAs) filed by stakeholders remained unresolved/sub-judice for long, which resultantly delays the timely resolution of account and defeats the purpose of IBC. As such, it is suggested that on IA filed during the CIRP, no stay should be granted without allowing the CoC to represent their side. Further, all the applications of similar nature can be merged and once an issue is settled, stakeholders shall not entertain any other application on the similar issue. STREAMLINING INDIA’S CIRP FOR A WIN-WIN OUTCOME

pplications of similar nature can be merged and once an issue is settled, stakeholders shall not entertain any other application on the similar issue. STREAMLINING INDIA’S CIRP FOR A WIN-WIN OUTCOME

19 As a result, speedy disposal of IAs filed by various stakeholders will streamline the CIRP. d) Most of the NCLT admitted cases are 4-5 years older non-performing assets (NPAs). In such cases, there are no significant transactions during the existing look back period. As such CoC should be given liberty to decide the look back period for each case based on the requirement and based on the time when the stress of the company started. However, the Code may fix an outer limit say 8 years for look back period. Further CoC should be given liberty to file application for all sort of avoidance transactions, where RP doesn’t take such decision or CoC is not satisfied with such decision. e) For timely conviction and punishment of fraudsters, trial of preferential, undervalued, fraudulent and extortionate (PUFE) applications may be started in a Special Court that will help to recover the funds diverted and siphoned off, from the defaulting and fraudulent directors / promoters and key managerial personnel. f) The current distribution mechanism has ambiguity on the distribution of proceeds of resolution plan / liquidation and raise disputes among financial creditors (FCs). Industry wide different practices are being followed as regards to distribution of proceeds among assenting / dissenting and secured / unsecured FCs. The same is resulting into disputes among stakeholders.

ry wide different practices are being followed as regards to distribution of proceeds among assenting / dissenting and secured / unsecured FCs. The same is resulting into disputes among stakeholders. The Code can clearly specify the distribution mechanism amongst the secured/ unsecured and first charge holders/ second /subservient charge holders etc. to avoid conflicts in distribution mechanism. g) It is seen that in most of the cases, the promoters submit the application for section 12A at the later stage of CIRP when they have already seen the value quoted under the resolution plan. Promoters should not be allowed to submit the application under section 12A after receipt of resolution plans. This practice is harmful for the smooth running of CIRP as after approval of resolution plan by CoC such applications are usually moved by promoters to delay the process. In case promoters are allowed to submit proposal for settlement of debts under section 12A of IBC, a minimum of 25% of the agreed amount should be required to be paid upfront. h) CIRP cannot be treated over till the resolution plan approved is implemented in true letter and spirit. Monitoring committee comprising of IRP/RP, representative of FCs and successful resolution applicant must submit periodical reports and final report about the implementation of resolution plan to the Adjudicating Authority (AA)/ IBBI and upon their approval only, the CIRP is to be taken as completed.

ust submit periodical reports and final report about the implementation of resolution plan to the Adjudicating Authority (AA)/ IBBI and upon their approval only, the CIRP is to be taken as completed. This will further streamline the implementation process. i) Reserve price in auction of assets of liquidation estate to be fixed as per decision of Stakeholders’ Consultation Committee. Further for sale of CD as going concern, Swiss Challenge method should be used along with auction process for value maximization. This will ensure value maximization and price discovery through transparent manner. j) It is mandated that the liquidator has to update complete information about the auction process at the web portal of IBBI. In case there is failure of auction, fresh auction should be conducted not later than 30 days. Outcome of all auctions should be updated at the IBBI portal as it will improve the overall liquidation process. ATUL KUMAR GOEL

20 Other suggestions a) Judicial infrastructure, processes like e-filing of applications, rejoinders, affidavits etc. can be automated. The intervention of technological initiatives and case management tools in the process will significantly lead to the reduction of time involved in the administrative task. b) The Government of India has set up an e-platform namely India Investment Grid (IIG) that showcases investment opportunities in stressed assets to allow purchase of viable stressed assets with a potential to turnaround.

ndia has set up an e-platform namely India Investment Grid (IIG) that showcases investment opportunities in stressed assets to allow purchase of viable stressed assets with a potential to turnaround. The portal is a one-stop solution bringing investors and the projects at one place for ease of acquisition and investment and presents a market for stressed assets in the country. RP can register the account under CIRP with IIG platform to maximize the value of stressed asset. c) The IBC ecosystem needs to harness the use of information technology (IT) to drive the processes in a more efficient and effective manner. There is need for a comprehensive IT platform that can ensure end-to-end integration and digitization of the processes and serve as a single source of truth. An integrated platform would improve the outcomes of the insolvency process including minimizing delays, increased transparency, increased participation of resolution applicants, facilitation in effective decision making, maximization of value etc. Further IBBI should provide a strong IT infrastructure having online forms & claims submission, platform for showcasing of accounts under CIRP.

effective decision making, maximization of value etc. Further IBBI should provide a strong IT infrastructure having online forms & claims submission, platform for showcasing of accounts under CIRP. Bringing more momentum to platform for distressed assets will allow price discovery and also enable increased investments in stressed assets. d) A dedicated framework for dealing with insolvency of Financial Service Providers and other specialized sectors such as real estate, telecom and power sector, steel & road sector can be framed under IBC. e) IRP/RP should inform all FCs through electronic means about admission of account in NCLT, at least to all FCs whose charges are filed with Ministry of Corporate Affairs (MCA) or in the books of CD. f) Legislative provisions for enabling cross-border insolvency, group insolvency and to further streamline the voluntary liquidation process to facilitate ease of exit are required to be inculcated. g) Amendments enabling PPIRP is also yet to completely take off. Expansion of applicability of PPIRP will help in resolution of genuine cases of distressed CDs. Accordingly, the PPIRP is required to be made applicable to all CDs. A robust PPIRP framework will allow faster resolution, reduce case load of the overburdened NCLTs and allow eligible promoters to submit resolution plans and at the same time retain control of the companies. While the CIRP has brought much needed structure to corporate insolvency in India, there’s room for improvement. Delays and complexities can hinder both company revival and creditor recoveries.

nies. While the CIRP has brought much needed structure to corporate insolvency in India, there’s room for improvement. Delays and complexities can hinder both company revival and creditor recoveries. Streamlining timelines, like Singapore’s approach, can expedite the process. Lessons from the UK, like pre-insolvency rescue options, could offer struggling companies a fighting chance before formal CIRP. Furthermore, by fostering a pool of skilled insolvency professionals, similar to Singapore’s model, India can ensure efficient case management. These improvements can create a win-win situation for companies with a chance at revival, creditors who receive faster dues, and a healthier overall business environment. STREAMLINING INDIA’S CIRP FOR A WIN-WIN OUTCOME

21 TAXATION AND INSOLVENCY: TOWARDS A FOUNDATIONAL UNDERSTANDING M P Ram Mohan and Sai Muralidhar K 03 ABSTRACT Taxation and insolvency laws, as critical economic legislations, play a key role in regulating economic activities. This article aims to chart a path toward understanding the source of the divergences between these two fields at a foundational level by examining their theoretical roots. The theoretical foundations of tax law that have formed the current principles of taxation have been examined against the backdrop of the creditor’s bargain and communitarian theories of insolvency. In India, the right of the State to tax corporations and individuals is espoused by the Constitution of India. This right is examined against the broader objectives of India’s Insolvency and Bankruptcy Code, 2016 (IBC/Code).

e State to tax corporations and individuals is espoused by the Constitution of India. This right is examined against the broader objectives of India’s Insolvency and Bankruptcy Code, 2016 (IBC/Code). In the last few years, there have been several cases in India, specifically on tax disputes during the insolvency resolution process. Examining the theoretical interplay between tax and insolvency enables us to see how insolvency and taxation laws could synergise and create positive outcomes for stakeholders. Keywords: Insolvency and Tax, Communitarian Theory, Creditors Bargain Theory

22 INTRODUCTION Taxation laws and the Insolvency Code are among the few significant economic legislations whose functioning impinges on a myriad of sectors such as employment, creation and sustaining of enterprises, financial stability, economic growth, etc. Any insolvency or bankruptcy proceeding involves an attempt to satisfy competing interests and claims with a limited pool of assets. Given the competing interests over limited resources of the insolvent company between a host of other creditors, including taxation authorities, tension exists among various stakeholders in this issue.1 The government’s dual role in raising revenue and aiding financially distressed companies and the underlying competition between these interests is at the forefront of this study. The issue of the treatment of taxation in insolvency merits a more fundamental enquiry into the very nature of these subjects to analyse theoretical inconsistencies and divergences.

nt of this study. The issue of the treatment of taxation in insolvency merits a more fundamental enquiry into the very nature of these subjects to analyse theoretical inconsistencies and divergences. Understanding the interplay between tax and insolvency laws would be incomplete without understanding their fundamental objectives, goals, and theoretical evolution. Further, any attempt to harmonise their interplay to benefit all the stakeholders, i.e., creditors, tax authorities, society, and the distressed company, would be unsustainable and transient unless the source of this divergence is more deeply examined. This article looks beyond the statutory conflicts and aims to create a theoretical framework for a corporate insolvency tax system, meeting the broad objectives of both these critical legal fields. Most of the scholarly work in India covers judicial interpretation between specific provisions of the IBC and taxation statutes.2 The authors take assistance from the work of Dr. Sylvia Villios, which explored the theoretical foundations for corporate insolvency taxation by examining the theoretical perspectives of Australian insolvency and taxation law. 3 The article is structured as follows: Firstly, the authors discuss the theoretical foundations of tax law and its operation within a contractarian model of insolvency. This is done by analysing the development of taxation and examining its historical justifications and internationally recognised taxation principles.

ation within a contractarian model of insolvency. This is done by analysing the development of taxation and examining its historical justifications and internationally recognised taxation principles. It is followed by examining the operation of the theoretical underpinnings of taxation in the context of a communitarian model of insolvency. The next section analyses the theoretical perspectives of insolvency and taxation in India from the lens of the Indian Constitution to understand better the source of the conflict and friction that exists today. The authors conclude the study with some suggestions on how to move forward to better understand the divergences in the operation of tax in insolvency proceedings. 1 Staff, Supreme Court Ruling Revives the Quandary, Holds Tax Authorities to Be Secured Creditors – Vinod Kothari Consultants, https://vinodkothari.com/2022/09/supreme-court-ruling-revives-the-quandary-holds- tax-authorities-to-be-secured-creditors/, (Nov. 1, 2023). 2 Rahul Verma and Siddharth Hemani, Unavoidable Interplay Between IBC and Tax Laws, https://papers.ssrn.com/ abstract=4582664,(Feb. 9, 2024) ; Bhumika Indulia, Interplay between Tax Laws and IB Code during Liquidation, SCC Blog, https://www.scconline.com/blog/post/2021/01/23/interplay-between-tax-laws-and-ib-code-during-liquidation/, (Nov. 1, 2023); Dhruva, Parikh, Kushal, Bheda, and Mehul, The Interplay of India’s New Insolvency Code with Income Tax Law, Pro Quest, https://www.proquest.com/docview/2377194371?pq origsite=gscholar&fromopenview =true&sourcetype=Scholarly%20Journals,(Feb.

The Interplay of India’s New Insolvency Code with Income Tax Law, Pro Quest, https://www.proquest.com/docview/2377194371?pq origsite=gscholar&fromopenview =true&sourcetype=Scholarly%20Journals,(Feb. 9, 2024). 3 Sylvia Villios, A Framework for Corporate Insolvency Taxation: The Crossroads of the Theoretical Perspectives in Taxation Law and Insolvency Law. 4 Monica Bhandari, Philosophical Foundations of Tax Law, Chapter 1 byJohn Snape, The “Sinews of the State” (Oxford University Press 2017), https://doi.org/10.1093/acprof:oso/9780198798439.003.0002, (Dec. 11, 2023). 5 John Snape, The Political Economy of Corporation Tax: Theory, Values and Law Reform (Hart Publishing 2011). TAXATION AND INSOLVENCY: TOWARDS A FOUNDATIONAL UNDERSTANDING

23 TAXATION AND INSOLVENCY: JUSTIFICATION AND GOALS A tax, simply put, is a compulsory levy imposed by the legislature, payable to the government, intended for a public purpose.4 Taxation, which defines the state’s and citizens’ duties in collecting revenue, forms a part of public law.5 The law of taxation reflects the relationship between the market, the state, and the citizens.6 Taxation as a concept has existed across different social and political orders since early;

ublic law.5 The law of taxation reflects the relationship between the market, the state, and the citizens.6 Taxation as a concept has existed across different social and political orders since early; it has evolved through feudal, absolutist times and the parliamentary and administrative state.7 Taxation in the modern administrative state saw a shift from merely ensuring the security of property to focusing on wealth redistribution and regulation and the creation of enterprises.8 Collecting taxes is no longer only for defending the state and property rights but also to prioritise fairness, promote social and welfare policies, build infrastructure, and thus enhance the broader economy.9 Taxes in the administrative state are supported by legal compulsion and legislative competence and operate as a broad public law.10 Today, it operates through several principles, some discussed below. Principles of Taxation The modern taxation system as it exists today is deeply influenced by the canons of taxation laid down by Adam Smith in the celebrated book An Inquiry into the Nature & Causes of the Wealth of Nations, in which he conveys:11 a) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. b) The tax each individual is bound to pay should be certain and not arbitrary.

