Early evidence from the personal insolvency framework in India

by Karan Gulati, Chitrakshi Jain, and Anjali Sharma.

In 2016, India enacted an insolvency and bankruptcy law, the Insolvency and Bankruptcy Code (IBC), which included corporate and individual insolvency provisions. However, except for a narrow use case, the insolvency of personal guarantors (PG) to corporate debtors, the provisions for personal insolvency are yet to be notified. These provisions for PG insolvency were notified in November 2019 and were upheld as constitutional in November 2023.

PGs represent a unique and narrow category of individual debtors. They are often promoters, key shareholders, or directors of corporate entities and thus provide guarantees for loans taken by these entities. Lenders can invoke these guarantees when the corporate entity defaults, making PGs liable for the loans. The terms of these personal guarantees may allow lenders to seize and liquidate the assets of the PGs to recover their debts. As per the Bankruptcy Law Reforms Committee (BLRC), it is common practice that Indian banks take a personal guarantee from the firm's promoter when they enter into a loan with the firm.

In this article, we examine the data on PG insolvency cases to understand two key issues: (i) can such cases serve as proof of concept for the broader implementation of personal insolvency provisions under the IBC?; and (ii) what feedback loop is emerging for lenders from enforcing personal guarantee contracts through insolvency proceedings? However, we restrict this examination to the outcome of PG insolvency cases (approval of a repayment plan) and exclude the input (the insolvency process itself). Thus, we do not attempt to explain the gap between the applications filed and those admitted or between the applications filed and the appointment of resolution professionals.

Importance of personal guarantees

Limited liability protects a firm's shareholders from personal liability for its debts during distress, allowing them to retain their assets and wealth even during debt recovery or insolvency proceedings. This protection encourages entrepreneurship and risk-taking. Individuals often choose to incorporate to benefit from limited liability. However, when a firm faces distress and the value of its shares falls, two things can happen: (i) limited liability can encourage risky business decisions, and (ii) the firm's promoters may alienate its assets in their favour. One way to balance limited liability with accountability for the firm's promoters is through personal guarantee contracts. If promoters enter into personal guarantee contracts with lenders, lenders can seize the promoters assets if the debts of the incorporated entity remain unpaid. These contracts can moderate risk-taking by making guarantors internalise the costs of default and disincentivise the firms promoters from alienating its assets in their favour.

The interplay between limited liability and personal guarantees affects creditor rights during firm distress. Personal guarantees widen the pool of assets available to lenders when a firms assets are insufficient to cover its debts. In this context, guarantees offer lenders additional collateral for loans to corporate debtors while preserving the principles of limited liability and enhancing the debtors creditworthiness.

Given the role of promoter-owners in managing firms in India, personal guarantees have become a common feature of corporate lending. These guarantees are often used alongside other forms of collateral. RBI guidelines also encourage personal guarantees when lending to closely held or higher-risk firms to enhance loan security and ensure management continuity. Additionally, the RBI has incorporated personal guarantees into its restructuring debt framework. While data on the proportion of corporate loans secured by personal guarantees is unavailable, disclosures by the largest five public-sector and four private-sector banks as of 31 March 2023 suggest that guarantees cover 4% of the advances extended by these banks (authors' calculations).

PG insolvency as a lab for personal insolvency implementation

As per provisions for personal insolvency under the IBC, PGs propose repayment plans based on their ability to honour the guarantee. A resolution professional submits this plan to the committee of creditors, as defined under section 79 (11) of the IBC. Once creditors vote in favour of the repayment plan, it is then approved by the NCLT. Generally, from admission to approval of the repayment plan, this process takes a little over a year.

As of June 2024, 3134 PG insolvency applications involving claims of approximately Rs. 2 trillion have been filed across National Company Law Tribunals (NCLTs) and 50 such applications have been filed before the Debt Recovery Tribunals (DRTs). Of these, 468 applications were admitted, and the NCLT approved repayment plans in 26 cases. Although overall data for the number of corporate debtors that correspond to PG applications is not available, the 26 cases studied in the article correspond to 4 corporate debtors.

In the 26 cases in which the NCLT has approved repayment plans only one featured a joint application for resolution filed by the corporate debtor and its PGs. In the remaining cases, actions against PGs were initiated near or after the conclusion of the corporate debtors insolvency resolution process. In one case, the PG also acted as the resolution applicant in the corporate debtors insolvency process. Table 2 summarises the outcomes of the PG insolvency processes (PGPs) alongside those of the corresponding corporate resolution processes.

Table 2: Outcomes of personal guarantor and the corporate debtor resolution processes
Corporate debtor	No. of PGs	Date of Admission of PGP	Amt. claimed against PGs (Rs. cr.)	Recovery against PGs (%)	Amt. claimed against Corporate Debtor (Rs. cr.)	Date of Liquidation/Resolution (Corporate Debtor)	Outcome of the Corporate Debtor case	Recovery against Corporate Debtor (%)
Bluefern Ventures	2	30-09-2021	30.3	39.6%	38.7	Unclear	Liquidation	NA
Vishwa Infrastructures	12	15-2-2022	1441.6	0.8%	1318.5	14-06-2019	Liquidation	4.3%
Chadalavada Infratech	7	21-09-2022	278.1	24.5%	440.4	11-04-2022	Liquidation	2.4%
Pradip Overseas	5	27-04-2022	3017.5	0.4%	2663.0	14-10-2021	Resolution	4.8%
Total	26	-	4767.5	2.2%	4460.6	-	-	4.1%
Source: IBBI Quarterly Newsletters, NCLT Orders in cases

Personal guarantees are meant to hold promoters accountable. Table 2 shows that, despite variations in the number of guarantors and the amounts claimed, PGPs have yielded an average recovery rate of 2.2%. However, these recovery rates should be viewed in the context of the poor outcomes in the corporate debtor insolvency process and the extent to which these debts have devolved on the PGPs. In three cases, the corporate resolution processes resulted in liquidation. The average recovery rate for the four cases was 4.1%.

The purpose of a personal insolvency framework is to provide the debtor with a way to exit a debt contract. Of the 3184 applications which have been filed, only 468 have been admitted. The tribunals have approved the repayment plans in only 26 out of the 468 admitted cases (till June 2024). These gaps cannot be explained by merely looking at the outcomes in the PGPs which have been completed. The next section underscores how the insolvency process may just be a costly detour, for a substantial number of PGs are unable to honour their obligations under the repayment plan. While the outcomes can only be studied for 26 cases, they are underwhelming and it would be useful to conduct an evaluation of both the process and outcomes in the PGPs before extending the coverage to all classes of individual debtors under the IBC framework.

