Understanding Corporate Governance
Before delving into the role of IBC, it is essential to understand what corporate governance entails. Corporate governance pertains to the system of regulations, customs, and procedures governing the direction and oversight of an entity. In case of a company, it involves a delicate balance of power and responsibility between a company’s board of directors, management, shareholders, other stakeholders and the regulators. The fundamental goal of corporate governance is to ensure that the interests of all stakeholders are safeguarded, and corporate objectives are met efficiently and ethically.
The OECD Principles of Corporate Governance (“OECD Principles”), established in 1999, have become a global reference for countries w.r.t corporate governance practices. These principles emphasize the vital role of good corporate governance in supporting economic strength and stability worldwide.
The OECD Principles serve as the international standard for corporate governance, guiding reform efforts by governments and the private sector. The OECD Principles emphasize that the entitlements of stakeholders are predominantly defined by legal statutes (e.g., labor, business, commercial, environmental, and insolvency laws) or through contractual agreements that companies are obliged to honor. Taking a closer look, the OECD Principles also stress the importance of an effective insolvency framework and the enforcement of creditor rights to complement the corporate governance framework.
Enactment of IBC
IBC enacted in 2016, is a landmark piece of legislation. Its primary objective is to consolidate and amend laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The IBC introduced a comprehensive framework for the resolution of distressed companies, promoting transparency and accountability. It replaced the existing, often cumbersome, and time-consuming insolvency laws with a more streamlined process.
The Impact of IBC on Corporate Governance in India
IBC’s impact on corporate governance in India has been substantial. The Supreme Court in the matter of Lalit Kumar Jain v. Union of India & Ors. [TRANSFERRED CASE (CIVIL) NO. 245/2020] also observed the following while acknowledging that IBC aims at promoting corporate governance:“The highlight of the Code is the institutional framework it envisions. This framework consists of the regulator (Insolvency and Bankruptcy Board of India) insolvency professionals, information utilities and adjudicatory mechanisms (NCLT and National Company Law Appellate Tribunal-NCLAT). These institutions and structures are aimed at promoting corporate governance and also enable a time bound and formal resolution of insolvency.”
Further, the Supreme Court in the matter of Arun Kumar Jagatramka v. Jindal Steel And Power Ltd [Civil Appeal No. 9664 of 2019] observed the following:
“A timely resolution of corporate insolvency was conceived as an instrument to support the development of credit markets, encourage entrepreneurship, enhance the ease of doing business and provide an environment conducive to investment, setting the economy on the path to growth and development. “
It was further observed:
“The enactment of the IBC has marked a quantum change in corporate governance and the rule of law. First and foremost, the IBC perceives good corporate governance, respect for and adherence to the rule of law as central to the resolution of corporate insolvencies. Second, the IBC perceives corporate insolvency not as an isolated problem faced by an individual business entities but places it in the context of a framework which is founded on public interest in facilitating economic growth by balancing diverse stakeholder interests. Third, the IBC attributes a primacy to the business decisions taken by creditors acting as a collective body, on the premise that the timely resolution of corporate insolvency is necessary to ensure the growth of credit markets and encourage investment. Fourth, in its diverse provisions, the IBC ensures that the interests of corporate enterprises are not conflated with the interests of their promoters; the economic value of corporate structures is broader in content than the partisan interests of their managements. These salutary objectives of the IBC can be achieved if the integrity of the resolution process is placed at the forefront. Primarily, the IBC is a legislation aimed at re-organization and resolution of insolvencies. Liquidation is a matter of last resort. These objectives can be achieved only through a purposive interpretation which requires courts, while infusing meaning and content to its provisions, to ensure that the problems which beset the earlier regime do not enter through the backdoor through disingenuous stratagems.”
Hence the judicial forum have recognized the importance of IBC in promoting good corporate governance.
Here are some key aspects of the transformation brought about by IBC:
Enhancing Creditor Rights
One of the critical aspects of corporate governance is the protection of the rights of all stakeholders. IBC has reinforced this by prioritizing the interests of creditors, which includes financial institutions, bondholders, and operational creditors.
IBC plays a crucial role in balancing the interest of all the creditors. The appointment of the resolution professional and constitution of the Committee of Creditors (“CoC”) in accordance with the provisions of IBC to monitor and govern the resolution process and for the CoC to oversee the tasks of the resolution professional so appointed, including operations of the corporate debtor as a going concern are crucial milestones towards good corporate governance. The major task with which the CoC is entrusted with, is the approval of the most viable resolution plan out of the resolution plans submitted for the corporate debtor. In deciding the successful resolution plan, the CoC not only has to identify as to which plan is able to extract the maximum value of the assets of the corporate debtor and also which plan is able to provide the fairest payment structure to all the creditors but also which plan will be able to reorganize the assets of the Corporate Debtor, which is also one of the main objectives of IBC.
Creditor rights are a critical aspect of corporate governance. The IBC prioritizes creditor interests, balancing the rights of various creditors and reinforcing the idea that creditors are respected. This promotes good corporate governance, as companies understand their financial responsibilities better.
Promoting Transparency
Transparency is a foundation of effective corporate governance.
IBC provides for a transparent resolution process of a corporate debtor wherein the resolution professional is obligated to investigate whether a corporate debtor has engaged in avoidance transactions, including preferential transactions, undervalued transactions, extortionate credit transactions, fraudulent trading, and wrongful trading and provide his/her opinion about the same vide Form CIRP 8.
Furthermore, the insolvency professional is obligated to provide specific disclosures upon assuming his/her role (whether as an interim resolution professional, resolution professional, or liquidator), which are imperative to ensure transparency and to establish their independence and impartiality.
This transparency ensures that shareholders, creditors, and the public have access to critical information regarding the financial health of companies and the actions taken by the insolvency professionals. This, in turn, fosters trust in the system.
Promoting Accountability
Accountability is another crucial pillar to good corporate governance. The extant corporate laws highlight the importance of appointment of independent directors on the Board of Directors of the Company and their crucial function in guaranteeing that companies operate in the utmost interests of all stakeholders.
Further, under IBC, the corporate debtor’s board of directors is often replaced by insolvency professionals during the resolution process. This change not only streamlines the decision-making process but also holds corporate leaders accountable for their actions. Concerns about relinquishing control over their organizations have compelled boards and management teams to adopt a more prudent approach, exercising greater responsibility, and steering clear of circumstances that could potentially result in insolvency.
IBC and the accompanying regulations unequivocally illustrate the integration of transparency and accountability standards, underscoring their fundamental role in ensuring IBC’s effectiveness.
Relationship between IBC and corporate governance in India has yielded several benefits, wherein improved governance practices have boosted investor confidence and created a healthier business ecosystem.
IBC has significantly contributed to enhancing corporate governance by safeguarding continuity and preserving value for stakeholders. Moreover, it has played an essential role in recognizing and respecting the rights and claims of a wide array of stakeholders, including employees, vendors, and operational creditors, alongside financial creditors.
Conclusion
Corporate governance and IBC are interwoven forces in India’s business landscape. IBC has played a pivotal role in advancing corporate governance by promoting accountability, transparency, and the protection of stakeholders’ rights. As India’s corporate sector continues to evolve, IBC’s influence promises to build even better boardrooms, where ethical conduct and responsible decision-making are paramount. The path to a thriving and transparent corporate environment in India is illuminated by the essential partnership between corporate governance and IBC.
The authors are Senior Partner and Senior Associate at S&A Law Offices.
