Madras High Court Calls On Parliament To Evaluate IBC Efficiency And Recovery Rates From Successful Resolution Processes

Madras High Court Calls On Parliament To Evaluate IBC Efficiency And Recovery Rates From Successful Resolution Processes

Madras High Court Justice N. Seshasayee has called upon Parliament to assess and evaluate the operational efficacy of the Insolvency and Bankruptcy Code, 2016 (IBC). He raised concerns about whether Parliament has taken into account the overall recovery percentage attained through successful corporate debtor resolution processes.

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, underwent the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC due to its failure to service the loan obtained from the Indian Overseas Bank (IOB).

Starting in June 2019, the petitioner also defaulted on paying electricity charges owed to the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO). On January 19, 2022, TANGEDCO issued a demand notice claiming Rs. 32 lakh as unpaid Electricity Charges.

The petitioner argued that since the Committee of Creditors (CoC), exercising its commercial discretion, approved the Resolution Plan, which subsequently received approval from the NCLT, all outstanding claims or liabilities not covered by the Plan should be deemed extinguished.

The petitioner filed a writ of certiorari and mandamus to annul the demand notice issued by TANGEDCO and further requested directives for TANGEDCO to reinstate the electricity connection.

The Madras High Court has called upon the Parliament to evaluate the effectiveness of the IBC and raised concerns about whether the Parliament has taken into account the overall recovery rate achieved through successful corporate debtor resolution processes.

In its remarks, the High Court stated, "While acknowledging the legislative objective of preserving the corporate debtor as a going concern, it should not be achieved at the expense of others, particularly considering the potential for manipulation within the IBC framework."

The Court noted that the issue lies not in defining statutory liabilities but in questioning why the liabilities of a corporate debtor should be distributed socially, especially when the debtor may not have shared its profits with society during prosperous periods, aside from obligatory corporate social responsibility mandates.

Highlighting an instance where electricity distribution licensees face losses under the waterfall mechanism due to their categorization as operational creditors, the Court emphasized that these losses ultimately burden other consumers. It raised the broader question of why Parliament should prioritize protecting one corporate debtor at the risk of jeopardizing the public interest.

Drawing upon insights from the review of the IBC by former Supreme Court Judge Shri. V. Ramasubramanian and Anant Merathia's book "Defaulter's Paradise Lost," the Court emphasized the importance of understanding the functioning of the IBC.

The Court dismissed the Writ Petition, asserting that the petitioner cannot evade its responsibility to settle dues owed to TANGEDCO. It cited this case as an example of how the IBC could be manipulated to the detriment of undisclosed creditors of the corporate debtor.

In conclusion, the Court urged Parliament to consider such perspectives and potentially enact legislative amendments to prevent the long-term adverse effects of the IBC or its misuse.