A feedback loop from PGPs

Since lenders may turn to personal guarantees due to poor value realisation in recovering debts extended to firms, enforcing personal guarantee contracts is important to provide creditors with an efficient means of recovery and to ensure that debtors can discharge their obligations. Before the notification of personal insolvency provisions for PGs to corporate debtors under the IBC, creditors relied on frameworks under the SARFAESI Act, the RDDB and FI Act, and the Indian Contract Act. These frameworks did not allow creditors to collectively enforce their rights.

Most corporate lending in India is secured by collateral, enforceable through the corporate debtor resolution process under the IBC. Enforcing personal guarantees under the IBC offers an additional recovery mechanism. The BLRC also recognised the importance of enforcing these guarantees and recommended establishing a framework to ensure the completeness of the corporate insolvency process. While the IBC extends the recovery process to include personal guarantees and provides a pathway to discharge an individual debtors obligations, it remains to be seen whether the framework is effective and represents an improvement over previous statutory recovery frameworks.

However, early evidence from the outcomes under this framework provides valuable inputs to lenders, helping them to make informed decisions about the value of personal guarantee contracts and their utility as collateral security for credit to firms. In two cases, the repayment plans of PGs resulted in better outcomes 24% and 39.6% compared to nil and 2.4% in the respective corporate processes. However, out of the 468 admitted PGPs, 108 were closed due to the non-submission or rejection of a repayment plan (IBBI Newsletter, Apr-June 2024).

Our analysis of 26 cases in which the NCLT has approved repayment plans reveals that these cases have not yet been marked as disposed of. A closer reading shows that this is because the PGs have failed to fulfil their obligations under the plans. Data on the implementation status of the repayment plans of PGs is available for 19 of the 26 cases (corresponding to two out of corporate resolution processes). Their details are presented in Table 3.

Table 3: Status of implementation of the repayment plans for PGs.
	Vishwa Infrastructures (CD)	Chadalavada Infratech (CD)
No. of PGs	12	7
No. of PGs that have defaulted on plan	7	5
Value of default (in Rs. cr.)	8.0	47.5
No. of PGs discharged	5	2
Value realisation from discharged PGs (Rs. cr.)	3.1	20.6
Total liability devolved on PGs (Rs. cr.)	1441.6	278.1
Recovery rate total	0.8%	24.5%
Recovery rate from discharged PGs	0.2%	7.4%
Average time to default after approval of repayment plan (in days)	274.0	81.4
Average time to discharge after approval of repayment plan(in days)	126	83
Source: Orders of the NCLT, Hyderabad

As of June 2024, of the 12 PGs associated with Vishwa Infrastructures, only 5 have fulfilled their obligations under the repayment plan. The remaining PGs have either been declared bankrupt or are in the process of filing for bankruptcy. Similarly, of the 7 PGs associated with Chadalavada Infratech, only 2 have been discharged from their obligations. The remaining have either been declared bankrupt or have filed for bankruptcy.

Feibelman and Sane (2020) also recognised the challenge of defaults in repayment plans within personal insolvency, noting that adhering to the requirements of the plans might just be a detour for some individual debtors. They recommended standardising repayment plans to identify debtors who should proceed directly to bankruptcy. Our examination of PGPs supports their recommendation.

According to the IBBI, 56 bankruptcy applications for PGs have been filed across DRTs and NCLTs as of June 2024. Completing these bankruptcy proceedings will provide a complete picture of how the IBC operates in personal insolvency cases. However, The low recovery rate and the failure of PGs to submit viable repayment plans suggest that the realisable value from guarantee contracts may be minimal, mirroring the declining fortunes of the corporate debtor. Thus, the likelihood that personal guarantees will cover the shortfall in recovering corporate debts is low. This should prompt lenders to reconsider the role of guarantees in corporate credit contracts.

Conclusion

In 2015, the BLRC had insisted that corporate insolvency provisions are incomplete without a personal insolvency framework. The PGPs that have resulted in approved repayment plans under the IBC have shown limited effectiveness as a value discovery mechanism for lenders and guarantors. Given that many PGs have been unable to fulfil their obligations under the repayment plan and have subsequently filed for bankruptcy, it remains to be seen how extending the coverage of the personal insolvency framework will balance the interests of the debtors and creditors. A careful evaluation of the process of insolvency should be conducted before the IBC framework is extended to all classes of personal debtors.

References

Designing a Personal Insolvency Regime: A Baseline Framework, by Feibelman A and Sane R , 2020, IBBI, Insolvency and Bankruptcy Regime in India - A Narrative.

Velvet Bankruptcy, by Hahn D, 2006, Theoretical Inquiries in Law, Volume 7 Number 2, pp. 523:554.

At the time of writing, the authors Karan Gulati and Anjali Sharma were researchers at TrustBridge. Chitrakshi Jain is currently a researcher at TrustBridge. We are grateful to Adam Feibelman and Renuka Sane for their comments. Views are personal.

An evaluation framework for public procurement processes

by Karan Gulati and Anjali Sharma.

Governments require and use goods and services to operate their machinery and deliver schemes and programs to their constituents. However, self-production cannot meet this need for goods and services. As a result, governments rely on public procurement. However, India does not have an optimal public procurement system. Tenders often undergo modifications, the government incurs significant debt due to payment delays, competition is limited, and contract execution is frequently delayed. Procuring entities also tend to favour large private companies by setting eligibility criteria that exclude small and medium-sized enterprises or providing them with private information that offers a competitive advantage.

Given this experience and the limitations of existing literature, integrating international and best practices can facilitate strategic evolution and ensure that the Indian public procurement system is conducive to achieving broader objectives of efficiency and effectiveness in public resource allocation. By methodically aligning with these practices, India can foster a competitive market environment, attract better vendors, and achieve effective and sustainable procurement outcomes. Specifically, such methodological alignment can help establish an evaluation framework with clear benchmarks and indicators that enable the measurement of procurement processes across departments, identify systematic weaknesses, and explore opportunities for reform.

