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Friday, November 18, 2016

Drafting hall of shame #2: Mistakes in the Insolvency and Bankruptcy Code

by Shefali Malhotra and Rajeswari Sengupta.

The Insolvency and Bankruptcy Code 2016 establishes the Insolvency and Bankruptcy Board of India. One of the primary functions of the Board is regulation of insolvency professionals and insolvency professional agencies. Section 240 of the Code empowers the Board to make regulations to carry out its functions. Some provisions under section 240 are peppered with drafting errors.

Confusing cross-reference


Section 240(2)(zzg) deals with setting up and management of governing boards of insolvency professional agencies. It should cross-reference the provision granting power to the Board to make appropriate regulations. Section 240(2)(zzg) states:

the setting up of a governing board for its internal governance and management under clause (e)...of section 196

It is not clear whether the above reference relates to clause (e) of sub-section (1) or sub-section (2) of section 196. Section 196(1)(e) deals with minimum curriculum for the examination of insolvency professionals, and has nothing to do with the governing of boards. It reads:

lay down by regulations the minimum curriculum for the examination of insolvency professionals for their enrolment as members of the insolvency professional agencies;

Section 196(2)(e) is the correct cross-reference. It reads:

setting up of a governing board for internal governance and management of insolvency professional agency in accordance with the regulations specified by the Board

Section 240(2)(zzg) also deals with the conduct of examination for insolvency professionals. Section 240(2)(zzg) reads:

...the manner of conducting examination under clause (m), of section 196

In this case also it is not clear whether the above reference relates to clause (m) of sub-section (1) or sub-section (2) of section 196.

Incorrect cross-reference


This part of section 240(2)(zzg) talks about setting up of curriculum for examination of insolvency professionals. It reads:

...the curriculum under clause (l)...of section 196

In this case, neither clause (l) of sub-section (1) nor of sub-section (2) of section 196 apply. Section 196(1)(l) deals with constitution of committees of the board, and section 196(2)(l) deals with procedure for enrollment of insolvency professionals.

The correct cross-reference should have been clause (e) of sub-section (1) of section 196. Section 196(1)(e) reads:

lay down by regulations the minimum curriculum for the examination of insolvency professionals for their enrolment as members of the insolvency professional agencies

Non-existent cross-reference


Section 240(2)(zzj) deals with the functioning of insolvency professionals. It reads:

the manner and the conditions subject to which insolvency professional shall perform his function under clause (f) of sub-section (2) of section 208

However, sub-section (2) of section 208 does not even have a clause (f)! The correct cross reference should have been clause (e) of sub-section (2) of section 208. Section 208(2)(e) reads:

to perform his functions in such manner and subject to such conditions as may be specified.

Conclusion


The Government setup the Bankruptcy Law Reforms Committee (BLRC), on 22nd August 2014, to design the legal framework for corporate insolvency in India. The BLRC submitted its report on 4th November 2015. That is a total of 440 days. The Insolvency and Bankruptcy Code 2016 is based on the report of the Committee. The Code was introduced for the first time in the Lok Sabha on 21st December 2015, was cleared by both the Houses on 11th May 2016 and received the assent of the President on 28th May 2016. During its passage, the Code was also referred to a joint committee.
That is a total of 160 days in the Parliament.

The quality of drafting does not appear commensurate with this effort. The drafting errors pointed out in the Code leads to unnecessary confusion and opens up gateways to litigation, which could have been easily avoided. The presence of such basic errors raises the possibility that more serious errors are also present. We should analyse the steps that led up to the IBC, evaluate them against the ideal mechanism, and do better in future projects.



Shefali Malhotra is a researcher at the National Institute for Public Finance and Policy. Rajeswari Sengupta is a researcher at the Indira Gandhi Institute for Development Research. They thank Shubho Roy and Anirudh Burman for useful discussions.

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