ctive abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. b) The tax each individual is bound to pay should be certain and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid should all be clear and plain to the contributor and every other person. c) Every tax ought to be levied at the time or in the manner most likely convenient for the contributor to pay it. d) Every tax ought to be contrived, both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the state’s public treasury. While Smith’s ideas of taxation significantly influenced tax policy and design the world over, an effective administrative state requires control over property rights and their intersection with taxation.12 Here, Hobbes philosophical backing lays the foundations for the state’s dominance over the individual in matters of tax and property rights.13 Hobbes’ theory of taxation postulated that the tax levy is made on man’s estate and rightfully justified by the 6 Allison Christians, Sovereignty, Taxation and Social Contract [2009] Minnesota Journal of International Law, https:// scholarship.law.umn.edu/mjil/245. 7 Snape, supra note 4. 8 Id. 9 Id. 10 Id. 11 Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations (Facsimile of 1904 ed edition, University of Chicago Press 1977). 12 Snape, supra note 4. 13 Id. M P RAM MOHAN AND SAI MURALIDHAR K

mith, An Inquiry into the Nature & Causes of the Wealth of Nations (Facsimile of 1904 ed edition, University of Chicago Press 1977). 12 Snape, supra note 4. 13 Id. M P RAM MOHAN AND SAI MURALIDHAR K

24 sovereign as the price for security and the price for certain benefits.14 Further, he believed in the equal imposition of taxes on all persons.15 In Hobbes’s view, benefits extend beyond security and involvement and are to be assessed based on consumption.16 Hobbes, therefore, believes that a law of taxation is a combination of prudential and moral rules.17 Another key contributor to the principles that govern taxation is classical economist Charles F Bastable, who laid down the Cannons of Taxation, which states that taxation should be productive, economical, justly distributed, an elastic system, certain, and convenient. Bastable believed that the productivity of taxation is to be measured by the amount of revenue collected by the imposition of a tax.18 He linked the productivity of taxation to the economic nature of tax by arguing that tax collection should be inexpensive and not hurt economic growth.19 Further, he argued that the elasticity of a tax system was the agency through which the dual goals of productivity and economy could be achieved.20 These principles have broadly shaped most tax systems across the world. These are also reflected in the policies adopted by the Organisation for Economic Cooperation and Development (OECD).

hieved.20 These principles have broadly shaped most tax systems across the world. These are also reflected in the policies adopted by the Organisation for Economic Cooperation and Development (OECD). The OECD identifies the following principles as critical considerations for a country’s tax policy and design21 - a) Neutrality - This principle postulates that taxation systems must apply equally to all forms of business enterprises. b) Efficiency - The efficiency of a taxation system is determined first by the cost of compliance by taxpayers and second by the cost of administration and implementation by the state. c) Certainty and Simplicity – Taxation systems are to be simple and easy to understand. d) Effectiveness and Fairness – Tax systems must be designed to collect the right amount of revenue at the right time while minimising avoidance and evasion. e) Flexibility – Tax systems must be flexible and able to adapt to changing societal, economic, and technological conditions. f) Equity – Equity in taxation involves vertical and horizontal equity. Horizontal equity requires persons who are similarly placed to be similarly taxed.

tal, economic, and technological conditions. f) Equity – Equity in taxation involves vertical and horizontal equity. Horizontal equity requires persons who are similarly placed to be similarly taxed. Vertical equity requires more affluent persons to bear a more significant tax burden.22 14 Id. 15 Id. 16 Dudley Jackson, Thomas Hobbes’ Theory of Taxation (1973) 21 Political Studies 175. 17 Id. 18 Charles Bastable, Public Finance(2nd ed, Macmillan, and Co 1895), https://books.googleusercontent.com/books/ content?req=AKW5Qaf5oTtqLC5UQ7HuZDDf5Y_FvwQPwjoHW2i073eZg4PdFLym_QnD7MwMbpbiT 31oBsU6Th2rTzRDFb6EDtw8ESm3syPon7GT0xJ3UebBeqiNbzfaoYgvwbprAubyMeI4-iTCniIbN5sWAxLeT5HW- zEUTBqxCL-Td2Uda46B0gBUWCZPyDfeXCOJDTdbv3BQ0-4jysfbQ944-iG_cLXJXJirvaCbbN_JTXRIzyiru A1uz6FlKiaS5LP7Zx2on2BH6Jz5yyj5, (Feb. 12, 2024). 19 Id. 20 Id. 21 OECD, Fundamental Principles of Taxation (OECD 2014), https://www.oecd-ilibrary.org/taxation/addressing-the-tax- challenges-of-the-digital-economy/fundamental-principles-of-taxation_9789264218789-5-en, (Feb. 5, 2024). 22 David Elkins, Horizontal Equity as a Principle of Tax Theory (2006) 24 Yale Law & Policy Review 43; See also Peter J Lambert, Income Taxation and Equity (2003) 4 Baltic Journal of Economics 5.

). 22 David Elkins, Horizontal Equity as a Principle of Tax Theory (2006) 24 Yale Law & Policy Review 43; See also Peter J Lambert, Income Taxation and Equity (2003) 4 Baltic Journal of Economics 5.

25 It is important to note that these principles do not operate independently but in a taxation system in consonance with other principles, including the socio-economic policies of the state. For instance, a neutral tax system ensures optimal allocation of resources and thereby aids in improving the efficiency of the state’s operation.23 Similarly, complex taxation systems lead to increased tax planning and strategies that cause greater costs of compliance, extended legal disputes, and hurt the tax system’s efficiency.24 Modern taxation systems play a vital role in the administrative state. Today, taxes pay for a host of public services and are crucial for funding social programs and development projects.25 The efficiency of taxation systems is also a determiner of business investment and growth. Tax administration profoundly influences companies’ willingness to invest in the nation.26 Taxation systems in various countries often reflect the level of priority given to each of the above-discussed factors. The evolution of these principles of taxation, both globally and in the context of India, is key to understanding the underlying friction with the theoretical framework of insolvency laws. Goals of Insolvency Law The development of corporate insolvency laws can be traced to several practical problems that emerged as a consequence of the failure of businesses.

mework of insolvency laws. Goals of Insolvency Law The development of corporate insolvency laws can be traced to several practical problems that emerged as a consequence of the failure of businesses. The failure of a business enterprise in the absence of an insolvency law would be a free-for-all among all the creditors of the business to try and recover as much of their debt as possible within the limited asset pool of the debtor.27 This would lead to inefficient and unfair outcomes for several creditors, particularly those late to enforce their rights.28 The core objective of insolvency law is efficient reorganisation, enabling creditors to recover their dues through an orderly debt recovery and collection exercise.29 A consensus exists that the goals of modern insolvency law have come through the Report of the Review Committee on Insolvency Law and Practice 1982,30 chaired by Sir Kenneth Cork.31 The Cork Committee Report has influenced modern insolvency systems, including the IBC, which adopted a rehabilitative approach to distressed entities.32 Finch, citing Cork Report, summarises the objectives of a modern insolvency system as follows:33 23 OECD, supra note 21. 24 Id. 25 ‘Why It Matters in Paying Taxes - Doing Business - World Bank Group’ <https://subnational.doingbusiness.org/ en/data/exploretopics/paying-taxes/why-matters#2> accessed 28 May 2024. 26 Enterprise Surveys Indicators Data - World Bank Group, https://www.enterprisesurveys.org/en/ enterprisesurveys,(May 28, 2024).

/data/exploretopics/paying-taxes/why-matters#2> accessed 28 May 2024. 26 Enterprise Surveys Indicators Data - World Bank Group, https://www.enterprisesurveys.org/en/ enterprisesurveys,(May 28, 2024). 27 Vanessa Finch and David Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edition, Cambridge University Press 2017). 28 Id. 29 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (Bankruptcy Law Reforms Committee 2015), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf,(Dec. 11, 2023). 30 Department of Trade: Insolvency Law Review Committee: Reports and Papers (1976) files and papers. 31 Vanessa Finch, The Measures of Insolvency Law (1997) 17 Oxford Journal of Legal Studies 227. 32 Insolvency & Bankruptcy Board of India, IBC: Idea, Impressions and Implementation (2022),https://ibbi.gov.in/uploads/ whatsnew/b5fba368fbd5c5817333f95fbb0d48bb.pdf, (June 12, 2024). 33 Finch, supra note 31.

26 1. Support the credit system. 2. To enable early insolvency assessment and resolve it immediately. 3. Prevent conflicts among creditors. 4. Realise value from debtors’ assets with minimum delay and expense. 5. Fair distribution of realised proceeds among creditors. 6. Ensuring honest realisation and distribution proceedings. 7. Ascertain the cause of insolvency. 8. Safeguarding the interests of not just debtors and creditors but other members of society affected by such failure. 9. Preserving viable enterprises that can contribute to the nation’s economy. A combination of the various theoretical perspectives guides the goals of modern insolvency

ety affected by such failure. 9. Preserving viable enterprises that can contribute to the nation’s economy. A combination of the various theoretical perspectives guides the goals of modern insolvency law. While several schools of thought exist on insolvency, two schools, the traditionalist and the proceduralist, have been adopted widely by scholars. While several theories have evolved from the traditionalist and proceduralist schools of thought, two theories have gained traction. Firstly, the creditor bargain theory was propounded by Baird and Jackson, who rely on proceduralist principles and contractarianism.34 Secondly, the Communitarian theory of insolvency has developed from traditionalist thinkers. Proceduralists believe in a streamlined bankruptcy system that aims to maximise creditors’ recovery. Traditionalists believe that insolvency is a tool to rehabilitate the company and protect the interest of all stakeholders while securing creditor wealth maximisation goals. While the traditionalists propose a more inclusive approach to resolving corporate insolvency that takes into consideration the interests of all stakeholders, Proceduralists contend that insolvency law should address issues that arise only within bankruptcy and non-insolvency creditors should not be protected by law unless doing so maximises value for creditors.

uralists contend that insolvency law should address issues that arise only within bankruptcy and non-insolvency creditors should not be protected by law unless doing so maximises value for creditors. We briefly discuss both these theories below to understand how they interact with the principles of taxation. TAXATION IN A CONTRACTARIAN MODEL OF INSOLVENCY To understand how the principles of taxation operate within a contractarian model of insolvency, we explore the creditors’ bargain theory of insolvency, which is rooted in the nexus of contracts perspective adopted by proceduralists. Those who view insolvency from a proceduralist perspective have adopted the Creditor’s Bargain Theory and the Contractarian Perspective. They view insolvency as a limited process driven by the market to create the optimal outcome for creditor wealth maximisation. 34 “The contractarian theory posits that the relationship between the managers and shareholders of a public corporation is contractual.”Michael Klausner, The Contractarian Theory of Corporate Law: A Generation Later (2007) 31CorpL779 The Journal of Corporation Law, https://law.stanford.edu/wp-content/uploads/2015/06/31JCorpL779.pdf,(May 2, 2024).

er, The Contractarian Theory of Corporate Law: A Generation Later (2007) 31CorpL779 The Journal of Corporation Law, https://law.stanford.edu/wp-content/uploads/2015/06/31JCorpL779.pdf,(May 2, 2024).

27 Proceduralist Perspective of Insolvency The proceduralist perspective of insolvency views the existence of a firm as a market-driven process, and bankruptcy should not be a tool for deciding whether firms are to live or die in a market.35 Proceduralists, as the name suggests, are deeply invested in the manner in which bankruptcy is conducted and its effect on external players’ behaviour and investment patterns.36 Proceduralists also consider the adjudicating authority as a neutral party that considers the biases of creditors, investors, managers, etc., to resolve the dispute optimally.37 They do not subscribe to traditionalists’ redistribution goals of insolvency unless such redistribution is to enhance value for the creditors.38 They also do not find any inherent value in ensuring that the distressed entity can continue operating as a going concern but focus on preserving the entity’s value to allow market solutions to resolve the company’s ultimate fate.39 Professor Ted Janger summarised the determinative factors to differentiate traditionalists from proceduralists – According to Douglas Baird, three litmus test questions, or axioms, determine a scholar’s affiliation. These questions are (1) whether the Bankruptcy Code should seek to rehabilitate firms; (2) whether bankruptcy judges should alter non-bankruptcy entitlements in order to rehabilitate firms;

iliation. These questions are (1) whether the Bankruptcy Code should seek to rehabilitate firms; (2) whether bankruptcy judges should alter non-bankruptcy entitlements in order to rehabilitate firms; and (3) whether bankruptcy judges are capable of distinguishing likely candidates for reorganisation from firms that are destined to fail. The paradigmatic proceduralist answers “no” to each question, while the paradigmatic traditionalist answers “yes” to all three.40 Baird argues that the objective of insolvency should neither be liquidation nor reorganisation but should ensure that the firm’s assets are used optimally.41 In his view, bankruptcy should exist to ensure that the market decides when a firm fails and that the lack of funds to repay creditors should not determine the failure of a firm. Further, he contends that the bankruptcy law cannot be justified if used to prolong bad companies’ lives. Proceduralists largely adopt a contractarian perspective of corporations in insolvency. The creditor’s bargain theory adopted by proceduralists is rooted in contractarianism.42 Contractarianism in Insolvency: The Creditors Bargain Theory The creditor’s bargain theory is rooted in the nexus of contract perspective,43 which proceduralists adopt.

rooted in contractarianism.42 Contractarianism in Insolvency: The Creditors Bargain Theory The creditor’s bargain theory is rooted in the nexus of contract perspective,43 which proceduralists adopt. The nexus of contracts perspective suggests that every corporate entity, at its core, is an amalgamation of bilateral contracts among shareholders, investors, lenders, 35 Douglas G Baird, Bankruptcy’s Uncontested Axioms (1998) 108 The Yale Law Journal 573.Thomas H Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain (1982) 91 The Yale Law Journal 857. 36 Baird supra note 39, at 578. 37 Id., at 579. 38 Charles W Mooney, A Normative Theory of Bankruptcy Law: Bankruptcy as (Is) Civil Procedure [2003] SSRN Electronic Journal, http://www.ssrn.com/abstract=425120, (Dec. 11, 2023). 39 Id. 40 Edward J Janger, Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design [2001] SSRN Electronic Journal, http://www.ssrn.com/abstract=260598,(Feb. 16, 2024). 41 Baird, supra note 39, at 582. 42 Finch, supra note 31. 43 Christopher F Symes, Statutory Priorities in Corporate Insolvency Law: An Analysis of Preferred Creditor Status (1st edition, Routledge 2016).

ird, supra note 39, at 582. 42 Finch, supra note 31. 43 Christopher F Symes, Statutory Priorities in Corporate Insolvency Law: An Analysis of Preferred Creditor Status (1st edition, Routledge 2016).