In a new TrustBridge Rule of Law Foundation Working Paper, we propose "An evaluation framework for public procurement processes" that recognises the government's dual role as the state and a market participant throughout the procurement life cycle and can be deployed to evaluate public procurement across sectors and procuring entities. It contributes to India's growing field of evidence-based literature and policy interventions. Based on the UNCITRAL Model Law on Public Procurement, OECD Recommendations of the Council on Public Procurement, the World Bank's Benchmarking of Procurement, FIDIC, ADB, and NEC standard contracts, and relevant literature, the evaluation framework includes the following benchmark:

• Transparency
• Integrity
• Documentation
• Capacity

• Timeliness
• Negotiation
• Monitoring
• Dispute resolution

It divides these benchmarks along two axes. The first pertains to the role of the procuring entities, either as (i) the state or (ii) a market participant. The second pertains to procurement stages: (i) pre-award to award, (ii) award to completion, and (iii) completion to payment. For instance, as the state, procuring entities must ensure transparency before awarding a tender. To evaluate transparency, the framework assesses whether procuring entities publish procurement plans, which aids in planning and reduces the need for emergency procurement. It also evaluates whether the entity conducts pre-bid consultations, which are beneficial for identifying suppliers early in the process.

To assess the effectiveness of the framework, we evaluate the procurement processes of the National Highways Authority of India (NHAI), India's largest public procuring entity, with tenders worth over 3,70,000 crore rupees (USD 44.5 billion). Its parent ministry, the Ministry of Road Transport and Highways, accounts for over half of India's capital expenditure on procurement. This operational experience should have endowed NHAI with expertise that reflects a spectrum of procurement processes and methodologies. Furthermore, the government's focus on infrastructure development, especially in road transport, underscores the NHAI's role as a driver of public procurement by the Indian state. Thus, evaluating NHAI can provide insights into public procurement processes in large-scale procuring entities and the efficacy of our framework.

Through this first-of-its-kind and illustrative evaluation, we identify several areas for improving India's public procurement system, thus optimising the allocation of public resources, curtailing opportunities for rent-seeking, and fortifying public trust. This includes better estimation of project timelines, improving the role of independent monitoring, and conducting performance evaluations. It also highlights that procuring entities need to enhance transparency not just in their operational processes but also in their data collection and reporting practices. These results validate the efficacy of our evaluation framework. Its comprehensive nature, encompassing a range of benchmarks, allows for a detailed evaluation of public procurement processes. Its application to NHAI demonstrates its potential to evaluate and improve procurement processes across procuring entities.

Extending this evaluation framework is essential to building on this foundational work. The task now involves evaluating other large-scale procuring entities. This endeavour is about identifying areas for improvement and understanding the patterns that define public procurement processes. The insights from this work can inform policy-making and catalyse systemic improvements, contributing to enhancing and refining the public procurement system.

References

Anirudh Burman and Pavithra Manivannan, Delays in government contracting: A tale of two metros, Leap Blog, 23 December 2022.

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, XKDR Working Paper No 10 of 2021.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, Leap Blog, 29 March 2022.

Karan Gulati and Anjali Sharma, An evaluation framework for public procurement processes, TrustBridge Rule of Law Foundation Working Paper No 4 of 2024.

Prasanta Sahu, Forget stimulus, clear your dues: Rs 7 lakh crore unpaid dues to industry by central govt depts and PSUs, Financial Express, 8 September 2020.

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, Leap Blog, 26 November 2020.

Yugank Goyal, How Governments Promote Monopolies: Public Procurement in India, The American Journal of Economics and Sociology, 26 November 2019.

The authors are researchers at the TrustBridge Rule of Law Foundation. We are grateful to Akshay Jaitly, Renuka Sane, Charmi Mehta, and participants at the Joint Field Workshop on Public Procurement for their valuable comments. Views are personal.

Author: Karan Gulati

Karan Gulati is a Researcher at the TrustBridge Rule of Law Foundation, New Delhi.

On this blog:

• An evaluation framework for public procurement processes, 17 July 2024.
• Improving judgment enforcement: Let judgment creditors file insolvency resolution applications, 26 October 2023.
• Litigation in public contracts: some estimates from court data, 26 May 2021.
• Grievance Redress by Courts in Consumer Finance Disputes, 23 March 2021.
• Why do we not see class-action suits in India? The case of consumer finance, 3 May 2020.
• India’s low interest rate regime in litigation, 11 March 2020.
• Delays in deposit insurance, 9 April 2019.

Improving judgment enforcement: Let judgment creditors file insolvency resolution applications

by Karan Gulati and Anjali Sharma.

Judgments form the basis of a sound legal system. However, the mere issuance of judgments, without ensuring their prompt enforcement, takes away the incentive to turn to the courts. It also reduces trust in contracts and property rights, the bedrock of economic activity. This discourages investment, curbs entrepreneurial enthusiasm, and impedes national development (World Bank 2003; Chemin 2007; Rao 2020). Beyond economic consequences, a delay or failure in enforcing judgments diminishes public confidence in the judiciary (Salzman and Ramsey 2013).

In India, enforcing monetary judgments is particularly challenging, as evidenced by its low ranking on the World Bank’s ‘Enforcing Contracts’ indicator and data from the National Judicial Data Grid (NJDG). To ensure and expedite the enforcement of such awards, we propose that judgment creditors – holders of a judgment by a court or tribunal – should be allowed to initiate insolvency resolution proceedings against judgment debtors. Due to the severe consequences under the Insolvency and Bankruptcy Code (IBC), such proceedings will deter non-compliant debtors from evading their obligations.

The problem

Enforcing judgments with monetary components is an especially difficult problem. In 2020, India ranked 163rd out of 190 countries on the World Bank’s Doing Business indicator for ‘Enforcing Contracts’. This metric measures the time and cost of enforcing a standard contract in a civil court. In India, once a dispute is initiated, it takes 1,445 days till enforcement, costing 31% of the claim value. In addition to the time already spent securing a judgment, enforcement takes 305 days. As per the NJDG, while approximately 4.5 lakh new execution petitions are instituted each year, only 3.9 lakh are disposed. Even then, less than 15% result in an award or decree.

This poor track record on court-led enforcement also dilutes alternate dispute resolution mechanisms, which operate in the shadow of the law. When parties understand that enforcing settlement agreements is likely to be prolonged, often with poor outcomes, their incentives change. Consequently, such mechanisms are used not to resolve disputes but to avoid payments and cause delays. In fact, poor performance on contract enforcement may be why Indian and international businesses often include international arbitration clauses in contracts when dealing with cross-border transactions.

