08 August 2019

India's Platonic Guardians and the IBC (Updated)

Since posting my thoughts below India's Supreme Court has issued a judgment in a case dealing with last year's amendments to the Insolvency and Bankruptcy Code. You can read a news account of the judgment here. (You can read the full text by going here.) In Pioneer Urban Land and Infrastructure Ltd. the Court simply applied the law as amended and recognized that real estate allottees (what most folks in the U.S. would call land contract vendees) were financial creditors. This conclusion was a straightforward reading of the amended statute. (For how the U.S. Bankruptcy Code protects the interests of such folks see 11 U.S.C. § 365(i).) The Court was willing to follow Parliamentary direction notwithstanding significant policy issues raised by dozens of large real estate developers. I hope the Court takes the same "plain-meaning" approach in the Essar Steel case.
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The relatively new (as of 2016) Insolvency and Bankruptcy Code of India drew me to spend four months in Delhi as a Fulbright-Nehru Research Scholar to study its implementation. You can see a couple of posts from my stay here and here.

Surveying and interviewing insolvency professionals and reading the judgments of the Indian equivalent of U.S. Bankruptcy Courts led my colleague Dr. Risham Garg and me to some unsettling conclusions. You can read an early draft of the paper describing those conclusions here. (The final draft is sitting on the desks of law review editors as I type.) 

Quite a bit happened after we posted the draft including some significant amendments to the IBC. FWIW, I think the amendments are largely positive but with a hint of overreaching. Of course, what I think is of limited significance.

What is of much more significance is the opinion of India's Supreme Court. An appeal in Essar Steel, one of India's largest bankruptcy cases, was pending when Parliament amended the law. The amendments would have the effect of reversing the appellate decision that is now before the Supreme Court.

One can understand that the issue of retroactivity of the amendments must be addressed. (The amendments provide they apply to any case on appeal but that raises the question of whether the amendments would change any vested rights. I believe the answer is no because the appellate decision badly misconstrued the law.)

But go here to read the comments attributed to one of the judges of the Supreme Court about his "take" on the Court's broader role when it comes to applying the amendments. Specifically, Judge R.F. Nariman is reported to have
observed that if the law allowed banks to decide that while they would take haircuts, they could give nothing to the operational creditor, “it was bad law”. “If this is not addressed even in the amendments, it is a major lacuna. The amendments, instead of addressing the issue, aggravate it,” the court said. The financial creditors tried to justify the latest amendments made to the IBC by claiming that the difference between them and the operational creditors was that they were secured lenders as opposed to the latter. The court, however, observed that as there was “no monopoly” of any operational creditor, it was possible that a new management could switch to another service provider instead of the old one.
Without getting into the weeds of the substantive issue, I will observe that the attitude of the Indian Court to legislation is remarkable even by the activistic standards of some U.S. Supreme Court justices. India's Parliament in effect finds itself needing to justify its correction of a misguided appellate decision. Rather than applying the democratically-legislated amendments, at least one judge on India's Supreme Court takes his role to be to re-evaluate those amendments in light of a policy that he identifies.

Some in America--from the Left and from the Right, depending on the case--have accused the U.S. Supreme Court from legislating from the bench. Yet nowhere do we find a majority of SCOTUS opining that it has the warrant to describe a law as "bad" and then effectively ignore it.

It is the case that America's constitutional jurisprudence has increased the democratic deficit and thus contributed to the culture wars. We have not seen such a degree of overreach when it comes to statutes, especially when it comes to statutes of a purely economic nature. And even more especially when the law is directed at unwarranted judicial construction.

The rules of statutory construction admit of some room to maneuver when it comes to what would otherwise be an absurd result. Even so, the recent amendments to the IBC can hardly be described as absurd. I thus hope that the India's Apex Court recalls its earlier jurisprudence (by earlier I mean from January 2019) when it quoted with approval from U.S. Supreme Court cases holding that courts should defer to legislation in the economic arena. See Swiss Ribbons Pvt. Ltd. v. Union of India (2019), para. 7.

(I should also point out that it would be a substantial blow to domestic and foreign lending to Indian businesses if the Court eviscerates the substance of the amendments. This would be particularly problematic when the effects of the U.S.-China trade-and-currency war is rippling to other nations, including India.)

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