28 directors, managers, etc.44 The creditor’s bargain theory finds utility in a contractarian interpretation of corporations. Contractarianism emphasises shareholder wealth maximisation. Professor Ian Ramsay and Dr Robert Austin expounded on the shareholder primacy envisaged in contractarianism, who argue that a competitive market creates a greater incentive to maximise shareholder wealth than specific legal rules and regulations.45 The creditor’s bargain theory, as envisaged by Jackson and Baird, acts as a debt collection mechanism in which the creditors of the enterprise agree beforehand on the collective procedure to enforce their claims.46 This reflects a notional agreement that would have been formed had the creditors been given the chance to bargain with each other before granting credit to the debtor.47 Jackson argues that the cost of transferring the debtor’s property to the creditors would be kept to a minimum through an ex-ante pre-determined collective procedure.48 Creditors bargain theory indirectly shows what real-world parties would agree to in such a hypothetical agreement if all parties acted rationally.49 The ex-ante nature of the creditor’s bargain supposes that the existence of such a bargain would lead to the creditors renouncing their independent claims and instead enforcing a single collective claim, thereby addressing the inefficiencies

in supposes that the existence of such a bargain would lead to the creditors renouncing their independent claims and instead enforcing a single collective claim, thereby addressing the inefficiencies that arise with the ‘first in time, first in priority’ scheme of asset distribution.50 Professor Christopher Symes expounds on the contractarian roots of the creditor’s bargain theory – However, the notion of shareholder primacy that underpins the contractarian perspective can be substituted in an insolvent corporation by the concept of creditor primacy - a requirement to act in the interests of creditors and to maximise their distribution from the estate.51 Symes argues that just as a contractarian view of a corporation exists with a notion of shareholder primacy, a contractarian view of an insolvent corporation would exist with a notion of creditor primacy, which is a crucial element of the IBC. Criticisms of Creditors Bargain Theory Nevertheless, the creditor’s bargain theory has been criticised for several reasons, including its focus on pre-insolvency rights, lack of consideration of corporate rescue and other non- 44 Villios, supra note 3. 45 Ian Ramsay and Robert Austin, Ford, Austin and Ramsay’s Principles of Corporations Law, (17th edn, Lexis Nexis Butterworths 2018), https://store.lexisnexis.com.au/products/ford-austin-and-ramsays-principles-of-corporations- law-17th-edition-skuprinciples_of_corporations_law_17th_edition,(Feb.

edn, Lexis Nexis Butterworths 2018), https://store.lexisnexis.com.au/products/ford-austin-and-ramsays-principles-of-corporations- law-17th-edition-skuprinciples_of_corporations_law_17th_edition,(Feb. 16, 2024). 46 Douglas Baird and Thomas Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy (1984) 51 University of Chicago Law Review, https://chicagounbound.uchicago.edu/uclrev/vol51/iss1/5. 47 Symes, supra note 43. 48 Baird and Jackson (n 46). 49 Thomas H Jackson and Robert E Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain (1989) 75 Virginia Law Review 155. 50 Ruzita Azmi, Adilah Abd Razak and Siti Nur Samawati Ahmad, The Theories Underpinning Personal Insolvency Or Bankruptcy Law: A Legal Overview (2018) Public Law Remedies In Government Procurement: Perspective From Malaysia European Proceedings of Social and Behavioural Sciences, https://www.europeanproceedings.com/article/10.15405/ epsbs.2018.12.03.49,(Dec. 11, 2023). 51 Symes, supra note 43.

Perspective From Malaysia European Proceedings of Social and Behavioural Sciences, https://www.europeanproceedings.com/article/10.15405/ epsbs.2018.12.03.49,(Dec. 11, 2023). 51 Symes, supra note 43.

29 economic values such as moral, political, social, and personal considerations, as detailed below.52 In Finch’s view, one of the criticisms of the creditor’s bargain theory is that creating a common pool of assets prior to insolvency would not be logical since repayments are ordinarily made on income, not from the asset sale.53 Furthermore, it is contended that income generated arises not merely from the asset but from the entire structure and network of a particular distressed entity.54 The creation of a pool of assets arises only from insolvency, and not prior to insolvency, she argues – It is, indeed, insolvency law itself that creates an estate or pool of assets and this undermines any assertion that insolvency processes should maximise the value of a pre-existing pool of assets and should not disturb pre-insolvency entitlements.55 Finch believes that any ex-ante bargain that takes place would reflect the disparities in the creditors’ skill, leverage, and wealth.56 Such an ex-ante bargain would likely be oppressive to weaker creditors and lead to inefficient outcomes.57 The second major criticism of the creditor’s bargain theory is its failure to consider the distributional consequences of such an ex-ante bargain.

weaker creditors and lead to inefficient outcomes.57 The second major criticism of the creditor’s bargain theory is its failure to consider the distributional consequences of such an ex-ante bargain. Since the creditor’s bargain takes place ex-ante, consensual creditors would be the only category of creditors involved in this bargain who have provided credit through a formal contractual arrangement. This disregards several non-consensual creditors, such as employees, income tax claims, tortious claims, etc, which would not arise at the time of extension of credit by contract creditors. The distributional consequences of the creditor’s bargain theory disregard the community interests, which may, in turn, have negative consequences on the economy. According to Korobkin, the creditor’s bargain model does not factor in creditors who would exist outside of formal contractual agreements and lack pre-insolvency rights due to being non-consensual creditors. This leads to unfair outcomes, given that those creditors with formal pre-insolvency rights do not bear all the costs of business failure.58 Korobkin instead posits a “principle of inclusion” – Let us call this the “principle of inclusion.” The principle of inclusion, it should be emphasised, does not speak at all to which particular demands should ultimately be recognised and which should be denied.

l this the “principle of inclusion.” The principle of inclusion, it should be emphasised, does not speak at all to which particular demands should ultimately be recognised and which should be denied. It provides only that no persons should be disqualified from pursuing their aims merely by virtue of the position that they occupy.59 The creditor’s bargain theory is also criticised for its inability to consider corporate rescue in conditions where the economic value of the corporate entity does not exceed the immediate 52 Villios. supra note 3. 53 Finch and Milman, supra note 27. 54 Id. 55 Id. 56 Id. 57 Villios, supra note 3. 58 Donald R Korobkin, Contractarianism and the Normative Foundations of Bankruptcy Law (1992) 71 Texas Law Review 541. 59 Id.

30 value that could be obtained by liquidating the company assets.60 Professor Korobkin argues that corporations are moral, political and social agents and not merely economic agents.61 He, therefore, says that insolvency by acting in a rehabilitative manner would be able to account for political, moral, and social considerations that the corporation’s failure would cause.62 These criticisms of the creditor’s bargain theory led to its evolution and modification. The modification of the creditor’s bargain theory by Scott and Jackson in 1989 addressed some of the concerns that had arisen.

of the creditor’s bargain theory led to its evolution and modification. The modification of the creditor’s bargain theory by Scott and Jackson in 1989 addressed some of the concerns that had arisen. They incorporate into the bargain a risk-sharing theory where “Secured creditors would agree that whenever insolvency is triggered by common risks (interrelated technological events with unpredictable effects), they would share with unsecured creditors and equity some of the asset pool otherwise reserved to them. Such an arrangement would provide a method of diversification for those risks that cannot be successfully reduced by individualised risk bearing.”63 Jackson developed the risk-sharing theory as a response to criticism that the creditor’s bargain theory does not account for the distributional consequences of bankruptcy. The risk-sharing theory broadly identifies two risks: common economic industry-wide risks and company-specific risks.64 Taxation in Creditors Bargain Theory Having examined the scope and evolution of the creditor’s bargain theory, we examine how principles of taxation operate within this theory.

pany-specific risks.64 Taxation in Creditors Bargain Theory Having examined the scope and evolution of the creditor’s bargain theory, we examine how principles of taxation operate within this theory. The creditor’s bargain theory does not provide any standing for statutory dues, including taxation dues that a company owes to tax authorities.65 The hypothetical bargain conducted by the ex-ante would not include non- consensual creditors who do not have formal rights.66 The tax authorities, being non-consensual creditors, would not be a part of the ex-antehypothetical bargain in the creditor’s bargain theory and, as a result, would not be eligible to recover any money. Jackson argues that taxation losses as a consequence of firms entering insolvency have to be accounted for while setting the rates of taxation – Finally, the state is itself likely to be a claimant (oftentimes, as in its taxing capacity, a non- consensual one), in which case the level of priority it provides is a part of the cost calculus it has decided on in setting its rates (whether tax rates or otherwise).67 The argument that inconsistencies in revenue collection due to firms entering insolvency are to be resolved by adjustments in tax rates leads to a conflict between the distributional goals of the creditor’s bargain theory and the ability of the taxation systems to ensure fiscal adequacy and avoid complex tax systems, which are fundamental principles of effective tax systems. 60 Villios, supra note 3.

’s bargain theory and the ability of the taxation systems to ensure fiscal adequacy and avoid complex tax systems, which are fundamental principles of effective tax systems. 60 Villios, supra note 3. 61 Donald R Korobkin, Rehabilitating Values: A Jurisprudence of Bankruptcy (1991) 91 Columbia Law Review 717. 62 Id. 63 Jackson and Scott, supra note 49. 64 Medha Shekar and Anuradha Guru, Theoretical Framework of Insolvency Law. 65 Villios, supra note 3. 66 Id. 67 Jackson, supra note 35.

31 The collective procedure undertaken by creditors in recovering debt under the creditor’s bargain theory is linked to the pari passu principle,68 which prescribes that creditors be awarded an equal stake in the distribution of assets during insolvency.69 The pari passu principle within the creditor bargain model considers equality only among the secured creditors with formal pre-insolvency rights.70 Equity prescribed in taxation would be defeated by such an application of equity in insolvency as it would effectively mean that the tax burden is not equally distributed among all taxpayers.71 The paripasu principle effectively shifts the tax burden onto society without accounting for the cost of the distribution of assets.72 Herein arises another source of friction between the creditor’s bargain model of insolvency and equitable taxation principles. It has also been theorised that a particular value shift under the creditors’ bargain theory imposes costs on middle-class taxpayers and distributes benefits to higher-income taxpayers.73

principles. It has also been theorised that a particular value shift under the creditors’ bargain theory imposes costs on middle-class taxpayers and distributes benefits to higher-income taxpayers.73 Therefore, there exists a theoretical tension between the basis of the creditor bargain theory and modern principles of taxation, with the creditor’s bargain model not providing any leeway for the functioning of tax during insolvency. This would inevitably lead to conflicts that would show up during insolvency proceedings. TAXATION IN COMMUNITARIAN THEORY OF INSOLVENCY Having examined how the principles of taxation operate within the contractarian perspective of insolvency law based on proceduralism (creditor bargain theory), this section explore show these principles operate within a communitarian perspective of insolvency based on a traditionalist perspective. The traditionalist perspective sees the role of insolvency as one that enables the rehabilitation of distressed firms.74 They contend that in the absence of insolvency laws, the distressed firms would likely fail and would cause job losses and economic damage to the community at large.75 This school of thought maintains that insolvency rules and their design would not affect creditors’ behaviour and willingness to enter into arrangements with various business enterprises.76 They view the insolvency resolution process in its entirety as a self-contained process.

ot affect creditors’ behaviour and willingness to enter into arrangements with various business enterprises.76 They view the insolvency resolution process in its entirety as a self-contained process. Insolvency law, accordingly, must give adjudicating authorities broad and flexible powers, as insolvency law cannot be designed to be applied commonly to different types of communities. From the traditionalist’s viewpoint, the underlying objective of insolvency is to enable financially distressed entities to avoid being liquidated and maintain the entity’s value as a going concern.77 68 The Pari Passu principle postulates that creditors appropriate an equal portion rate of the assets of the insolvent. See Andrew Keay, Insolvency Law: A Matter of Public Interest? (2000) 51 Northern Ireland Legal Quarterly 509. 69 Villios, supra note 3. 70 Id. 71 Id. 72 Id. 73 Frances R Hill and Frances A Hill, Toward a Theory of Bankruptcy Tax: A Statutory Coordination Approach (1996) 50 The Tax Lawyer 103. 74 Baird, supra note 35. 75 Id. 76 Id. 77 Shekar and Guru, supra note 64.

Hill and Frances A Hill, Toward a Theory of Bankruptcy Tax: A Statutory Coordination Approach (1996) 50 The Tax Lawyer 103. 74 Baird, supra note 35. 75 Id. 76 Id. 77 Shekar and Guru, supra note 64.