At present, enforcement of civil judgments is governed by the Code of Civil Procedure 1908 (CPC). To ensure enforcement, a court can attach a judgment debtor’s (a person against whom a judgment capable of execution has been passed) assets, imprison them, or appoint an individual to manage their property. Once attached, the debtor cannot dispose of or transfer the property. If they fail to fulfil the judgment claim, the attached property can be auctioned off. While the CPC comprises intricate and complex procedures, which may be necessary to deal with the myriad of matters adjudicated by the civil court system (for example, specific performance, partition trusts, inheritance rights, etc.), there are no provisions to determine the true value of the debtor’s assets or reverse undervalued or preferential transactions. This allows assets to be unduly siphoned off. Due to the non-specificity of provisions regarding monetary awards, judgment debtors can also exploit procedural gaps and employ dilatory tactics to delay or frustrate the enforcement of such awards.

A proposed solution

The IBC already recognises judgment creditors as ‘creditors’ (Section 3 (10)) with legitimate ‘claims’ (Section 3 (6)) against a debtor. However, because they have not been explicitly recognised as financial or operational creditors, they cannot initiate insolvency resolution proceedings. Instead, they must wait for a financial or operational creditor or the corporate debtor to set the ball rolling on insolvency proceedings and, even then, only file their claims during the process without any participatory rights. This inability to initiate insolvency takes away a potent lever to ensure compliance with judgments.

We propose that judgment creditors be allowed to initiate insolvency resolution proceedings under the IBC. Such a move will pose a significant threat to non-compliant debtors. This is because the IBC creates two significant deterrents against wilful non-payment of claims: (i) the displacement of the promoter when the insolvency resolution proceedings commence, and (ii) a possibility of liquidation of the company if the resolution fails. Given these grave consequences, the judgment debtor’s incentive will be to voluntarily fulfil the judgment claim. This change should be prospective, allowing all creditors to adjust to evolving dynamics.

In fact, when allowed, admission of an insolvency application filed by a judgment creditor should be made simpler than one filed by other creditors. This is because the IBC requires that four factors be considered before admitting an insolvency resolution application: (i) whether there is a claim of a certain threshold, (ii) whether it is undisputed, (iii) whether it has become time-barred, and (iv) whether it has come to the correct bench of the tribunal. In the case of judgment claims, the first three are validated by a court or a tribunal; hence, there are no ambiguities that may delay the admission proceedings.

This is not a novel solution. Judgment creditors can initiate insolvency proceedings in both the United Kingdom and the United States of America.

• United Kingdom: Judgment creditors have specific rights to push a debtor into administration or winding up (analogous to insolvency resolution and liquidation proceedings in India, respectively). Under paragraph 11 of schedule B1, read with Section 123, of the Insolvency Act 1986, a creditor may file an administration application if an order of any court in their favour is returned unsatisfied. Under Section 122, a creditor can file a winding-up application on the same grounds. When it comes to individuals, the process is slightly different. Section 267 of the Insolvency Act allows a creditor to present a bankruptcy petition if the individual owes a judgment debt of £5,000 or more.

• United States of America: Judgment creditors possess distinct rights to push a debtor into involuntary bankruptcy proceedings. Under 11 USC § 303 of the US Bankruptcy Code, upon satisfying the prerequisites, creditors can file an involuntary bankruptcy petition against a debtor. If the court determines the involuntary petition is valid, it will issue an “order for relief,” initiating the bankruptcy process. For individual debtors, this often translates to a Chapter 7 liquidation or a Chapter 13 repayment plan.

To enable this in India, the IBC must be amended to recognise judgment creditors of a monetary award as financial creditors holding financial debt under Sections 5 (7) and 5 (8), respectively. This is because the award includes interest, penalties, or costs, and aligns with the time-value-of-money considerations intrinsic to financial debts. As loans accrue interest over time, judgment awards accumulate interest until settled, mirroring the financial obligations of the judgment debtor. Once a court has passed a monetary award, the claim is rooted in the judgment award, not the original transaction. Hence, even when the underlying dispute is related to the provision of goods or services, the judgment award should be understood to represent a financial debt. This view has been endorsed by the Supreme Court of India and should be legislatively incorporated. The Court, in Kotak Mahindra Bank Limited v A Balakrishnan (2022 INSC 630), has noted that:

Taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallised in the form of a decree, outside the ambit of clause (8) of Section 5 [financial debt] of the IBC.

Classifying judgment creditors as financial creditors during the insolvency process would also ensure that they have an influential participatory role, commensurate with the significance of court-sanctioned monetary awards.

Allowing judgment creditors the power to initiate insolvency proceedings will generate strong monitoring and compliance effects in the pre-insolvency world. Other financial creditors of the debtor will factor current and potential adverse judgment claims into their credit decisions. This, in turn, will generate strong incentives to avoid adverse judgments and to comply with judgment claims when they arise. Conversely, businesses would be compelled to take a proactive stance in settling disputes, knowing the ramifications are not just reputational but could also threaten their solvency and control over the enterprise. It will signal to the market that judgments are not just moral proclamations but actionable financial commitments.

An illustration

To better understand how this will play out, let us consider an arbitration proceeding between X Co and Y Co concerning a contract violation, where the arbitrator awards Rs. 2,00,00,000 to Y. X will likely challenge such the award under Section 34 of the Arbitration and Conciliation Act 1996 (Arbitration Act). Since the grounds for challenge under Section 34 are procedural, courts generally uphold arbitral awards.

Traditionally, Y would have been forced to then rely on the procedure set out under the CPC. However, as mentioned, enforcement under the CPC is notorious for delays. The award would remain stuck in court procedures, and Y may face a cash crunch. The money they rightfully won, tied up in legal battles, would not be accessible for business needs, growth, or reinvestment. At the same time, X would remain operational, benefiting from the liquidity that it has withheld (Gulati and Roy 2020).

However, things may be different if Y is allowed to initiate an insolvency resolution proceeding. Although X may prefer an appeal under Section 37 of the Arbitration Act, the confirmation of the award under Section 34 will convert it into a claim under the IBC (a right to payment reduced to judgment). The initiation of the insolvency proceeding will immediately shift the dynamics. Under IBC, X’s promoters could be displaced, and there may be a potential change in the company’s ownership. Thus, it will attempt to clear the dues and settle its dispute with Y. In essence, the IBC will be the much-needed lifeline for Y, ensuring it doesn’t remain stuck in the quagmire of the CPC and can promptly access its rightful claim.

