Mitigating Recessions: Incorporating Macroeconomic Levers into Bankruptcy Law in India

Abstract

The role of Insolvency and Bankruptcy Code, 2016 in India, as foreseen by the Bankruptcy Law Reforms Committee Report 2015, was to facilitate a sound bankruptcy system in case of a major macroeconomic recession. India’s economy presently is undergoing its worst phase of the economic recession caused by the COVID-19 pandemic. However, at a time when we need the Insolvency and Bankruptcy Code, 2016 desperately for insolvency resolution, the Government of India suspended the filing of any new insolvency cases through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. This was done mainly to save debtors from multiple insolvency claims in a difficult time like the present. The author argues that such a blanket provision was counter-intuitive, as it refuses the opportunity of resolution to the firms, and would push them to the brink of liquidation. The author uses statistical methods and macroeconomic variables to forecast the number of insolvency cases that would have been admitted in India, had the Insolvency and Bankruptcy Code, 2016 not been suspended. The statistical analysis forecasts an exponential growth in number of insolvency cases which would have been filed, but were not due to the suspension of the insolvency law itself. The author also analyses that counter cyclical insolvency law is the need of the hour in the present recession, as the focus of insolvency law must shift towards protecting jobs and not doggedly go after protecting only secured creditors.As a solution, the author proposes an important concept of a macroeconomic trigger clause which can be incorporated into the insolvency legislation itself. This macroeconomic trigger clause will be crucial to practicably effect a counter-cyclical insolvency law framework. The state’s role increases manifold during a crisis or a recession. At the same time, arbitrariness creeps in due to the number of crucial decisions to be made. This arbitrariness is observed in the Government of India’s recent actions to suspend the filing of fresh insolvency cases altogether. A macroeconomic trigger clause can root out arbitrary state action like the one in India, by incorporating macroeconomic variables directly into the insolvency law.Hence, the author has conceptualised the macroeconomic trigger clause which is a novel concept in law and economics, to link the insolvency law to certain macroeconomic variables. The author also proposes certain changes in the Indian insolvency law framework to suit it to future economic crises.