Flipping through a copy of the Insolvency and Bankruptcy Code can be a daunting experience. Not only is it a hefty document when considered in isolation, but it must also be read with several regulations. Even the precise meaning of several of its provisions is hanging in uncertainty, as the Code has unleashed a flood of litigation and we will soon see many important sections being conclusively interpreted by judicial authorities. To make matters worse (or better, for lawyers), a large set of amendments is just around the corner.

Lost beneath the headlines that the Code has been generating on an almost regular basis (thanks mainly to the giant companies currently fluttering in its dismal web) is the original intent with which it was brought into existence.

The TK Viswanathan Committee which drafted the first version of the Code wrote an extremely readable report to go with their draft. The report makes it clear that the Code was envisioned as a small but vital part of a larger environment that made it simpler for businesses to flourish. Three goals, embedded in the Code and visible in its various sections, drove this vision: firstly, making it easy for companies to access credit, secondly, maximising stakeholder value by speedily resolving insolvencies, and lastly, signalling to entrepreneurs that they could take business risks without being penalised if they failed.

I have attempted to write a few words on these three goals and how they have impacted the Code. One of them, as we will see, is no longer visible in the Code, and has been amended out for being “morally unacceptable”.

1. Ending the dominance of secured credit and smoothening the path to unsecured loans

The IBC represents an attempt to correct the imbalance in favour of secured credit in India. Secured lending has almost monopolised the debt market in India, primarily because of higher recoveries when compared with unsecured debt. These higher recoveries can be related to the fact that the Securitisation Act (better known by the acronym “SARFAESI”) allows secured lenders to monetise their securities without court interference.

The problem this has spawned is that lenders’ emphasis on getting security for their debts has killed the corporate bond market in India. Further, lenders do not have to, and often do not bother with analysing the creditworthiness of a company before extending it credit, and can confine themselves to ascertaining the value of the security offered. Thus, asset-heavy companies get the lion’s share of credit, and firms with fewer assets, like trading companies, are starved of credit – regardless of their ability to repay. This distorts the market, raises unnecessary barriers to entrepreneurship, and artificially increases the cost of capital.

The IBC has sought to even things out for unsecured creditors. They are now entitled to a seat on the elite Committee of Creditors that decides on the fate of an insolvent company. Moreover, if the company is liquidated, unsecured creditors are entitled to be repaid in priority to Central or State Governments. The Code also expressly prohibits the operation of the Securitisation Act while the company is undergoing insolvency resolution.

If the IBC can boost recoveries for unsecured creditors and thereby make it less difficult for asset-light companies to get loans, it will have served one of its purposes.

2. Resolving insolvencies as fast as possible

The TK Viswanathan Committee suggested a radical change to India’s bankruptcy law – instead of the earlier “debtor in possession” model, where the company’s management remained in control even during insolvency proceedings, management of the company would now be with a “resolution professional” appointed by the creditors of the company.

What this meant was that during insolvency proceedings under the IBC, the company would be like a rudderless ship with no one to purposefully navigate it. It was therefore essential that insolvency proceedings end as quickly as possible. As the Committee put it in its report, “Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer.” This explains the strict time limit prescribed by the Code for resolving insolvencies – 180 days with an extension of 90 days in exceptional conditions. The Committee worried about the destruction of value that would ensue if a company was kept on life support (with a resolution professional in charge) for too long.

Anther factor that accounts for the stern emphasis on speedy resolution is the depreciation that the assets of the company would suffer from being used in a sub-optimal manner during insolvency.

3. Nudging businesspeople to take risks (*No longer valid after Section 29A)

Risk-taking, said the Committee, is the wellspring of economic growth.The report stressed the importance of ensuring that a loan default by a company was not automatically equated with malfeasance, as this would stifle risk-taking. As the Committee put it, the law “must give honest debtors a second chance.” The Committee’s ambitious vision of an insolvency law that promoted risk-taking among entrepreneurs was evident in the first edition of the IBC.  The new law consciously abandoned the old thinking that a defaulting company must have failed because its promoters were dishonest.

The Insolvency and Bankruptcy Code initially had no prohibitions against persons associated with the management of the insolvent company making a bid to get back on the saddle. The earlier owners of the company used to be entitled (like everybody else) to submit a resolution plan, stipulating their proposal for managing the company and paying off its debts. Their failure with the company was not held against them.

However, from November 2017 onwards, the Code was amended to insert Section 29A, which bars persons associated with the company from submitting resolution plans, because as the Finance Minister said in his speech to Parliament, the Government thought this was “morally unacceptable”. The new message seems to be that owners have to pay for risks that go awry – by having to walk away from their company.

So, the Committee’s idea to give entrepreneurs a soft landing is now obsolete – a white dwarf, to put it in astral terms. Without it, the Code is less magical, and revolutionary, and, of course, risky, than it might have been.