Concerns

One potential concern regarding the proposal might be the risk of overburdening the insolvency resolution process and, consequently, the NCLT. While the IBC recognises that time is of the essence, it is already struggling with capacity challenges and mounting delays. Overloading this system could create an environment reminiscent of the current civil court enforcement mechanism, fraught with delays and backlogs. This would counteract the benefits and efficiencies the proposed change aims to introduce.

However, this concern does not acknowledge the strong deterrents to frivolous insolvency proceedings built into the IBC. Judgment debtors will need to comply with the minimum default value requirement of Rs. 1,00,00,000. Further, the filing of the insolvency application is understood to aid negotiations between the filing creditor and debtor, often resulting in a settlement between parties outside the purview of the NCLT. As per the Insolvency and Bankruptcy Board of India, 28% of the insolvency resolution matters are settled or withdrawn. These figures do not account for the negotiations in the shadow due to the mere threat of an insolvency application being filed. Thus, the actual strain on the NCLT might be lower than anticipated. 

Similarly, there may be concerns about whether insolvency proceedings can take away the judgment creditor’s right to prefer an appeal against the underlying judgment. These concerns can be alleviated by deferring to good design principles. One way of doing this is to only allow judgment creditors to initiate insolvency proceedings when the judgment debtor has exhausted all statutory remedies (e.g., an appeal under Section 37 of the Arbitration Act by X in our example). As an alternative, it may be recognised that even under the IBC, there is a 14-day period within which an admission application is to be decided. The judgment debtor may file a statutorily permitted appeal against the underlying judgment within this period. In practice, the time between filing an insolvency application and its admission is far more than 14 days. This gives the judgment debtor ample opportunity to prefer statutorily permitted appeals. In such cases, the judgment claim will be viewed as disputed until the appeal is decided, resulting in non-admission of insolvency proceedings. The path to be taken between the two alternatives is a procedural policy decision independent of the merits of the core proposal of allowing judgment creditors to initiate insolvency proceedings.

Conclusion

The efficacy of a legal system not only lies in the issuance of judgments and their timely enforcement. For India, where enforcing monetary judgments remains a daunting challenge, it is pivotal to usher in mechanisms that effectively bridge this gap. Allowing creditors to initiate insolvency resolution applications presents a powerful tool that can drastically transform the landscape of judgment enforcement.

Not only will this proposal push judgment debtors to be more compliant, but it will also signify a broader shift in the perception of judgments. Such reforms, emphasising actionable financial commitments, will help restore public faith in the judiciary, boost investment, and stimulate economic growth. By embracing this change, India can pave the way for a more robust and efficient legal system, thus fostering a climate of trust, accountability, and development.

References

Doing Business: 2020, The World Bank, 2020.

Judging the judiciary: Understanding public confidence in Latin American courts, Ryan Salzman and Adam Ramsey, 2013, Latin American Politics and Society, Volume 55, Issue 1, pp 73-95.

India’s low interest rate regime in litigation, Karan Gulati and Shubho Roy, 11 March 2020, Leap Blog.

Institutional Factors of Credit Allocation: Examining the Role of Judicial Capacity and Bankruptcy Reforms, Manaswini Rao, 2020, JusticeHub.

The Impact of the Judiciary on Economic Activity: Evidence from India, Matthieu Chemin, 2007, Cahier de recherche / Working Paper.

World Development Report 2004: Making Services Work for Poor People, The World Bank, 2003.

The authors are a research fellow and the research director at the TrustBridge Rule of Law Foundation. We are thankful to Madhav Goel and Renuka Sane for their insightful comments. Views are personal.

Litigation in public contracts: some estimates from court data

by Devendra Damle, Karan Gulati, Anjali Sharma and Bhargavi Zaveri.

Introduction

Public contracts are contracts executed by the government and its agencies to procure goods, services and works. Public contracts in India are perceived to be litigation prone. There is evidence that more than half the road projects awarded by the government of India were the subject matter of litigation before the courts and arbitration tribunals, and that a significantly large value of infrastructure projects are stuck in litigation for prolonged periods. This article seeks to estimate and understand the volume and nature of litigation relating to public contracts by observing litigation in one high court in India.

Understanding the volume, value and nature of litigation arising in public contracts is critical. First, the government is an active procurer of goods, services and works in several large sectors such as natural resources and infrastructure. The state's litigation propensity in contracts is a key factor in the ease of doing business in such sectors. Second, the propensity of each government department and agency, such as the union, states, urban local bodies, CPSEs and SPSEs, to engage in litigation may vary. Assessing the litigation propensity of different government departments and agencies helps contractual counterparties assess the costs of dealing with them. Third, estimating the volume, value, costs and outcomes of government litigation helps understand its impact on the exchequer. It can serve as a useful feedback loop in planning the litigation policy of the government and its agencies.

Our analysis suggests that the government is a counterparty to more than half the civil commercial litigation in the Delhi High Court. However, a small proportion of this litigation can be linked to disputes in public contracts. Second, we find that the government is not a major initiator of, but is a large defender in litigation involving public contracts. However, more than 50% of the cases filed by the government against businesses are of one type, namely, challenges to arbitration awards passed in disputes arising in public contracts. Finally, we find that businesses are not using the standard legal remedy of suits for enforcing contractual claims against the government or its agencies. This suggests that most of this litigation is related to the pre-award stages of the business-government engagement. This could also be attributed to the procedural simplicity of proving claims in writ petitions and the relatively quicker duration within which they get disposed.

The popular discourse on government litigation has focused on the volume and pendency of the litigation to which the government or its agencies are a counterparty. Our findings, although limited to observations to the Delhi High Court, provide a foundation for drawing up data-backed country-level estimates of the government's propensity to litigate, and the time, costs and court capacity consumed in litigation relating to public contracts.

Data and approach

For our analysis, we start with a dataset of cases filed before the Delhi High Court from 1st January 2007 until 30th September 2020 ("study period"). We select the Delhi High Court for our analysis for two reasons. First, the Delhi High Court is one of the five High Courts in India exercising original jurisdiction over contractual disputes. All High Courts in India, except these five, exercise appellate jurisdiction. This means that they restrict themselves to reviewing the lower courts' orders. The Delhi High Court is the first level dispute redressal forum for disputes within its territorial jurisdiction in commercial contracts exceeding Rs. 2 crores. The second reason is the physical proximity of the Delhi High Court to the central government and its agencies.