32 Communitarian Theory While the creditor’s bargain theory follows a contractarian perspective that emphasises the private rights of creditors, the communitarian theory of insolvency views insolvency as public law and considers the interests of multiple stakeholders.78 Communitarian theory propounds that corporations have a responsibility to multiple stakeholders, including but not limited to creditors, clients, employees, local communities, etc.79 Finch describes the distributional goals envisaged in the communitarian vision as - It accordingly countenances the redistribution of values so that on insolvency high priority claimants may to some extent give way to others, including the community at large, in sharing the value of an insolvent.80 Professor Andrew Keay argues that public interest must be essential in insolvency law.

may to some extent give way to others, including the community at large, in sharing the value of an insolvent.80 Professor Andrew Keay argues that public interest must be essential in insolvency law. Keay refrains from defining the exact scope of public interest but envisions it as: For the purposes of insolvency law, that the public interest involves taking into account interests which society has regard for and which are wider than the interests of those parties directly involved in any given insolvency situation, that is, the debtor and the creditors.81 Professor Donald Korobkin ascribes to the communitarian vision of insolvency through a value-based theory.82 The value-based theory suggests that insolvency considers the distributional impacts on those who are not technically creditors or lack formal legal rights in the distressed entity.83 It is multi-dimensional and looks at economic, social and political challenges that arise from insolvency.84 Elizabeth Warren, another proponent of a multi- dimensional/multi-value, views insolvency as an elastic and interconnected subject.85 The Value-based theory outlined by Finch states– Multiple values/eclectic approaches as exemplified by Warren and Korobkin see insolvency processes as attempting to achieve such ends as distributing the consequences of financial failure among a wide range of actors; establishing priorities between creditors; protecting the interests of future claimants; offering opportunities for continuation, reorganisation, rehabilitation; providing time for adjustments;

tors; establishing priorities between creditors; protecting the interests of future claimants; offering opportunities for continuation, reorganisation, rehabilitation; providing time for adjustments; serving the interests of those who are not technically creditors but who have an interest in continuation of the business (for example, employees with scant prospect of re- employment, customers, suppliers, neighbouring property owners and state tax authorities); and protecting the investing public, jobs, the public and community interests.86 The communitarian perspective received support from the Cork Report in 1982, where the insolvency law was deemed to have three parties, i.e., the creditor, debtor, and society.87 The 78 Symes, supra note 43. 79 Id. 80 Finch, supra note 31. 81 Keay, supra note 68. 82 Korobkin, supra note 61; Korobkin, supra note 58. 83 Id. 84 Shekar and Guru, supra note 64. 85 Elizabeth Warren, Bankruptcy Policy (1987) 54 The University of Chicago Law Review 775. 86 Finch and Milman, supra note 27. 87 Symes, supra note 43.

83 Id. 84 Shekar and Guru, supra note 64. 85 Elizabeth Warren, Bankruptcy Policy (1987) 54 The University of Chicago Law Review 775. 86 Finch and Milman, supra note 27. 87 Symes, supra note 43.

33 communitarian perspective also inspired the Indian Insolvency law. The Bankruptcy Law Reforms Committee (BLRC), while preparing the IBC, referred to two design principles, namely, that creditors who were not part of the process must have their interests represented. Secondly, the rights of all creditors must be respected equally.88 The IBC follows a value-based theory espoused by Korobkin. It adopts a traditionalist approach that considers the interests of all stakeholders to try and ensure the entity retains value as a going concern.89 The manner in which the principles of taxation operate in the communitarian theory is discussed below to understand the root of theoretical divergences. Taxation in a communitarian theory of insolvency Unlike the creditor’s bargain theory, the communitarian theory of insolvency allows non- consensual creditors’ interests to be considered during the insolvency resolution process.90 The concern about protecting community interests would effectively require creditors and the company to bear some of the costs of failure, such as tortious claims, environmental damage, etc, instead of passing the burden onto the taxpayers.91 Further, the communitarian perspective focuses on distributional outcomes and ensures that the costs are not externalised to those who lack formal pre-insolvency rights.92 The reduction in the costs being externalised

nitarian perspective focuses on distributional outcomes and ensures that the costs are not externalised to those who lack formal pre-insolvency rights.92 The reduction in the costs being externalised itself would benefit the level of tax revenue being collected. The focus on rehabilitation creates the opportunity for future tax revenue to arise from the restructured entity.93 The notions of equity in tax law (horizontal and vertical equity) are also far more compatible with this theory due to the focus on a more equitable distribution scheme being the focus of insolvency law.94 Adopting a broader economic model of efficiency that looks beyond ensuring only the highest return for creditors secures the broader interests of the community.95 The focus on transaction cost efficiency that aims at achieving the results of insolvency at the least cost and effort compliments notions of efficiency in taxation. Both these theories of insolvency, by their very nature, treat tax dues to the state differently. The communitarian theory is far more harmonised with the broader theoretical and principled frameworks in which taxation exists. This shows the theoretical divergences between various insolvency theories and taxation principles. Given the greater harmonisation with the principles of taxation, the question remains as to why legislations framed with communitarian objectives, such as the IBC, continue to clash with taxation statutes and claims.

harmonisation with the principles of taxation, the question remains as to why legislations framed with communitarian objectives, such as the IBC, continue to clash with taxation statutes and claims. The answer to this is explored by examining the state’s taxation powers in India from the lens of India’s Constitution. 88 Shekar and Guru, supra note 64; The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, supra note 29. 89 Shekar and Guru, supra note 64. 90 Villios, supra note 3. 91 Id. 92 Id. 93 Id. 94 Id. 95 Finch, supra note 31.

34 APPLICATION OF CONSTITUTIONAL TENETS OF INDIAN TAXATION IN INDIAN INSOLVENCY In India, the field of taxation is broadly governed by the Income Tax Act of 196196 and the Central Goods and Services Act of 2017.97 The field of Insolvency is governed by the Code.98 Tax revenue collection is crucial to the government’s ability to redistribute wealth, target inequality, and fund vital public services.99 Ineffective revenue collection and protracted legal disputes are detrimental to the State and the private sector alike.100 The number of tax disputes in India is growing at a rate faster than the judicial system can clear.101 In 2023, the Government stated that its priority was increasing the appeals disposal rate to reduce the burden on taxpayers and the system.102 The Indian taxation system, for the longest time, was characterised by the compensatory tax theory, which was only recently deemed as a wrong interpretation of the right to tax as granted by the Constitution of India.

n system, for the longest time, was characterised by the compensatory tax theory, which was only recently deemed as a wrong interpretation of the right to tax as granted by the Constitution of India. The compensatory tax theory was developed to reconcile the freedom of trade under Article 301 and the state’s sovereign right to tax. Under this theory, a tax would be justified when the state provided some facilities or services commensurate with the tax levied. While the compensatory tax theory never intersected with the IBC in practice, examining its intersection would help better understand the evolving divergences between these two fields. Communitarian vision of IBC The earlier Indian insolvency framework, being fragmented, gave rise to forum shopping, and placed greater emphasis on secured financial creditors (FCs),103 thus leading to a lack of focus on the socio-economic impact of insolvency proceedings. The BLRC tasked with preparing the Indian insolvency resolution framework104 referred to the UNCITRAL Legislative Guide on Insolvency and suggested that insolvency proceedings should be the least cost imposed on society.105 The underlying philosophy behind the IBC broadly aligns with a communitarian vision of insolvency.106 96 The Income Tax Act 1961, https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx. 97 Central Goods and Services Tax Act 2017, https://www.indiacode.nic.in/handle/123456789/15689. 98 Insolvency and Bankruptcy Code 2016, https://www.indiacode.nic.in/handle/123456789/2154?sam_handle= 123456789/1362.

and Services Tax Act 2017, https://www.indiacode.nic.in/handle/123456789/15689. 98 Insolvency and Bankruptcy Code 2016, https://www.indiacode.nic.in/handle/123456789/2154?sam_handle= 123456789/1362. 99 Taxes & Government Revenue, World Bank,https://www.worldbank.org/en/topic/taxes-and-government-revenue, (June 12, 2024). 100 IMF, How Can an Excessive Volume of Tax Disputes Be Dealt With?, https://www.imf.org/external/np/leg/tlaw/2013/ eng/tdisputes.pdf, (June 24, 2024). 101 Tax Department Sets Strict Targets to Resolve Appeals: Sources, CNBCTV18, https://www.cnbctv18.com/finance/ tax-department-sets-strict-targets-to-resolve-appeals-sources-18368031.htm, (Feb. 9, 2024). 102 Id., Dhirendra Kumar, Budget 2024: Govt to Withdraw Outstanding Disputed Tax Demand to de-Clog Recover, Mint, https://www.livemint.com/budget/news/budget-2024-govt-to-withdraw-outstanding-disputed-tax-demand-to- de-clog-recovery-11706774550860.html, (Feb. 9, 2024). 103 Rajeswari Sengupta, Anjali Sharma and Susan Thomas, Evolution of the Insolvency Framework for Non-Financial Firms in India, http://www.igidr.ac.in/pdf/publication/WP-2016-018.pdf, (May 8, 2024); Aparna Ravi, The Indian Insolvency Regime in Practice-An Analysis of Insolvency and Debt Recovery Proceedings, http://igidr.ac.in/newspdf/publication/ WP-2015-027.pdf, (May 8, 2024). 104 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, supra note 29. 105 Id. 106 Shekar and Guru, supra note 64.

ewspdf/publication/ WP-2015-027.pdf, (May 8, 2024). 104 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, supra note 29. 105 Id. 106 Shekar and Guru, supra note 64.

35 The BLRC noted that the following primary objectives were to be met by the new insolvency framework107 – 1. Low time to resolution 2. Low loss in recovery 3. High levels of debt financing across a variety of debt instruments The IBC was enacted to promote business reorganisation and retain corporate entities’ value as a going concern to promote growth and efficiency in the market.108 The overall objective of the IBC was to create information symmetry between creditors and debtors to enable creditor wealth maximisation. It aimed to assess the viability of the business to enable resolving the entity while maintaining it as a going concern.109 These are also the modern goals and objectives of insolvency law. The IBC is reflective of the value-based theory espoused by Korobkin and Warren. This is evidenced in the BLRC Report, which expounds the principles that the IBC: These principles are derived from three core features that most well developed bankruptcy and insolvency resolution regimes share: a linear process that both creditors and debtors follow when insolvency is triggered; a collective mechanism for resolving insolvency within a framework of equity and fairness to all stakeholders to preserve economic value in the process; a time-bound process either ends in keeping the firm as a going enterprise or liquidates and distributes the assets to the various stakeholders.

takeholders to preserve economic value in the process; a time-bound process either ends in keeping the firm as a going enterprise or liquidates and distributes the assets to the various stakeholders. These features are common across widespread differences in structure and content, present either through statutory provisions or their implementation in practice.110 Constitutional Perspective of Taxation In India, after independence, the right of the state to tax its citizens emerged from the Constitution of India. Article 366 (28) of the Constitution of India defines taxation as follows – “taxation” includes the imposition of any tax or impost, whether general or local or special, and “tax” shall be construed accordingly 111 The Supreme Court has held that the right to tax exists as a sovereign right of the state. The court held – The power to levy taxes has been recognised as an essential attribute of sovereignty. The power to tax is a necessary incident of sovereign authority (imperium) but not an incident of proprietary rights (dominium). …… The assertion of authority to collect a duty or tax is in the realm of the sovereign authority, but not a proprietary right. 112 107 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, supra note 29. 108 Id. 109 Id. 110 Id. 111 The Constitution of India 1950, Article 366(28). 112 Thressiamma Jacob v. Dept of Mining & Geology 2013 9 SCC 725 (Supreme Court of India).

ale and Design, supra note 29. 108 Id. 109 Id. 110 Id. 111 The Constitution of India 1950, Article 366(28). 112 Thressiamma Jacob v. Dept of Mining & Geology 2013 9 SCC 725 (Supreme Court of India).

36 Taxation, therefore, while being an extension of the sovereign right of the state, is not an extension by the government into the proprietary rights of persons or corporations. While tax is understood as a means to raise revenue to meet the state’s expenditure, courts have held that today, taxation also exists to achieve certain fiscal and social objectives.113 It is important to note that despite taxation being a state sovereign right, any tax levied has to conform with all other provisions of the Constitution of India.114 Against this backdrop, the compensatory tax theory emerged in India through the court’s interpretation of Part XIII of the Indian Constitution, which regulates trade and commerce. Article 301 of Part XIII states – 301. Freedom of trade, commerce and intercourse. —Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.115 The Supreme Court, in one instance, was tasked with interpreting whether taxation statutes would be ultra vires of Article 301due to the resultant restriction on trade and commerce.116 In Automobile (Rajasthan) Transport Ltd. v. State of Rajasthan,117 the court was tasked with determining the validity of the Rajasthan Motor Vehicles Taxation Act of 1951.

n on trade and commerce.116 In Automobile (Rajasthan) Transport Ltd. v. State of Rajasthan,117 the court was tasked with determining the validity of the Rajasthan Motor Vehicles Taxation Act of 1951. While analysing whether the said legislation and imposition of tax was a restriction on trade and commerce, the court held that the Act was valid and carved out an exception under Article 301 that would exempt compensatory taxes. The court expounded the scope of taxes being compensatory as follows - It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. It would be impossible to judge the compensatory nature of a tax by a meticulous test, and in the nature of things that cannot be done.118 If a court determined that a particular tax levied was compensatory, it could not be said to be ultra vires of the Constitution of India.

ous test, and in the nature of things that cannot be done.118 If a court determined that a particular tax levied was compensatory, it could not be said to be ultra vires of the Constitution of India. In this case, the court noted that the tax does not restrict trade but instead facilitates the maintenance and provision of roads, which was a constitutionally sound law.119 The compensatory tax theory was widened and held that “some link between the tax and facilities extended to such dealers directly or indirectly” would be sufficient for a taxing statute to be exempt from scrutiny under Article 301.120 The broad interpretation of the compensatory tax theory led to difficulties distinguishing taxes from fees, which traditionally had a quid pro quo relationship wherein payment was made for particular services rendered.121 Over time, the broad interpretation of the compensatory tax theory was gradually narrowed through a series of judicial decisions.122 113 Elel Hotels & Investments Ltd v. Union of India1989 3 SCC 698 (Supreme Court of India). 114 Karthik Sundaram, Tax, Constitution, and the Supreme Court Analysing the Evolution of Taxation Law in India (Oakbridge Publishing Private Limited 2019). 115 The Constitution of India, Article 301. 116 Atiabari Tea Co v. the State of Assam1961 1 SCR 809 (Supreme Court of India). 117 Automobile (Rajasthan) Transport Ltd v State of Rajasthan 1962 SCC OnLine SC 21 (Supreme Court of India). 118 Id. 119 Id. 120 Bhagatram Rajeevkumar v.

ssam1961 1 SCR 809 (Supreme Court of India). 117 Automobile (Rajasthan) Transport Ltd v State of Rajasthan 1962 SCC OnLine SC 21 (Supreme Court of India). 118 Id. 119 Id. 120 Bhagatram Rajeevkumar v. CST 1995 Supp 1 SCC 673 (Supreme Court of India). 121 Neha Pathakji, Slippery Slopes of Compensatory Tax and Fee (2014) 56 Journal of the Indian Law Institute 78. 122 Id.

