IBBI as insolvency regulator

Section 188 of the IBC provides for the establishment and incorporation of the Insolvency and Bankruptcy Board of India (IBBI) as the regulatory body overseeing insolvency and bankruptcy processes. The main functions of the IBBI include: laying down the compliance requirements and standards for its regulated entities – insolvency professionals (IPs), insolvency professional agencies (IPAs) and information utilities (IUs) – and overseeing their compliance with applicable laws; making regulations and guidelines on all matters relating to insolvency and bankruptcy; and collecting and maintaining records, and disseminating information in relation to insolvency and bankruptcy cases.

The current regulatory framework for IPs (who are responsible for conducting the insolvency and liquidation process) involves dual oversight: the IPAs serve as the frontline regulators, while the IBBI oversees the IPAs while also directly regulating the IPs on certain aspects. This dual regulation is intended to enhance accountability and ensure compliance with established standards. However, this system can lead to an increased regulatory burden on the IBBI.

Sectoral regulation

Role and functions. During insolvency, regulators often don two hats: as a creditor (for regulatory and/or contractual/licence-related dues) and as a regulator (responsible for overseeing compliance of regulatory standards). The objectives and goals of the regulator in these two capacities are disjunct and may even be inherently contradictory and/or conflicting – while a creditor may solely look at maximising its own recoveries, a regulator needs to consider the interest of the sector as a whole.

In the case of FCC v Nextwave Personal Communications Inc, 537 US 293 (2003), the US Supreme Court had categorically recognised this dichotomy and conflict in the functions of the Federal Communications Commission. Noting that a regulator continues to exercise jurisdiction over the insolvent regulated entities with respect to regulatory conditions, the recovery of debt by a regulator is a subject matter of insolvency, which cannot be preferentially enforced as a regulatory condition.

The role of sectoral regulators during insolvencies is not well defined in India. In fact, insolvencies in regulated sectors (such as telecommunications, aviation and mining) have been met with suspicion and stigma from sectoral regulators, who have only passively participated in the insolvencies (as a creditor) and have been wary of the reduced financial capacity of insolvent debtors and the treatment of their dues in the proposed resolution plans.

This has marred the insolvency process with regulatory constraints and unnecessary delays, e.g., the insolvencies of Aircel and Reliance entities are pending since 2018, which has significantly deteriorated the useful life/residual value of their main asset (the right to use spectrum). The involvement of regulators, therefore, becomes crucial to ensure that the insolvency resolution does not disrupt essential services or create systemic sectoral risks.

Intervention by sectoral regulators

Licences/concessions. Concessions and licences (such as in telecoms or the mining sector) are often argued by regulators to be “natural resources”, which cannot be a subject matter of insolvency. It needs to be considered that these natural resources (held in trust for the public) are exploited and monetised through the concessions/licences granted to companies.

Through public auctions, the government monetises these natural resources and grants the right to use them. The grantees make significant investments and incur financial obligations to, firstly, acquire this licence/concession and, secondly, develop infrastructure to run a business using such a licence/concession to monetise and generate revenue out of them. This process involves the investment of huge monies, both as equity and debt (availed by the licensee from banks and financial institutions). Therefore, the process of making such natural resources monetisable involves substantial investments from businesses having the right to use such natural resources and leads to the creation of third-party interests.

Hence, there is a legitimate expectation of the licensees that these concessions/licences constitute assets of the company, despite the “natural resource” being cestui que trust (a differentiation needs to be made between the asset held by the government and the right to use such asset held by the company). The IBC contemplates all assets of the debtor, including intangibles like concessions/licences, to be a subject matter of insolvency.

Recovery of regulatory and other dues. While the sectoral regulators may insist on the payment of their dues during insolvency, the IBC clearly specifies that any amounts relating to the period prior to the insolvency commencement date need to be submitted as “claims” in the insolvency process.

While these claims are subject to resolution in insolvency and cannot be recovered/enforced preferentially on account of a moratorium, there is no relaxation for the insolvent debtor from complying with the applicable regulatory laws, which obligation is placed on the IP in terms of section 17(2(e) of the IBC.