The objective of our analysis is to understand litigation in public contracts. The Delhi High Court classifies case-types into 288 categories. During the study period, 5,42,355 cases have been filed before the Delhi High Court across these categories. These categories cover every type of case that the court deals with, ranging from admiralty cases to family disputes. We undertake three rounds of data filtering to arrive at a subset of cases that are the closest proxies of contractual disputes involving the government.

Filtering out cases not involving contractual disputes with the government

In the first instance, we filter out all the case-types which are not related to contracts. For instance, we filter out bail and criminal applications, testamentary and tax matters and matters under the Companies Act and contempt petitions. We filter out all appellate matters and references from lower courts. We filter out cases where either of the parties is unknown or the data is not machine-readable. This gives us a dataset of 2.2 lakh civil cases filed in the study period. Of these, 1,37,734 cases (about 62%) have the government or its agencies as a counterparty (Table 1). This dataset includes completed as well as pending cases. 81% of the cases in our dataset are disposed of.

Table 1: Cases in our data to which the state or its agency is a counterparty

Sr.No.	Party-type	As Petitioner	As respondent	Total (% of government cases)
1.	Union of India	8020	58,184	66,204 (48.06)
2.	State Government	2443	31,539	33,982 (24.62)
3.	Municipal bodies/panchayats	2174	16,121	18,295 (13.28)
4.	CPSEs	3908	9021	12,119 (8.79)
5.	SPSEs	1161	3427	4,588 (3.33)
6.	Court	171	833	1,004 (0.72)
7.	Constitutional bodies	189	543	732 (0.53)
Total		18,066	1,19,668	1,37,734 (100)

Constitutional bodies in Table 1 refer to constitutional authorities, such as the Comptroller and Auditor and General of India. The Union of India includes the government of India, statutory authorities set up under a central law such as the National Highways Authority of India (NHAI), and statutory regulators such as SEBI and TRAI. Table 1 demonstrates that a bulk of the civil commercial litigation in the Delhi High Court has the government as a counterparty. It also shows that while the state is not responsible for initiating large amounts of civil commercial litigation, the state and its agencies constitute the largest respondent in such litigation.

We classify the Government-cases in Table 1 into five categories: civil writ petition, civil suits (original side and commercial), miscellaneous petitions (original and civil misc main), arbitration petitions and applications and land acquisition-related disputes (Table 2).

Table 2: Types of government related cases in our data

Sr.No.	Civil writ petitions	Govt. as Petitioner	Govt. as respondent	Total (% of government cases)
1.	Writ petitions	10,476	1,06,179	1,16,655 (84.69)
2.	Miscellaneous petitions	3,493	5,168	8,661 (6.28)
3.	Land Acquisition related cases	3,180	3,663	6,843 (4.9)
4.	Arbitration petitions and applications	221	2,837	3,058 (2.54)
5.	Civil suits	696	1,818	2,514 (1.8)
Total		18,066	1,19,668	1,37,734 (100)

Table 2 shows that civil writ petitions constitute the bulk of the cases involving the government and its agencies. Writ petitions are, by design, cases filed against the government or its agencies for the violation of fundamental rights and not contracts. However, anecdotally, we know that contractual claims against the government and its agencies are often agitated through civil writ petitions. Hence, we retain civil writ petitions for our analysis.

Findings

While the government is a counterparty to 1.4 lakh or 60% of the civil commercial cases in our data-set, a bulk of these cases are by and against individuals and other types of entities such as trade unions or political parties. These disputes would therefore largely pertain to employment matters such as unfair dismissals, denial of promotion in government service or pension and evictions from public premises. The objective of our study is to understand the litigation arising out of public contracts.

Litigiousness

For our study, we characterise only cases filed by or against businesses (body corporates incorporated as private or public limited companies) as public contracts-related litigation. This is because our data covers public contracts whose value exceeds Rs. 2 crores. Public contracts exceeding this threshold value are awarded through a tender process. The condition that a bidder for public contracts should be incorporated as a company is commonly found in government tender documents.

In the sub-set of writ petitions, we retain writ petitions between businesses and a sub-set of government agencies, such as CPSEs (except banks) and SPSEs, and statutory agencies that are engaged in procurement, such as the National Highways Authority of India (NHAI), Airports Authority of India (AAI), the Delhi Metro Rail Corporation (DMRC) and the National Buildings Construction Corporation Limited (NBCC) in our data.

We exclude writ petitions filed against government owned banks as they largely pertain to debt restructuring and not procurement-related disputes. We also exclude the writ petitions filed by businesses against the government of India, constitutional authorities and State Governments from our analysis as a large percentage of them pertain to tax matters, constitutional challenges to laws enacted by the Parliament and state legislatures respectively, and executive actions, such as notifications and circulars issued by the government and state governments respectively. Similarly, a review of a sample of writ petitions filed by businesses against municipal bodies and panchayats suggests that they largely pertain to matters involving eviction from public premises and violations of licensing norms governing commercial establishments operated by such businesses. We also exclude land acquisition-related matters as they are largely challenges to notifications issued by the government notifying land parcels for compulsory acquisition and other actions undertaken by the government under the land acquisition laws.

This exercise of filtering may exclude some contractual disputes between the government and its contractors or vendors. Our findings are therefore based on a conservative estimate of the volume of litigation in public contracts.

This filtering exercise generates a subset of 9,313 cases between businesses and the government and its agencies (Table 3). We use this subset of cases as a proxy for litigation between the government and businesses in connection with public contracts. Table 3 suggests that such litigation is a small proportion (about 7%) of the overall litigation involving the government. Further, the state is not a major initiator of such litigation. Businesses initiate the bulk of the government-business contractual litigation. The CPSEs account for nearly half of such litigation in the Delhi High Court. This suggests that while CPSEs are a small contributor to the overall commercial litigation involving the government (as shown in Table 1), they are a large contributor to the litigation involving public contracts. The central government and several states have issued policies to manage and curb litigation by the government and its agencies ( example, example and example). These policies have largely taken a top-down approach towards minimising litigation at the level of the union and state governments. Our assessment suggests that there is potential for the government to explore the incentive structures at the level of the departments within the Union government and CPSEs that drive litigation arising from public contracts.