37 In 2017, the Supreme Court in Jindal Stainless Ltd. (2) v. State of Haryana123 held that the compensatory tax theory was not rooted in constitutional jurisprudence and, as a result, was no longer a good law. The court reasoned that categorising taxes as compensatory effectively obliterates the difference between a fee and a tax.124 The court relied on Thomas M Cooley’s definition of tax as “a compulsory exaction of money for general public good”.125 The court held that since all taxes are collected with the broader objective of serving a public purpose, then all taxes would effectively be compensatory when looked at broadly.126 The court, while analysing whether taxes could be construed as affecting the freedom of trade, held – Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word ‘Free’ used in Article 301 does not mean “free from taxation”127 The court, therefore, effectively held that a non-discriminatory tax could not be construed as a restrictive or violative of the rights to free trade enshrined under Part XIII of the Constitution of India.

treet, 2009 (published by the Penguin Group). 2 Banikinkar Pattanayak, Voluntary business closure time down to 93 days from 499 in FY22: Ministry of Corporate Affairs, Economic Times (Aug. 8, 2024).

42 corporate debtor (CD) is less than the outstanding debts. If each debtor were to pursue its own individual interest and recovery of the outstanding dues, then that would result in chaos. This situation gives rise to the need for a collective process, streamlined by a law and monitored by a judicial authority – to explore the possibility of a resolution without liquidation of the CD facing insolvency. A deal which can help the company survive would be in the interest of all stakeholders than the alternative of the company meeting its corporate death by going into liquidation. In certain cases, liquidation itself can be a better resolution, but if the business case of the CD is viable and has potential to be brought back on its feet, then ensuring survival of the company is certainly a better option and ought to be the legislative goal. The Insolvency and Bankruptcy Code (IBC/Code), which was operationalized in 2016, introduced a new regime exactly for this purpose – to facilitate corporate insolvency resolution. However, while evaluating the working or efficacy of IBC, the discourse often looks at it from the prism of recovery – how much of their dues creditors have been able to recover through the corporate insolvency resolution process (CIRP)? The ‘haircut’ creditors have to take is seen as a sort of failure.

of recovery – how much of their dues creditors have been able to recover through the corporate insolvency resolution process (CIRP)? The ‘haircut’ creditors have to take is seen as a sort of failure. However, this would not be the correct approach to look at this law or at the reforms this law may need going forward. The IBC, which brought in the much-needed reform to the legal regime for insolvency resolution, is premised on this principle. In the words of the former Chairman of Insolvency and Bankruptcy Board of India (IBBI), Dr. Sahoo – “The soul of the Code is resolution of insolvency of a firm by (a) a collective effort (b) to keep it going (c) to maximise the value of its assets, and (d) to balance the interests of all stakeholders.”3 This policy objective behind the IBC has been recognized, reaffirmed and repeatedly highlighted by the courts as well. In the Swiss Ribbons case (2019), the Supreme Court had underlined this aspect by unequivocally stating that the “primary focus of the [IBC] is to ensure revival and continuation of the corporate debtor by protecting….. it from a corporate death by liquidation”. The Court further nuanced it by adding that “[the IBC] is a beneficial legislation which puts the corporate debtor back on its feet.”4 (emphasis added). A recovery-centric approach misses the point and ignores the equally important public interest / beneficial legislation feature which is hardwired into IBC. In the Binani Industries case (2018), the National Company Law Appellate Tribunal(NCLAT) had emphasised the ‘resolution’ goal of the IBC.

/ beneficial legislation feature which is hardwired into IBC. In the Binani Industries case (2018), the National Company Law Appellate Tribunal(NCLAT) had emphasised the ‘resolution’ goal of the IBC. The NCLAT emphasised it by noting that - [t]he purpose of Resolution is for maximisation of value of assets of the Corporate Debtor’ and thereby for all creditors. It is not maximisation of value for a ‘stakeholder’ or ‘a set of stakeholders’ such as Creditors and to promote entrepreneurship, availability of credit and balance the interests. The first order objective is “resolution”. The second order objective is “maximisation of value of assets 3 Dr. M.S. Sahoo, Resolution: The Soul of IBC, IBBI Newsletter, Oct-Dec 2017. 4 Swiss Ribbons (P) Ltd. v. Union of India - (2019) 4 SCC 17, para 28. INCREASING RESOLUTIONS IS KEY TO IBC’S SUCCESS

43 of the ‘Corporate Debtor’’ and the third order objective is “promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.5 (emphasis added) In Invent Asset v.

Debtor’’ and the third order objective is “promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.5 (emphasis added) In Invent Asset v. GirnarFibres,6 the Supreme Court reiterated IBC’s primary goal by observing: “time and again, it has been expressed and explained by this Court that the provisions of the Code are essentially intended to bring the corporate debtor to its feet and are not of money recovery proceedings as such.” In Asset Reconstruction,7 the apex court once again reminded that IBC is not just a statute for recovery of debts or a law prescribing the modalities of liquidation of a corporate body, rather “it is essentially a statute which works towards the revival of a corporate body, unable to pay its debts.” Resolution of corporate insolvency is critical, especially in a developing economy like ours where capital is scarce and must be put to efficient use. As the 2021 ‘Report of the Working Group on Tracking Outcomes under the IBC’ noted - Unused or underused productive resources is anathema for the growth of a country and people. By rescuing viable businesses through the insolvency process and closing non-viable ones through liquidation, it is releasing resources, including entrepreneurs.

r the growth of a country and people. By rescuing viable businesses through the insolvency process and closing non-viable ones through liquidation, it is releasing resources, including entrepreneurs. The reallocation of resources to more efficient use is essential to optimise the economic cycle. In a research paper (August 2023) titled “Report of Study on Effectiveness of the Resolution Process: Firm Outcomes in the Post-IBC period” authored by two professors of IIM Ahmedabad, it is concluded, based on their data-based analysis and also qualitative analysis, that performance of the resolved firms has reverted to being productive and efficient and that resolved firms contribute to job creation, capital investments and efficient utilization of resources.8 Of course, “maximisation of value of the assets” (of the CD) is an objective, but resolution is and should always remain the primary focus. And maximisation of value does not mean just maximisation of recovery for the creditors. CIRP must be seen from the point of view of all stakeholders and not just from the perspective of ‘a stakeholder’ or ‘a set of stakeholders.’ The CD also consists of several employees and workmen whose livelihood is dependent on the outcome of the CIRP. If there is a resolution applicant who can continue to run the CD as a going concern, every effort must be made to try and see that this is made possible. Ultimately, CIRP is largely a creditor-led, commercial process. It is the wisdom of the creditors that decides whether a CD will have a resolution plan or will go into liquidation.

is made possible. Ultimately, CIRP is largely a creditor-led, commercial process. It is the wisdom of the creditors that decides whether a CD will have a resolution plan or will go into liquidation. The CIRP must attract resolution plans from third parties (who until they submit a plan have no skin in the game in so far as the insolvent CD is concerned) and to do so will always involve a compromise. 5 Binani Industries Limited v. Bank of Baroda & Anr, 2018 SCC OnLine NCLAT 565, para 17.2. 6 M/s. Invent Asset Securitisation and Reconstruction Pvt. Ltd. v. M/s. Girnar Fibres Ltd. – 2022 SCC OnLine SC 808, para 4. 7 Asset Reconstruction Company (India) Limited v. Tulip Star Hotels Limited & Ors – 2022 SCC OnLine SC 944, para 55. 8 Prof. M.P. Ram Mohan and Prof. B. Gopalakrishnan, Report of Study on Effectiveness of the Resolution Process: Firm Outcomes in the Post-IBC Period, IIM-Ahmedabad (Aug. 2023). SIDHARTH SHARMA

44 Unfortunately, we cannot say that IBC has met its resolution goal optimally. While the reasons for it can be several, research shows that since the inception of the law, “for every one case resolved under the Code, four cases end up in liquidation”.9 It cannot be pinpointed whether the recovery-centric approach caused liquidations, but researchers have pointed out that “the COC focuses on the upfront payment and hence tends towards rejection of [Resolution Plans] where the haircut is high”.

centric approach caused liquidations, but researchers have pointed out that “the COC focuses on the upfront payment and hence tends towards rejection of [Resolution Plans] where the haircut is high”. This tendency of creditors to focus on higher upfront amounts rather than the ability or capacity of the resolution plan to revive the company, requires a more qualitative assessment.10. DELAYS IN CIRP: A BIG STUMBLING BLOCK TO SUCCESSFUL RESOLUTION The desire to maximise value is often seen as maximisation of recovery for the creditors and in the process, the primary focus gets mired in protracted litigation. The sanctity of the process and the timelines get short shrift. But it is important to remember that the part in the statement of objects and reasons of IBC which highlights “maximization of value” is preceded by an equally important consideration – that it should happen “in a time bound manner”. It cannot be gainsaid that currently most CIRPs get unduly delayed. A research study undertaken under IBBI’s research initiative reveals that the main reasons for delays in CIRP are: (i) inadequate capacity of National Company Law Tribunal (NCLT); (ii) difficulty in marketing stressed assets; (iii) non-cooperation by CDs; and (iv) improper documentation model of companies.11 In the initial years of IBC, many cases took time to achieve finality due to a debate – and the resulting litigation cycle in NCLT, NCLAT and the Supreme Court – about the rights of operational creditors.

e initial years of IBC, many cases took time to achieve finality due to a debate – and the resulting litigation cycle in NCLT, NCLAT and the Supreme Court – about the rights of operational creditors. Cases involving dues of the Government, including tax authorities, would often make finality and a successful resolution at the end of the CIRP tunnel elusive. However, swift legislative amendments12 and supportive interpretation by the courts clarified the issue and cleared this bottleneck. It was recognised that in most cases, CIRP will not – it cannot – ensure payment of all dues. In Ghanashyam Mishra v. Edelweiss (2021),13 the Supreme Court quashed tax demands of hundreds of crores which were being pursued by the Central and State revenue authorities against companies which had undergone CIRP in terms of an approved resolution plan. The apex court held that all dues owed to the government, including tax dues, that are not part of the resolution plan shall stand extinguished and no proceedings in respect of such dues could be continued. 9 Neeti Shikha and Urvashi Sinha, Assessment of Corporate Insolvency and Resolution Timeline, IBBI Research Initiative (RP-01/2021) (Feb. 2021). 10 Id. 11 Id. 12 See, Insolvency and Bankruptcy Code (Amendment) Act, 2019. (Amendment to Section 31 of IBC as made to clarify binding effect of approved resolution plans on Central and State Government authorities to whom any statutory dues are owed by the corporate debtor). 13 See, Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. - (2021) 9 SCC 657.

and State Government authorities to whom any statutory dues are owed by the corporate debtor). 13 See, Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. - (2021) 9 SCC 657. [Note: Owing to some subsequent conflicting judgments (in Rainbow Papers (2022) and Paschimanchal Vidyut (2023), ambiguities still remain on priority of dues under state laws which create statutory charge, and which can be held to be in the nature of secured financial debt. In the author’s respectful view, Ghanashyam Mishra and Paschimanchal lay down the correct law. This is however not the subject matter of this article]. INCREASING RESOLUTIONS IS KEY TO IBC’S SUCCESS

45 While delays in CIRP due to repeated issuance of ‘Expression of Interest’, numerous modifications to ‘Request for Resolution Plans’, iterations in the resolution plan, and consideration of unsolicited plans have been addressed by the IBBI through amendments to the rules, delays in the judicial process – at the stage of admitting cases and appellate proceedings at almost of every stage of CIRP – is a serious issue. The 2024 Report of the Standing Committee on Finance on ‘Implementation of Insolvency and Bankruptcy Code (IBC) – Pitfalls and solutions’ noted that “13,170 IBC cases pending with the NCLT involve an approximate amount of Rs.

nding Committee on Finance on ‘Implementation of Insolvency and Bankruptcy Code (IBC) – Pitfalls and solutions’ noted that “13,170 IBC cases pending with the NCLT involve an approximate amount of Rs. 9,00,000 crore and that 71% of these cases have been pending for more than 180 days”.14 Much of the delay at the NCLT and NCLAT level is symptomatic of the larger problem of judicial delays in our country, but it is unfortunate that despite vesting the jurisdiction in specialised Tribunals, such delays continue. It is important to note there is no IBC-exclusive Tribunal. NCLT, and particularly the NCLAT today, is undoubtedly the most important commercial court in the country, with jurisdiction to adjudicate appeals under the Companies Act, Competition Act and the IBC – the three most important corporate-commercial laws. The infrastructure and manpower for this specialised Tribunal, therefore, has to be proportionately beefed up. This is an area that should be the focus of the next reform cycle for the efficient and efficacious working of the IBC. Speed is of the essence in CIRP. If it is not followed, there is bound to be reduction in value of the CD and that will be mutually destructive for all stakeholders.

d efficacious working of the IBC. Speed is of the essence in CIRP. If it is not followed, there is bound to be reduction in value of the CD and that will be mutually destructive for all stakeholders. Former IBBI Chairman, Dr. Sahoo, recognising that timeline is a foundational pillar of IBC, had articulated the fallout of delays in CIRP - In early days of default, enterprise value of a firm is usually higher than its liquidation value and hence the CoC is motivated to resolve insolvency to preserve its value rather than to liquidate it. However, the enterprise value of the firm reduces exponentially with time, as prolonged uncertainty about its ownership and control and generally apprehension surrounding insolvency leads to a flight of customers, vendors, workers, etc. The Code, therefore, mandates closure of the process ordinarily at the latest by 180th day.15 It is an acknowledged fact that delays have a direct bearing on the potential of rescuing the CD from liquidation. Studies show that delays, in fact, not only lead to lesser recovery but also reduce the chances of maintaining and resuscitating the CD as a going concern. Statistics collated by the IBBI show that delays in completion of the CIRP reduce the rate of recovery for creditors. Data of 947 resolved cases as of March, 2024 indicates a direct correlation between the length of the CIRP and the recovery rate. As per the data, the recovery rate for creditors stands at 49.2% if the CIRP is concluded within 330 days.

