Abstract
The law governing credit transactions in India is compartmentalized and concomitantly poses difficulties to contractual parties and access to credit: the overall effect of this is already being felt owing to the country's low rank on the 'getting credit' indicator of the World Bank's Ease of Doing Business Report 2020. The Insolvency and Bankruptcy Code 2016 (Code), being almost a mirror-image of the English Insolvency Act 1986, has some inherent defects that are incompatible with the local conditions vis-à-vis access to credit and business rescue. Some of these defects arguably emanate from the Code's unfair categorization of creditors into the 'operational' and 'financial' types, and the ensuing confusion as was witnessed in the Supreme Court's Home Buyers' case in 2019. Strangely, financial creditors enjoy some Code-given preferential treatments over operational creditors including the right to constitute committees of creditors in voting and confirming business rescue plans. The insolvency resolution process of the Code is incompatible with the fact that over 90% of the companies doing business in India are SMEs and family-owned. The crushing financial weight of insolvency resolution processes is foreseen to gradually cannibalize these SMEs and cause a sharp rise in the unemployment rate. The article diagnoses a number of defects in the credit and insolvency systems of India, and proposes transplantable solutions from the English system, the U.S. Chapter 11, and Article 9 of the Uniform Commercial Code.
Highlights
A Glimpse of the ProblemsHenry Macleod repeats the ancient and accepted wisdom that credit is the lifeblood of market economies:[1] yet according to the World Bank Ease of Doing Business Report 2020,2 India does not still rank impressively on the ‘getting credit’ indicator
In agreement with the views expressed by LoPucki et al, this paper proposes that the U.S unitary-functional approach to security would be more suitable for the Indian system, mainly due to its less complicated nature, and the fact that it tends to appeal more to individuals and small businesses that are unlikely to afford legal services in concluding a complex credit transaction.[18]
Given the heightened need for confidentiality in an informal rescue process, i.e., the need to ensure that sensitive news about the looming financial distress of a company does not leak into the hands of its employees, certain creditors, the general society, the debtor company and its creditors may begin informal talks by executing a non-disclosure agreement, even though, this will not guarantee the debtor any total assurance of the creditors’ commitment not to breach the agreement.[92]
Summary
Secured credit law and insolvency law are interwoven and a reform of one invariably necessitates a reform in the other. Company to block the possibility of a floating charge holder from ousting the management from operation.[53]
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