Table 3: Cases between government and businesses

	Business as Petitioner	Business as Respondent	Total (% share)
CPSE	3,329	1,223	4,552 (48.87)
Union	2,027	885	2,912 (30.26)
State	711	249	960 (10.30)
Panchayat/Urban local body	412	124	536 (5.75)
SPSE	239	111	350 (3.75)
Autonomous constitutional	3	0	3 (0.03)
Total (% share)	6,721 (72.16)	2,592 (27.83)	9,313 (100.0)

Case types

Table 4 shows that the bulk of the government initiated litigation is in the 'original miscellaneous petitions' (OMPs) category. Conversations with practitioners and support staff of the judges in the Delhi High Court suggest that as large as 70% of the cases filed as OMPs in the Delhi High court involve challenges to the enforcement of arbitration awards. We also reviewed a small sample of OMPs, which confirmed this perception. Arbitration petitions and applications account for the second-largest type of cases involving the government and businesses. These petitions are generally filed for directions from the court for the appointment of an arbitrator where either party to the dispute fails to appoint one, interim relief during arbitration proceedings and extension of timelines for conducting the arbitration. The high proportion of 'OMPs' and 'arbitration' cases in our data suggests that a significant proportion of government-business contractual litigation is getting resolved by arbitration.

We also find that a bulk of the writ petitions filed by businesses in our dataset (a little more than 84%) are against CPSEs. This pattern holds over the entire window of observation. We estimate that these writ petitions could pertain to disputes in two areas of public procurement. They may pertain to violation by CPSEs of procurement norms in the tendering phase of public procurement. The second possibility is that they could pertain to disputes in the post-award stage, such as delayed payments or other wrongful acts during the term of the contract. This is problematic because writ petitions are a remedy for the enforcement of fundamental rights against the government. Courts have repeatedly denied purely contractual claims against the government through the remedy of writ petitions. However, if the writ petitions against CPSEs indeed pertain to disputes arising post the tender award, it suggests that businesses find it efficient to agitate contractual claims through writ petitions. This may indicate a judicial tendency to prioritise writ petitions over other matters. This could also be attributed to the relatively lower threshold for proving claims in writ petitions.

Table 4: Government to business (G2B) and Business to government (B2G) commercial litigation

	WP	CS	OMP	Arbitration	Others	Total
G2B	69	276	1938	152	157	2,592
B2G	932	895	2704	1973	217	6,721
Total	1,001	1,171	4,642	2,124	374	9,313

Time taken

Approximately 1.7 lakh of the 2.2 lakh cases in our dataset are disposed cases. We find that the average disposal period for a case in our data is about one year from its institution. For this subset of disposed cases, we calculate the average duration for disposal in years based on the year of institution to the year of disposal (Table 5). The average duration for the disposal of writ petitions is lower than that for civil suits and lower than the overall average. This reinforces the notion that counterparties to government contracts may be enforcing their contractual claims through writ petitions.

Table 5: Average duration for disposal (by case-type)

Case-type	Average time for disposal (in years)
Writ petitions (civil)	0.81
Civil suits (original)*	2.30
Civil suits (commercial bench)**	1.01
Miscellaneous petition	1.17
Arbitration petitions, applications, etc.	0.56
Overall	0.98
*Suits disposed of by a regular bench of the court.
**Suits disposed of by the commercial division of the High Court set up under the Commercial Courts Act, 2015.

Table 6 shows the number of years for the disposal of cases in the overall data, cases to which the government is a party, and other cases. Table 6 suggests that a bulk of the commercial cases are disposed of by the Delhi High Court within two years from the date of their institution. We also find that a significantly higher number of commercial cases involving the government are disposed of within a year compared to the other cases. This is contrary to the popular perception that delays prolong government litigation. This does not appear to the case for commercial litigation involving the government. In fact, we find that commercial cases involving the government as a respondent and those not involving the government require, on average, the same number of hearings by the court before their disposal. This suggests that a commercial case involving the government does not, on average, consume more resources of the court than regular cases.

Table 6: Duration of disposed cases (party-wise)

	Number of cases (% share)
Duration (years)	Overall	Govt and businesses	Business and non-govt party
Less than 1	95,962 (54.01)	13,867 (57.75)	19,724 (43.74)
[1, 2)	42,931 (24.16)	5,618 (23.4)	13,521 (29.98)
[2, 3)	17,064 (9.6)	1,902 (7.92)	4,901 (10.87)
[3, 4)	9,475 (5.33)	1,011 (4.21)	2,716 (6.02)
[4, 5)	4,682 (2.64)	467 (1.94)	1,414 (3.14)
[5, 10)	6,807 (3.83)	993 (4.14)	2,576 (5.71)
Greater than 10	745 (0.42)	153 (0.64)	246 (0.55)
Total	1,77,666 (100)	24,011 (100)	45,098 (100)

Conclusion

Our findings are limited to our observations on the government litigation in the Delhi High Court.

Some of these observations confirm pre-conceived notions of litigation between the state and businesses in India. For example, data from the Delhi High Court demonstrates that so far as concerns civil commercial cases, the government is a party to more than the popularly cited 46% of the cases in courts. However, very little of this litigation is attributable to public contracts between business and the state. Similarly, the usage of writ petitions to enforce contractual claims against the state is documented to some extent in court judgements. Our data demonstrates a high proportion of writ petitions linked to the enforcement of public contracts. This may be partly attributable to the nature of the claim involved and the relatively higher average duration for the disposal of suits. Some of our findings help dispel some pre-conceived notions. For example, the widely held perception that the government prolongs litigation is not true of commercial cases adjudicated before the Delhi High Court, as shown by the average number of hearings taken for commercial cases involving the government and those not involving the government. This may also be reflective of the capacity of the Delhi High Court itself.

A quantitative assessment of the government's litigation is important for identifying the precise bottlenecks that lead to the government being sued and designing a litigation policy that responds to these considerations. Data backed assessments of the litigation load of the government holds important insights into the costs of doing business with the government and the resources required within the state and in courts to deal with such litigation. This work provides a foundational understanding of commercial litigation involving the government in India. Better and deeper country-level insights can be obtained by expanding the assessment to more courts and potentially undertaking a textual analysis of the final orders in such litigation to identify aspects such as the success ratio and litigation costs.

Bhargavi Zaveri is a researcher at xKDR- Chennai Mathematical Institute. Devendra Damle and Karan Gulati are researchers at the National Institute of Public Finance and Policy. Anjali Sharma is at National eGovernance Services Limited.

Grievance Redress by Courts in Consumer Finance Disputes

by Karan Gulati and Renuka Sane.