h, 2024 indicates a direct correlation between the length of the CIRP and the recovery rate. As per the data, the recovery rate for creditors stands at 49.2% if the CIRP is concluded within 330 days. It reduces to 36%, if the CIRP process concludes between 330-599 days; and beyond 600 days, the recovery rate stands at a mere 26.1%.16 14 PRS Legislative Research, Standing Committee Report Summary: Implementation of Insolvency and Bankruptcy Code (IBC) – Pitfalls and Solutions (Aug. 5, 2021). 15 Dr. M.S. Sahoo, supra note 3. 16 Source: IBBI Newsletter, Jan-Mar 2024. SIDHARTH SHARMA

46 There is also a direct correlation between the speed of CIRP and enhancement of recovery. Recent studies have shown that delays in the CIRP significantly reduces recovery, and the chances of resolution and bringing the CD back on its feet. In the January-March 2024 edition of the IBBI Newsletter, the current IBBI Chairman, Mr. Mital has aptly acknowledged that - The delays often due to litigations by multiple stakeholders with competing interests, erodes the value of already distressed CD further, and minimises the recovery value to the creditors…..Hence, it is important for all the stakeholders to expedite decision making.17 To conclude, it is now widely recognised that survival of CDs serves larger interests. All attempts, therefore, should be made for resolution and in a time bound manner.

o expedite decision making.17 To conclude, it is now widely recognised that survival of CDs serves larger interests. All attempts, therefore, should be made for resolution and in a time bound manner. Resolution plans, once approved by the committee of creditors (CoC) in their commercial wisdom should be brought to finality. It is nobody’s case that to achieve resolution somehow, resolution applicants can be allowed to hoodwink the process. The Courts and the CIRP rules must ensure procedural integrity and safeguard against plans that deceive and shortchange stakeholders.18 Similarly, any action or decision during the CIRP which is based on extraneous considerations, corruption or collusion must not be countenanced. However, any attempt to go on a path of equitable considerations or fairness of the price offered by the resolution applicant will be like going on a slippery slope and must be eschewed. In CIRP, the perfect need not be the enemy of the good. In commercial transactions it is said that ‘no deal is better than having a bad deal’. But in the context of the ‘resolution’ goal of IBC, which depends on a collective effort, it is important to remember that having a deal is more desirable than waiting for the elusive ‘better’ deal and ending up with no deal! 17 Ravi Mital, Record Resolutions by NCLT, IBBI Newsletter, Jan-Mar 2024. 18 IBC and the IBBI’s rules contain safeguards such as mandating priority payments to operational creditors and dissenting creditors; and such payment by a resolution applicant cannot be less than the liquidation value of the corporate debtor.

ds such as mandating priority payments to operational creditors and dissenting creditors; and such payment by a resolution applicant cannot be less than the liquidation value of the corporate debtor. To foster more effective and time bound decision making by the CoC members, and to stem value erosion, procedural delays and to enhance transparency and coordinated approach of decision making by the members of the CoC, the IBBI has recently come out with a set of new Guidelines for Committee of Creditors (Aug. 6, 2024). INCREASING RESOLUTIONS IS KEY TO IBC’S SUCCESS

47 “Claims of right and insistence upon obligations may depend upon treaty stipulations, or upon the rules of international law, or upon the sense of natural justice applied to the circumstances of a particular case, or upon disputed facts.”

• Elihu Root INTRODUCTION The interaction between international law and domestic legal systems has long been a subject of scholarly debate, often framed in terms of dualist and monist theories. While monists view international and domestic law as part of a single legal system with international law holding a superior position, dualists see them as separate systems where international norms require adoption into domestic law to have effect.

as part of a single legal system with international law holding a superior position, dualists see them as separate systems where international norms require adoption into domestic law to have effect. In practice, most nations adopt a nuanced approach that doesn’t strictly adhere to either extreme. The Indian legal system, grounded in the supremacy of its Constitution, exemplifies a sovereign nation’s careful balancing of domestic priorities with international commitments. As a sovereign republic, India’s participation in various international legal arrangements is a deliberate choice, reflecting its engagement with the global community while maintaining the primacy of its constitutional framework. This approach to some extent aligns with the dualist perspective articulated by scholars like Triepel, who likened international law to a commander-in-chief whose orders reach the troops (domestic legal systems) only through the generals (states). Several instruments such as treaties, customs and conventions etc. set the contours of the international legal order spelled out through binding and voluntary commitments. This article focuses on far-reaching impact of international conventions that they often have on business operations and, by extension, on insolvency resolution processes. They can affect various aspects of business, from contract enforcement to asset protection, which become particularly pertinent when a company faces financial distress.

solvency resolution processes. They can affect various aspects of business, from contract enforcement to asset protection, which become particularly pertinent when a company faces financial distress. In the context of insolvency, these conventions can influence creditor rights, asset recovery procedures and cross-border insolvency processes. EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS Sudhaker Shukla and Raghav Maheshwari 05

48 EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS IBC: A MARKET-WISE LAW VIS-À-VIS SECTORAL CONVENTIONS The Insolvency and Bankruptcy Code, 2016 (IBC/Code) stands as a comprehensive, market- oriented law designed to address insolvency issues across sectors. A key feature of the IBC is its sector-neutral approach, which is fundamental to its effectiveness and fairness in resource allocation. This sector-neutrality ensures a level playing field for all businesses, preventing the distortion of market dynamics that could occur if certain sectors were given special considerations. By avoiding preferential treatment, the IBC contributes to the efficient allocation of resources in the economy, as any sector-specific preference could lead to misallocation, potentially impeding overall economic growth. The IBC’s approach is rooted in trust in the market’s capacity to understand and value businesses across various sectors. This market-driven philosophy allows for more accurate and fair valuations during insolvency proceedings.

in trust in the market’s capacity to understand and value businesses across various sectors. This market-driven philosophy allows for more accurate and fair valuations during insolvency proceedings. Furthermore, the law empowers Insolvency Professionals (IPs) to appoint any necessary experts to assist in understanding sector-specific nuances. This flexibility ensures that even highly specialized businesses can be properly managed during insolvency proceedings without requiring sector-specific provisions in the law itself. Importantly, the sector-neutral approach of the IBC aligns with other crucial laws governing resource allocation, such as competition and securities laws. This alignment creates a cohesive legal framework that supports fair market practices across the economy. It’s worth noting that the sector-neutral nature of the IBC does not mean it ignores sector-specific challenges. Rather, it provides a flexible framework that can accommodate these challenges without compromising its core principles. While sectoral conventions often focus on specific industries or types of assets, the IBC provides a broader, more adaptable framework applicable to various business entities. This difference in scope creates an interesting interplay between the IBC and sectoral conventions, necessitating careful navigation to ensure compliance with both domestic law and international obligations. Even at the domestic level, there is significant interplay between the IBC and sectoral laws.

cessitating careful navigation to ensure compliance with both domestic law and international obligations. Even at the domestic level, there is significant interplay between the IBC and sectoral laws. For instance, the Indian Telecommunication Bill, 2022 and the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 contain provisions that address certain aspects of insolvency within their respective sectors. This intersection highlights the need for a balanced approach that respects both the overarching principles of the IBC and the specific requirements of different sectors, while maintaining the fundamental sector-neutrality of the insolvency process. The challenge lies in harmonizing these sector-specific considerations with the underlying principles of the IBC, ensuring that the integrity of the insolvency process is maintained while still addressing unique sectoral needs. This balancing act is crucial for the continued effectiveness of India’s insolvency regime in a complex, globalized economy.

vency process is maintained while still addressing unique sectoral needs. This balancing act is crucial for the continued effectiveness of India’s insolvency regime in a complex, globalized economy.

49 SECTORAL CONVENTIONS AND THEIR IMPACT Cape Town Convention and Protocol The Convention on International Interests in Mobile Equipment (Cape Town Convention) and its Protocol on Matters Specific to Aircraft Equipment, collectively known as the Cape Town Convention,1 have a significant impact on the treatment of aircraft-related assets under insolvency regimes. These international instruments aim to facilitate the financing of high- value mobile equipment by providing a uniform international legal framework for the creation, registration, and enforcement of security interests in such equipment. India ratified the Cape Town Convention and its Protocol on March 31, 2008. This ratification signifies India’s commitment to align its domestic laws with international standards in the realm of aviation finance.

d the Cape Town Convention and its Protocol on March 31, 2008. This ratification signifies India’s commitment to align its domestic laws with international standards in the realm of aviation finance. The interface between the Cape Town Convention and India’s IBC has been further clarified by a recent notification from the Ministry of Corporate Affairs dated October 3, 2023.2 This notification, issued under the powers conferred by clause (a) of sub-section (3) of section 14 of the IBC, explicitly states that the provisions of sub-section (1) of section 14 of the IBC shall not apply to transactions, arrangements, or agreements under the Convention and Protocol relating to aircraft, aircraft engines, airframes, and helicopters. This exemption is significant as it effectively carves out these specific aviation assets from the moratorium provisions of the IBC. Under normal circumstances, section 14(1) of the IBC imposes a moratorium during the corporate insolvency resolution process, which prohibits certain actions against the corporate debtor (CD), including the recovery of property by an owner or lessor where such property is occupied by or in the possession of the CD. However, with this notification, such restrictions will not apply to the aforementioned aviation assets. The implications of this notification are far-reaching for the aviation sector and creditors involved in aircraft financing.

n, such restrictions will not apply to the aforementioned aviation assets. The implications of this notification are far-reaching for the aviation sector and creditors involved in aircraft financing. Creditors and lessors of aircraft and related equipment will have rights to repossess these assets in certain circumstances in the event of insolvency, aligning with the protections provided under the Cape Town Convention. This development underscores the evolving nature of India’s insolvency regime and its efforts to harmonize domestic laws with international conventions. It also highlights the challenges in balancing sector-specific needs with the overarching principles of the IBC. As India’s aviation sector continues to grow, the interplay between the Cape Town Convention and the IBC will remain a crucial area of focus for stakeholders. The careful navigation of these intersecting legal frameworks will be essential for maintaining a robust and internationally aligned insolvency regime that can effectively address the unique needs of the aviation industry while upholding the broader objectives of insolvency law. 1 Convention on International Interests in Mobile Equipment, Nov. 16, 2001, 2307 U.N.T.S. 285; Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, Nov. 16, 2001, 2367 U.N.T.S. 517, https://www.icao.int/sustainability/Pages/Capetown-Convention.aspx. 2 Ministry of Corporate Affairs, Government of India, Notification S.O. 4321(E) (Oct.

Equipment, Nov. 16, 2001, 2367 U.N.T.S. 517, https://www.icao.int/sustainability/Pages/Capetown-Convention.aspx. 2 Ministry of Corporate Affairs, Government of India, Notification S.O. 4321(E) (Oct. 3, 2023), https://ibbi.gov.in/ uploads/legalframwork/8273e42bb4de11d39f37ab81f96f93ec.pdf. SUDHAKER SHUKLA AND RAGHAV MAHESHWARI

50 Proposed UNCITRAL rules on digital assets As the digital economy continues to grow, the United Nations Commission on International Trade Law (UNCITRAL) is currently developing rules for the treatment of digital assets in insolvency proceedings. While these rules are still in the proposal stage, they are likely to have significant implications for insolvency regimes once finalized and adopted. The proposed rules aim to address challenges unique to digital assets, such as identification and valuation of digital assets, jurisdictional issues in cross-border insolvency cases involving digital assets, treatment of cryptocurrencies and other virtual currencies in insolvency proceedings, and protection of digital asset holders’ rights. UNIDROIT Principles on digital assets and private law The International Institute for the Unification of Private Law (UNIDROIT) has developed Principles on Digital Assets and Private Law3 to address the legal challenges posed by digital assets in private transactions. These principles aim to provide a harmonized legal framework for dealing with digital assets, covering aspects such as control, transfer, and security interests.

gital assets in private transactions. These principles aim to provide a harmonized legal framework for dealing with digital assets, covering aspects such as control, transfer, and security interests. While not specifically focused on insolvency, the UNIDROIT Principles may have implications for insolvency regimes worldwide, potentially influencing how digital assets are treated in proceedings. The treatment of crypto currency constitutes heart of the discussions on UNIDROIT Principles. Consensus is alluding the nations as its status as legal currency is shrouded in mystery. Proposing the way forward, the G20 New Delhi Leaders’ Declaration 20234 endorsed the Financial Stability Board’s (FSB’s) high-level recommendations for the regulation, supervision and oversight of crypto-assets activities and markets and of global stablecoin arrangements. This global consensus could significantly influence how digital assets are to be handled. In moving forward, it appears that consensus on global standards has to evolve first before individual jurisdictions take appropriate decision to adapt and align with international best practices in handling digital assets during insolvency and bankruptcy proceedings. Environmental conventions India has been a significant contributor to the development of multilateral environmental legislation, consistently advocating for a balanced approach that harmonizes developmental needs with environmental protection. This commitment is reflected in India’s domestic legislations, which aligns with international environmental laws and commitments.

