The genesis of the Insolvency and Bankruptcy Code that we have today lies in the draft Bill that was produced by Dr. TK Viswanathan’s Bankruptcy Law Reforms Committee as part of its two volume report submitted on 4 November 2015. The Committee’s Bill is in Volume II. Volume I, titled ‘Rationale and Design’, is essential reading for anyone who wants to fully understand the intent behind the Code. In this Volume, the Committee unravels the thoughts, concerns and motivations from whence spouted the Code. The Supreme Court thought Volume I was important enough to reproduce large passages from it in Innoventive Industries, its first judgment interpreting the provisions of the Code. It repays close study.

One of the main prejudices that the Committee wanted to dispel was that all default involves malfeasance. The Committee thought that this thinking was the hallmark of a “weak insolvency regime”, and the new law ought to recognise that some business plans will always go wrong, and this was no reason to disincentivise risk-taking. “If default is equated to malfeasance, then this can hamper risk-taking by firms”, said the Committee, in a section titled “Drawing the line between malfeasance and business failure”.

The Code was structured to give the company’s earlier management inducement to share its knowledge of the company, with the promise that if it could convince the company’s creditors, it might resolve the company’s loan default and jump back in the saddle and run its business anew.

The newly introduced Section 29A changes all that. In his speech to the Lok Sabha, Finance Minister Arun Jaitley railed against the fact that “the man who created the insolvency pays a fraction of the amount and comes back into management”.

This, he said, was “morally unacceptable”, and so we needed Section 29A, which disqualifies any person who has an account which is classified as an NPA from submitting a resolution plan to the committee of creditors. Jaitley obviously feared the real possibility that such a resolution plan may mandate that the same person comes back into management. With the legislation of 29A, the line between malfeasance and business failure has been obliterated.

It is difficult to understand why it should be a problem if creditors are willing to have the same person come back into management. After all, if a company’s business is still viable, then its going concern value will be more than its liquidation value, and no one knows the company’s business like its promoters. If they haven’t been guilty of any foul play, why can they not run the company again?

It is for this very reason that it makes sense to give a company’s erstwhile management some skin in the game during insolvency resolution. Further, if management has nothing whatsoever to gain from insolvency resolution, then promoters can keep vital bits of information from the resolution professional, thereby eroding the organisational worth of the company, and frustrating the process of maximising value for all stakeholders.

According to the Viswanathan Committee, the insolvency resolution process was meant to offer “a calm period for creditors and debtors to meet as equals in negotiations” putting the onus on debtors to reduce information asymmetry. Leave alone being equals, Section 29A makes debtors non-entities, and makes information asymmetry an insurmountable wall.

The Committee’s vision is in tatters.