This framework is similar to the automatic stay provision under section 362 of the US Bankruptcy Code, which halts most legal actions (like creditor claims) during insolvency, but may allow regulatory actions to enforce public safety or regulatory compliance. However, whether such regulatory action is barred by a moratorium would be a factual determination that may bring the insolvency professional/tribunal and the regulator at loggerheads. This tussle can lead to prolonged legal battles, as seen in disputes between bankruptcy courts and regulatory agencies.

Approvals and licences. The explanation to section 14(1) states that no licence, permit, concession, or similar rights/grants provided by an authority shall be suspended/terminated on grounds of insolvency, subject to the condition that there is no default in payment of “current dues”.

However, the IBC does not envisage any mechanism relating to renewal/extension of licence wherein the licence expires due to an efflux of time. Since these licences/concessions form the substratum of the debtor’s business, and considering that the insolvency process may be subject to delays due to which many of these licences may lie underutilised for a significant time, the lack of a provision regarding extension/renewal of the licence/concession has several practical implications.

Therefore, if a licence expires and cannot be renewed during the insolvency of a regulated debtor, it also deteriorates the realisable value of the debtor’s assets, since the value of businesses in regulated sectors is entirely attributable to the specialised infrastructure and the licences/concessions needed to operate and generate value out of such infrastructure.

However, the central government in exercise of its powers under section 14(3) of the IBC may exclude the application of section 14(1) to certain transactions. For example, the central government has recently utilised this provision to exclude licences and leases relating to oilfields from the purview of a moratorium. This exemption dilutes the protection available to insolvent debtors in the oil and gas sector, especially when they may be willing to and capable of performing the terms of licences (including payment of current dues) even during insolvency and, therefore, it may have the effect of pushing viable corporate debtors (which are capable of being resolved) towards liquidation.

Considering that these contracts form the entire substratum of business of the insolvent debtor in the respective sectors, such blanket exemption may dilute the potency of the IBC in the revival of debtors, and is contrary to the objectives of the IBC.

Transfer of licences and/or approvals. A resolution would typically involve the applicant taking over control of the corporate debtor and/or a transfer of assets/licences of the corporate debtor. As a usual norm, the sectoral regulators often need to approve asset transfers, licence modifications or changes in ownership of the regulated entity. The implementation of the resolution plan would inevitably be conditional on these approvals from the regulator. At this stage, if regulators request preferential treatment of their dues as a condition precedent for their regulatory approval, it would conflict with the broader scheme and objectives of the insolvency law.

Solutions

Regulated sectors often provide essential services and/or involve significant public interest, which may have the effect of making standard insolvency procedures difficult to apply seamlessly. Addressing these complications is essential for efficient resolution, maintaining public trust, and ensuring that regulated sectors continue to serve public and economic interests during the insolvency proceedings of regulated entities. Ensuring the following can achieve efficient resolutions while maintaining sectoral stability:

• The clear delineation of jurisdiction would minimise litigation delays on account of regulatory tussles between authorities.
• Capacity building of regulators to educate them about the macroeconomic and systemic effect of insolvencies. This will provide greater impetus to the regulators to assume a more facilitative role during an insolvency, which may serve to preserve competition and promote the ease of doing business in regulated sectors often marked by fewer market players due to high barriers to entry.
• A formal and collaborative co-ordination mechanism between insolvency institutions and regulators would streamline approvals/clearances. In fact, section 196 of the IBC specifically identifies “enter into memorandum of understanding with other statutory authorities” as one of the powers of the IBBI.
• Sectoral regulators may establish clear guidelines for their approvals in the case of transferring licences/restructuring of insolvent licensees. When stakeholders have well-defined criteria to consider, they will be better equipped to make informed decisions while negotiating resolution plans, which would minimise delays in implementation of resolution plans on account of regulatory approvals.

This article was originally published in India Business Law Journal on 7 March 2025 Co-written by: Anoop Rawat, Partner; Ahkam Khan, Associate; Ananya Khanna, Associate. Click here for original article

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