h that harmonizes developmental needs with environmental protection. This commitment is reflected in India’s domestic legislations, which aligns with international environmental laws and commitments. The interface between environmental laws and the IBC becomes particularly relevant in cases involving companies with significant environmental liabilities. The intersection of Environmental, Social, and Governance (ESG) criteria with insolvency and restructuring practices is garnering global attention due to its profound implications for sustainability and societal impact. Further, the Companies Act, 20135 recognizes the need 3 International Institute for the Unification of Private Law [UNIDROIT], Principles on Digital Assets and Private Law (2023), https://www.unidroit.org/wp-content/uploads/2024/01/Principles-on-Digital-Assets-and-Private-Law- linked.pdf. 4 G20, New Delhi Leaders’ Declaration (Sept. 9-10, 2023), https://www.mea.gov.in/Images/CPV/G20-New-Delhi- Leaders-Declaration.pdf. 5 Companies Act, No. 18 of 2013, India Code (2013). EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS

www.mea.gov.in/Images/CPV/G20-New-Delhi- Leaders-Declaration.pdf. 5 Companies Act, No. 18 of 2013, India Code (2013). EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS

51 for promoting ESG norms by the corporates. SEBI has also made it compulsory for the top 500 listed companies (ranked by market capitalization) to provide information on business responsibility and sustainability, through Business Responsibility Reporting (BRRs).6 Furthermore, the World Bank is implementing a new corporate flagship, Business Ready (B- READY) Index.7 The Business Enabling Environment which will provide a new benchmarking exercise will also address environmental obligations in bankruptcy and review good environmental regulatory practices within insolvency proceedings. As mother earth is taking massive green (hair) cut, focusing on environmental claims as proposed in the B-Ready Framework alone would not suffice; rather each jurisdiction has to eventually find global cost effective solutions for promotion of greener, efficient and zero emission technologies through suitable integration of these options in the resolution plans and its implementation. Without any explicit mention of environmental trade-offs, the Code has a nuanced approach towards dovetailing environmental issues by way of having provision of respecting provisions of all the laws. Under the Code, the IP is mandated to take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with all applicable laws.

provisions of all the laws. Under the Code, the IP is mandated to take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with all applicable laws. However, moving forward, in the long run, the key considerations may include the treatment of environmental clean-up costs in insolvency proceedings, priority of environmental claims in the distribution of assets, responsibility for ongoing environmental compliance during insolvency proceedings, and balancing environmental obligations with the goals of business rescue and creditor satisfaction. As India continues to be front runner in upholding its international environmental commitments, such as those under the United Nations Framework Convention on Climate Change (UNFCCC)8 and Paris Agreement, the insolvency regime must also evolve to address the unique challenges posed by environmental liabilities in insolvency scenarios. Maritime-related conventions There are several international maritime conventions that potentially have implications for insolvency proceedings involving shipping companies or maritime assets.

arios. Maritime-related conventions There are several international maritime conventions that potentially have implications for insolvency proceedings involving shipping companies or maritime assets. Key conventions in this area include the International Convention on Maritime Liens and Mortgages, 19939, the International Convention on Arrest of Ships, 199910, and the Nairobi International Convention on the Removal of Wrecks, 2007.11 The Convention on Maritime Liens and Mortgages establishes uniform rules relating to maritime liens and mortgages, providing for their recognition and enforcement across jurisdictions and setting out priority rules for competing claims against vessels. The Arrest of Ships Convention provides a framework for the arrest of ships as a means of obtaining security for maritime claims, setting out the types of claims for which a 6 Ministry of Corporate Affairs, Govt. of India, Report of the Committee on Business Responsibility Reporting (2020), https://www.mca.gov.in/Ministry/pdf/BRR_11082020.pdf. 7 World Bank Group, B READY Index, https://www.worldbank.org/en/businessready. 8 United Nations Framework Convention on Climate Change, May 9, 1992, S. Treaty Doc No. 102-38, 1771 U.N.T.S. 107, https://unfccc.int/. 9 International Convention on Maritime Liens and Mortgages, May 6, 1993, 2276 U.N.T.S. 39, https://unctad.org/ system/files/official-document/aconf162d7_en.pdf. 10 International Convention on Arrest of Ships, Mar. 12, 1999, 2797 U.N.T.S.

Liens and Mortgages, May 6, 1993, 2276 U.N.T.S. 39, https://unctad.org/ system/files/official-document/aconf162d7_en.pdf. 10 International Convention on Arrest of Ships, Mar. 12, 1999, 2797 U.N.T.S. 3, https://unctad.org/system/files/ official-document/aconf188d6_en.pdf. 11 Nairobi International Convention on the Removal of Wrecks, May 18, 2007, 46 I.L.M. 697, https://www.imo.org/ SUDHAKER SHUKLA AND RAGHAV MAHESHWARI

52 ship may be arrested and the procedures for arrest and release of vessels. The Wreck Removal Convention provides a legal basis for states to remove shipwrecks that may be hazardous to navigation or the marine environment, addressing issues of liability and compensation for wreck removal. Further, the United Nations Convention on the International Effects of Judicial Sales of Ships,12 also known as the Beijing Convention on the Judicial Sale of Ships, marks a significant development in maritime law with potential implications for insolvency proceedings. Opened for signature on September 5, 2023, this convention aims to establish a harmonized regime for giving international effect to judicial sales of ships. While preserving domestic laws governing the procedure of judicial sales, it aims to ensure legal certainty regarding the title acquired by purchasers in international navigation. This convention is particularly relevant to the IBC’s interface with maritime law, as it could impact the treatment of ships in cross-border insolvency cases. It could impact the price a ship can attract in the international market.

elevant to the IBC’s interface with maritime law, as it could impact the treatment of ships in cross-border insolvency cases. It could impact the price a ship can attract in the international market. As and when India considers its position on this convention, suitably, its interaction with the IBC’s provisions on moratorium and asset sales in insolvency proceedings may require careful consideration. These conventions affect various aspects of maritime insolvency, including recognition and enforcement of maritime liens, arrest and judicial sale of vessels, and treatment of wreck removal costs in insolvency proceedings. The IBC should be interpreted and applied in a manner that respects India’s obligations under these maritime conventions, ensuring a consistent approach to maritime insolvencies that aligns with international standards. This requires carefully balancing the objectives of insolvency law with the specialized regime for maritime claims and liens established by these conventions. As India’s maritime sector continues to grow, the interplay between these international maritime conventions and domestic insolvency law will remain an important area of focus. Ultimately, a harmonized approach that respects both insolvency and maritime law principles will be crucial for maintaining India’s competitiveness in the global shipping industry while providing certainty and fairness to all stakeholders involved in maritime insolvencies. Other important conventions interfacing with IBC The IBC operates within a complex web of international conventions and treaties that

d fairness to all stakeholders involved in maritime insolvencies. Other important conventions interfacing with IBC The IBC operates within a complex web of international conventions and treaties that significantly impact cross-border insolvency cases. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), 195813, to which India is also a signatory, plays a crucial role in ensuring that foreign arbitral awards are recognized and enforceable in member countries. This becomes particularly relevant in the context of insolvency when dealing with cross-border disputes or enforcing arbitral awards against companies undergoing insolvency proceedings. The convention’s provisions may sometimes conflict with the moratorium imposed under the IBC, necessitating a careful 12 United Nations Convention on the International Effects of Judicial Sales of Ships, Dec. 7, 2022, https:// treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=X-21&chapter=10&clang=_en. 13 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3, https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII- 1&chapter=22&clang=_en. EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS

517, 330 U.N.T.S. 3, https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII- 1&chapter=22&clang=_en. EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS

53 balancing act between honouring international commitments and preserving the integrity of domestic insolvency processes. Although India is not yet a party to the United Nations Convention on Contracts for the International Sale of Goods (CISG), 1980,14 its principles are frequently incorporated into international commercial contracts. The interaction between the CISG and the IBC becomes significant in cases involving international trade disputes and insolvency proceedings. Bilateral Investment Promotion Agreements (BIPAs) form another critical layer of international agreements that interface with the IBC. India has also pursued a policy of entering into BIPAs with a view to providing predictable investment climate to foreign investment in India as well as to protect Indian investments abroad.15 These treaties often contain provisions related to investor protection in case of expropriation or nationalization, which can intersect with insolvency proceedings involving foreign investments.

d.15 These treaties often contain provisions related to investor protection in case of expropriation or nationalization, which can intersect with insolvency proceedings involving foreign investments. The challenge lies in reconciling the investor protection guarantees under BIPAs with the collective proceedings nature of insolvency, especially when it comes to the treatment of foreign creditors and the potential for investor-state dispute settlement proceedings. Double Taxation Avoidance Agreements (DTAAs) signed by India with multiple nations16 to prevent double taxation of income also have significant implications for cross-border insolvency cases. These agreements can affect the tax treatment of assets and income during insolvency proceedings, potentially influencing the overall value of the insolvency estate and the returns to creditors. IPs must navigate the complex interplay between DTAAs and the IBC to ensure fair and efficient resolution of insolvency cases involving cross-border element while complying with international tax obligations. CONCLUSION The interface between the IBC and these various international conventions and treaties presents both challenges and opportunities for India’s insolvency regime. As India continues to integrate into the global economy, maintaining a balance between the principles of insolvency law and international commitments becomes increasingly crucial.

insolvency regime. As India continues to integrate into the global economy, maintaining a balance between the principles of insolvency law and international commitments becomes increasingly crucial. This balancing act requires continuous monitoring of international developments in insolvency law and related fields, as well as regular review and updating of the IBC framework to ensure alignment with international best practices. To effectively navigate this intricate legal tapestry dealing with complex economic landscape, India must develop specialized expertise within its insolvency ecosystem perfectly aligned with the nuances of both domestic and international insolvency regimes. This may involve development of state of art insolvency ecosystem, technologically agile (IT and AI) with inbuilt 14 United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S. Treaty Doc. No. 98- 9 (1983), 1489 U.N.T.S. 3, https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=X- 10&chapter=10&clang=_en. 15 Govt. of India, Ministry of Commerce & Industry, Stocktaking of India Bilateral Agreements for the Promotion and Protection of Investments, https://www.commerce.gov.in/international-trade/india-and-world-trade-organization-wto/ indian-submissions-in-wto/investment/stocktaking-of-india-bilateral-agreements-for-the-promotion-and-protection- of-investments/. 16 Income Tax Department, Govt.

ia-and-world-trade-organization-wto/ indian-submissions-in-wto/investment/stocktaking-of-india-bilateral-agreements-for-the-promotion-and-protection- of-investments/. 16 Income Tax Department, Govt. of India, Double Taxation Avoidance Agreement (DTAA), https://incometaxindia.gov.in/ pages/international-taxation/dtaa.aspx. SUDHAKER SHUKLA AND RAGHAV MAHESHWARI

54 tools to suggest credible and swift response to stresses and opportunities emerging from international conventions and their interaction with domestic insolvency law. For a harmonized international approach it is imperative to foster enhanced cooperation between domestic and international regulatory bodies incharge of piloting the initiatives; prioritizing sector specific intervention. Enhanced cooperation with international bodies, reflecting the spirit of ‘Vasudhaiva Kutumbakam’ (the world is one family), will also be crucial in addressing the challenges of forum shopping and regulatory arbitrage in cross-border insolvency cases. By successfully managing the interplay between the IBC and international conventions, India can create a robust, internationally aligned insolvency regime that promotes investor confidence, meets sector specific obligations, facilitates cross-border trade, and supports sustainable economic growth. Ultimately, the goal should be to create an insolvency framework flexible enough to cater to emerging domestic economic needs and also able to respond to enforcement issues related to international legal norms.

the goal should be to create an insolvency framework flexible enough to cater to emerging domestic economic needs and also able to respond to enforcement issues related to international legal norms. The Code provide enough flexibility for carving out needed exception to avert any compliance issues. This enhances India’s attractiveness as a destination for foreign investment. As India continues its trajectory towards becoming a $5 trillion economy, the adept management of the intersection between domestic insolvency law and international conventions will be pivotal. By fostering a legal environment that harmoniously blends domestic priorities with global best practices, India is poised to not only maintain its competitive edge in the global marketplace but also to emerge as a thought leader in shaping the future of international insolvency law. EVOLVING INSOLVENCY REGIME AND LEGAL OBLIGATIONS UNDER INTERNATIONAL CONVENTIONS

55 This paper explores the legal framework regarding the treatment of dues of workmen and employees related to provident fund, gratuity, and pension fund under the Insolvency and Bankruptcy Code, 2016 (IBC/Code). It traces the evolution of entitlements of workmen and employees under IBC. It delves into the legislative intent of section 18(1)(f) and section 36(4)(a) of the Code regarding exclusion of third-party owned assets in possession of the corporate debtor (CD) from corporate insolvency resolution process (CIRP) and liquidation process under IBC.

36(4)(a) of the Code regarding exclusion of third-party owned assets in possession of the corporate debtor (CD) from corporate insolvency resolution process (CIRP) and liquidation process under IBC. It also delves into the legislative intent behind creating an exclusion for provident funds, pension funds and gratuity funds under sub-clause (iii) of section 36(4)(a) of IBC. The paper also compares section 36 and section 53 of the IBC as they both deal with workmen dues and employee dues from the provident fund, gratuity and pension fund and distinguishes the legislative intent behind both these provisions. However, they deal with them in different context i.e. section 36 deals with ‘assets’ which form and do not form part of liquidation estate, while section 53 deals with the priority of payment of liabilities of different categories. It argues that section 36(4)(a)(iii) is applicable when the funds are available and are in possession of the CD. However, there is no such restriction in section 53 of IBC where sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund again find place there, as it refers to the definition of ‘workmen’s dues’ as transported from section 326 of the Companies Act.

ployee from the provident fund, the pension fund and the gratuity fund again find place there, as it refers to the definition of ‘workmen’s dues’ as transported from section 326 of the Companies Act. It attempts to critically analyse the trends in judicial interpretations about the repayment of workmen and employee dues from these funds and whether these interpretations are in line with the provisions, their legislative intent and the objectives as enshrined in the long title of IBC. The paper also examines as to whether the obligation cast on the successful resolution applicant (SRA) for payment of all past workmen and employee dues above the amount available in these funds, is violative of the ‘clean slate’ principle. Lastly, the paper also lays emphasis on the need to distinguish between dues owed to employees vis-à-vis amount due from employer payable to statutory authority like Employees’ Provident Fund Organisation (EPFO) under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). It argues that amounts claimed by statutory authorities like EPFO in nature of penal interest, damages and penalties levied should get treatment alike other Government dues under IBC. LEGAL FRAMEWORK UNDER IBC Background The objective of the Code is as follows – An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of TREATMENT OF DUES TO ANY WORKMAN AND EMPLOYEE FROM THE PROVIDENT FUND, PENSION FUND AND GRATUITY FUND UNDER IBC Sandip Garg, Anshul Agrawal and Vishal Rajpurohit 06

tion and insolvency resolution of TREATMENT OF DUES TO ANY WORKMAN AND EMPLOYEE FROM THE PROVIDENT FUND, PENSION FUND AND GRATUITY FUND UNDER IBC Sandip Garg, Anshul Agrawal and Vishal Rajpurohit 06

56 TREATMENT OF DUES TO ANY WORKMAN AND EMPLOYEE FROM THE PROVIDENT FUND, PENSION FUND AND GRATUITY FUND UNDER IBC corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. The Code completely replaces the earlier framework for insolvency and bankruptcy resolution that was inadequate, ineffective and guilty of causing undue delays. The enactment of the Code and the amendments thereafter are a consequence of detailed consultation and deliberations by several committees, commissions and experts, in a matter which deals with the economy of the country as a whole.1 The Report of the Bankruptcy Law Reforms Committee (BLRC) marked a significant shift in arguing about changing the priorities of payments as appearing in the Companies Act. Earlier all unsecured creditors other than government were at a lower pedestal. In the Report of the BLRC2, higher priority was given to unsecured financial creditors by placing them above Government dues.

r all unsecured creditors other than government were at a lower pedestal. In the Report of the BLRC2, higher priority was given to unsecured financial creditors by placing them above Government dues. Operational creditors (OCs) were placed lower than government dues. This is also evident from the long title of the IBC which focuses on better availability of credit and lowers the priority to the dues of the Government. Further, the BLRC had recommended that 3 months of workmen’s dues were to be treated at par with secured creditors, which was increased in the Bill to 12 months and then by the Joint Committee on the Insolvency and Bankruptcy Code (JPC)3 to 24 months. The treatment of priority of workmen and employee dues, by various forums, can be seen from the table below: Priority of BLRC Bill JPC Companies Act Workmen’s dues for this 3 months 12 months 24 months No limit duration rank equally with secured creditors Thereafter, employee dues for 3 months 12 months 12 months 4 months this duration are ranked So, it can be seen that BLRC tried to emphasise on prioritising the rights of financial creditors, (FCs) over other stakeholders, for promoting the availability of credit and developing a market for unsecured financing (including the development of bond markets).

the rights of financial creditors, (FCs) over other stakeholders, for promoting the availability of credit and developing a market for unsecured financing (including the development of bond markets). They also argued for substantial reduction of duration of workmen and employees which are placed on priority. Though, the reduced rights of workmen and employees, as outlined by the BLRC, were significantly improved in the Bill and later by the JPC, it may be noted that IBC still lowered the priority of Government dues as well as dues of workmen compared to their priority in Companies Act, 2013. 1 Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union of India and Ors. [Writ Petition no. 421 of 2019]. 2 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (November 2015). 3 Lok Sabha, The Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015 (April 2016).

57 Determination of estate of the CD An insolvency law deals with assets of the debtor. What does or does not constitute an asset for the debtor for the purposes of the liquidation are determined by the general principles of property and contract law applicable to solvent parties.4 The assets which do not belong to the debtor or over which the debtor has no ownership rights (i.e. the third party assets) are excluded.

of property and contract law applicable to solvent parties.4 The assets which do not belong to the debtor or over which the debtor has no ownership rights (i.e. the third party assets) are excluded. The BLRC5 also noted the need to establish the assets of the debtor and therefore, in its Report it noted the following – Not all assets that are present within the entity, from the start of the IRP, can be considered for Liquidation….following sets of assets must be kept out of the liquidation process: a. Assets held by the entity in trust (such as employee pensions). b. Assets held as collateral…. c. Assets held as part of operational transactions where the entity has rights over the asset but is not the owner of the title of the asset. For example, there could be goods belonging to third parties given to the debtor for processing or value addition.….[emphasis supplied] Accordingly, section 18(1)(f) of IBC provides for Interim Resolution Professional (IRP) to take control and custody of ‘assets’ of the CD and not of the third-party assets. It reads as follows – (1) The interim resolution professional shall perform the following duties, namely: - … (f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor… including -… Explanation.

duties, namely: - … (f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor… including -… Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: - (a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;…[emphasis supplied] Similarly, section 36(1) provides for creation of an estate comprising the ‘assets’ of the CD. The liquidator holds these ‘assets’ for the benefit of all the creditors and is a fiduciary of the liquidation estate. Section 36(3) list out various ‘assets’ (such as tangible, intangible, etc.) which are part of liquidation estate. An exception has been carved out under section 36(4) which clarifies as to what assets will not form part of the liquidation estate. It reads as follows– … (4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:- (a) assets owned by a third party which are in possession of the corporate debtor, including – (i) assets held in trust for any third party; (ii) bailment contracts; (iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund; (iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets;

ue to any workman or employee from the provident fund, the pension fund and the gratuity fund; (iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and (v) such other assets as may be notified ….; …[emphasis supplied] 4 Wadhwa Brothers, Guide to the Insolvency and Bankruptcy Code 1887(Wadhwa Law Chambers, 3d ed. 2024). 5 Bankruptcy Law Reforms Committee, supra note 3, para 5.5.5. SANDIP GARG, ANSHUL AGRAWAL AND VISHAL RAJPUROHIT

58 Thus, the scheme of the Code follows a consistent structure in both processes i.e. CIRP and liquidation process, making it clear that third-party assets (over which the CD has no ownership rights) cannot be treated as assets of the CD. Both these provisions [i.e. explanation to section 18(1)(f) and section 36(4)(a)] are merely stating the obvious, i.e. the third-party assets on which CD has no ownership rights cannot be part of the estate of CD. Even in the absence of these provisions, the third-party assets would not have become part of estate of the CD. Exclusion of workmen and employee related funds in CD from estate of CD As per the Insolvency and Bankruptcy Bill, 2015 introduced in the Parliament, section 36(4)(a)(iii) read as ‘contributions in respect of employee pensions’. As per the Report of the JPC, submitted to the Lok Sabha on April 28, 2016, representatives of the EPFO expressed concerns about the re-prioritization of debt payments under IBC, which placed PF dues at a lower priority.

the JPC, submitted to the Lok Sabha on April 28, 2016, representatives of the EPFO expressed concerns about the re-prioritization of debt payments under IBC, which placed PF dues at a lower priority. They highlighted that the Eleventh Schedule of IBC proposes to exclude sections 326 and 327 in the event of liquidation, effectively nullifying section 11 of the EPF Act. The representatives referenced a Supreme Court judgment that established the precedence in payment of PF dues over all other debts, including those of secured creditors. Considering these representations, section 36(4)(a)(iii) was modified to include ‘all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund’. However, though change was made to section 36(4)(a)(iii) to include provident fund and gratuity besides pension funds, the qualifying part in clause (a) i.e. ‘assets owned by a third party which are in possession of the corporate debtor’, was kept intact and it always remained a pre-requisite for application of the various sub-clauses of clause (a). The third-party assets, for this purpose, are assets in the nature of the pension funds, gratuity funds or provident funds which are in ‘possession’ of the CD. Accordingly, where any of such funds, if they are not in possession of CD, but are in possession and control of any other authority including EPFO, then clause (a) won’t be applicable.

on’ of the CD. Accordingly, where any of such funds, if they are not in possession of CD, but are in possession and control of any other authority including EPFO, then clause (a) won’t be applicable. Such funds not in possession of CD, would anyway, can never be part of estate of CD and therefore they will never be considered while discussing liquidation estate of the CD. Further, even when such funds are in possession of the CD, only a part of such funds i.e. workmen and employee dues have been excluded from liquidation estate under sub-clause (iii) – i.e. workmen and employee dues have been envisaged as a sub-set of third-party assets which are in possession of the CD and not the other way round where the entire workmen and employee dues are considered outside liquidation estate irrespective of whether the funds for them exist or not. Therefore, the amendments to section 36(4)(a)(iii) by the JPC did not alter the underlying intention to exclude only those assets which are in possession of the CD but are owned by third parties. Therefore, section 36(4)(a)(iii) relates to non-government provident funds, pension funds and gratuity funds, being maintained by the CD and in possession of the CD as the funds managed by the Government authorities are not in possession of the CD. Section 17 of the EPF Act allows for exemption to CDs from provisions of the EPF Act, provided they have schemes which offer favourable return to employees in comparison to the scheme under the EPF Act.

tion 17 of the EPF Act allows for exemption to CDs from provisions of the EPF Act, provided they have schemes which offer favourable return to employees in comparison to the scheme under the EPF Act. Reliance Industries Limited is one of the companies whose provident fund has been exempted under section 17 of EPF Act.6 Also, section 16A of the EPF Act provides for authorising an employer for maintenance of a provident fund by the employer.7 Thus, only

59 such funds, which are in possession of the CD, are intended to be covered under section 36(4)(a)(iii). Accordingly, unless a fund is maintained by CD and the CD is in possession of such fund, the question of application of section 36(4)(a)(iii) does not arise. The waterfall mechanism in section 53 is based on a structured mathematical formula, and the hierarchy is created in terms of payment of debts in order of priority with several qualifications. The Code is based on the organic evolution of law and is a product of an extensive consultative process to meet the requirements of the Code governing liquidation. It introduced a comprehensive and time-bound framework to maximise the value of assets of all persons and balance the interest of the stakeholders. The guiding principle for the Code in setting the priority of payments in liquidation was to bring the practices in India in line with global practices. In the waterfall mechanism, after the costs of the insolvency resolution process and liquidation, secured creditors share the highest priority along with a defined period of dues of the workmen.

ces. In the waterfall mechanism, after the costs of the insolvency resolution process and liquidation, secured creditors share the highest priority along with a defined period of dues of the workmen. The unpaid dues of the workmen are adequately and significantly protected in line with the objectives sought to be achieved by the Code and in terms of the waterfall mechanism prescribed by section 53 of the Code. In fact, the secured creditors are taking significant hair-cut and workmen are being compensated on an equitable basis in a just and proper manner as per section 53 of the Code. The Code balances the rights of the secured creditors, who are financial institutions in which the general public has invested money, and also ensures that the economic activity and revival of a viable company is not hindered because it has suffered or fallen into a financial crisis. The Code focuses on bringing additional gains to both the economy and the exchequer through efficiency enhancement and consequent greater value capture.8 The dues of workmen and employees may fall under various clauses of section 53 depending upon whether the same are due to them or to a Government department, and for which period do they belong.

re.8 The dues of workmen and employees may fall under various clauses of section 53 depending upon whether the same are due to them or to a Government department, and for which period do they belong. The limbs of section 53 where these dues may fall are quoted below: - (a) …. (b) the following debts which shall rank equally between and among the following: (i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor in the event …; (c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; (d) …. (e) the following dues shall rank equally between and among the following: - (i) any amount due to the Central Government and the State Government …, in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) …; (f) any remaining debts and dues; ….[emphasis supplied] For workmen, the dues pertaining to 24 months prior to the liquidation commencement date have been given priority and are placed at same priority as that of secured creditors [section 6 Integrated Annual Report 2023-24 for Reliance Industries Limited, https://www.ril.com/ar2023-24/pdf/ RIL_IAR_2024pdf, 85. 7 Not yet in force. 8 Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma v. Union of India and Ors. [Writ Petition no. 421 of 2019].

tps://www.ril.com/ar2023-24/pdf/ RIL_IAR_2024pdf, 85. 7 Not yet in force. 8 Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma v. Union of India and Ors. [Writ Petition no. 421 of 2019].

60 53(1)(b)(i)]. Thereafter, the dues pertaining to employees other than workmen, for 12 months from the liquidation commencement date, have been placed [section 53(1)(c)]. Thereafter, the dues of the Government for two years (i.e. dues not owed to the workmen / employee) like penalty, damages and interest payable by the employer to the Government (including Government organisations like EPFO), beyond what is payable to workmen / employee, will be covered [section 53(1)(e)(i)]. Any dues of the workmen / employee / Government or otherwise, beyond the periods covered above, have the lowest priority [section 53(1)(f)]. As per explanation (ii) to section 53 of IBC, the term ‘workmen’s dues’ has been assigned the same meaning as in section 326 of the Companies Act 2013, which reads as follows – (b) “workmen’s dues”, in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:— (i) all wages or salary …; (ii) all accrued holiday remuneration ….; (iii) ….; (iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company;[emphasis supplied] The phrase ‘all sums due to any workman from the provident fund, the pension fund, the gratuity fund’, also finds place in section 36(4)(a)(iii).

orkmen, maintained by the company;[emphasis supplied] The phrase ‘all sums due to any workman from the provident fund, the pension fund, the gratuity fund’, also finds place in section 36(4)(a)(iii). However, the protection accorded under each of these provisions is different. Under section 36(4)(a)(iii), the funds which are available, being third-party assets do not become part of the liquidation estate of the CD and the dues of workmen and employees are to be paid out of such funds. Section 53 applies after proceeds have been received from sale of liquidation estate [i.e. assets owned by the CD beyond the funds which are available under section 36(4)(a)(iii)], and therefore, under section 53(1)(b)(i) and 53(1)(c), the dues of workmen and employee from these funds, pertain to a situation where the funds are not available, because had the funds been available, same would have been covered under section 36(4)(a)(iii). Accordingly, there appears to be no inconsistency between section 53(1)(b)(i) and section 36(4)(a)(iii). Further, even if any inconsistency is noticed, section 53 will have to prevail over section 36, as it contains a non-obstante clause. Different priorities have been envisaged under section 53 for different types of workmen’s dues – whether to workman or emplo