India has made progress on financial inclusion through the use of digital payments and fintech. As more and more consumers interact with the consumer finance industry, there will invariably be greater frictions and an increasing number of grievances. In an environment with a good consumer complaints system, these should get resolved by the financial service provider (FSP), and if not the FSP, then the regulator. However, this is not so in India. Courts are often the preferred recourse for retail consumers. For example, in the ongoing dispute regarding Yes Bank's written off AT-1 bonds, consumer courts seem like the last remaining alternative for retail investors. Unless grievances are satisfactorily resolved, we may hurt the progress made on financial inclusion. While India needs to set up good regulator-based grievance redress mechanisms such as a Financial Redress Agency, it also needs to improve the functioning of courts to provide effective relief in consumer finance (and other)disputes. In a recent paper, Grievance Redress by Courts in Consumer Finance Disputes, we review 60 judgments on consumer finance to study the position that courts have taken on these disputes. We also describe the challenges in court functioning that have a bearing on the efficiency of courts in dealing with issues of grievance redress.

The structure of courts

In 2020, India enacted a new Consumer Protection Act (CPA). The Act aims to protect consumers' interests and provide timely and effective settlement of disputes. It entrusts courts to redress consumer grievances. A complainant can approach specialised courts i.e. consumer commissions established by the CPA. However, these are additional remedies. Cases may also be decided by the High Court of various States and the Supreme Court of India.

The powers to grant relief depend on which court the complainant approaches. Consumer commissions are bound by the CPA. They may order a party to: (i) remove defects, (ii) return the price of the goods or the charges for the services along with interest, (iii) pay compensation or punitive damages, and (iv) withdraw the goods or services from the market. High Courts are bound to decide cases either within the confines of a statute under which they are approached or the constitution. Going one step further, the Supreme Court has held itself not restricted in any way to grant adequate relief.

Banking and insurance disputes

Litigation is disproportionately costly and troublesome for small consumers. Very rarely can an ordinary consumer go through the prolonged ordeal of fighting with a bank. For this reason, courts have granted relief to individual consumers, given that they come with clean hands.

This has not been the case when interpreting insurance contracts. If consumers knew about the terms, courts have enforced the terms of the contract, regardless of whether the terms themselves were unfair, one-sided, or opaque. On the other hand, if the terms were kept hidden from the consumer, courts have granted relief to consumers. This is true both while entering the contract and settling claims.

Several consumers have been introduced to complex products and contracts, but these consumers have insufficient know-how. They are vulnerable to mis-selling. The strategy in Indian finance has historically focused on the caveat emptor doctrine -- let the buyer beware. Though the new CPA gives consumer commissions the power to declare certain unfair terms as void, it does not address the ability to understand the terms. Thus, consumers have been left to their own devices, and unaware consumers are unlikely to get their desired remedy if they approach a court.

Challenges to court functioning

We find the following challenges in court functioning as they deal with consumer finance disputes.

1. Low Compensation: Courts tend to award low compensation that does not adequately compensate the complainant. For example, in Dr Virendra Pal Kapoor v. Union of India and Ors, a senior citizen had invested INR 50,000 in a unit-linked product in 2007. Upon payout in 2012, he had lost the entire sum except INR 248 on account of hidden charges. Though the insurer was directed to repay the original Rs. 50,000, no interest was awarded. The reason for low compensation seems to be that there are no guidelines for courts to follow. There is no expert analysis of the loss. In the absence of financially prudent legislation, courts often tend to award compensation that only makes sense when the legislation is enacted.

2. Delay: Low compensation becomes more severe when it takes too long to settle disputes. The CPA provides that cases should be decided in no more than five months. However, as per the case management system of the National Commission, it takes 1.99 and 2.38 years to settle banking and insurance disputes, respectively, i.e. more than five times the statutory guideline. In fact, in February 2020, the National Commission adjourned a matter till January 2021 - almost a year after the hearing.

3. No Class Action: If consumers cannot understand complex financial agreements, they may benefit from pooling their knowledge and approaching courts as a class. Plaintiffs can share evidence, expert witnesses, and litigation costs. However, unlike other countries, such suits are few and far between in India. This may be because of unclear substantive law and strict rules on financing litigation. This makes it difficult for class members to come together. Courts have left it to their discretion to evaluate whether the class is adequately represented and whether financing agreements are fair. Moreover, the legislature had prohibited contingency fees. This creates a system that either prohibits or disincentives class actions.

4. Specialisation: Consumer courts in India resolve all consumer disputes. Though the members are highly qualified individuals, they lack specialization in finance. This is unlike other common law countries where sectoral experts adjudicate finance disputes. They have adopted extensive adjudicatory legislation regarding financial products and services. On the other hand, laws in India regarding finance have been restricted, leaving courts to start from a clean slate. If timeliness and predictability can make India's finance regime more appealing, specialization by adjudicators could prove valuable.

Way forward

One obvious way to improve the system is by general improvements in the judiciary's capacity and knowledge on matters related to finance. This will, however, take a long time. Policymakers should also consider adopting certain targeted interventions.

There are two types of interventions that are required. The first is on the legislative front. Like the targeted legislation in other countries, the legislature could enact separate rules for financial transactions mandating clear and understandable disclosures. Policymakers may also consider prescribing adequacy requirements in class action suits and transitioning towards contingency fees for lawyers and third-party investors. Any such changes in legislation would also benefit from an advisory council on consumer finance. The council may be responsible for making representations about policies; reviewing, monitoring, and reporting their effectiveness; and highlighting its views on new rules and regulations.

The second is on the judicial front. One problem we identify is low compensation. This may be addressed by updating and consolidating the rules governing compensation considering modern market understanding. Other jurisdictions often order disgorgement (surrender of profits earned through illegal means) or grant a remedy of restitution. This seeks to measure actual damages. On the question of delays, courts may also separate their judicial and administrative functions. This will likely reduce the time it takes to conclude hearings since members of the commission would have more time to focus on their judicial tasks. The National Commission can also exercise its power to call for statistics from State Commissions and conduct systematic reviews.

These solutions can have significant consequences, especially in India, where financial literacy is low and regulatory enforcement appears weak. Though they were developed after studying consumer finance disputes, they may have consequences outside this domain and yield better functioning courts. Market-oriented compensation, without delay, when parties can come together as a class would be beneficial in any dispute. In a growing financial landscape such as India, redress bodies such as the judiciary become increasingly important. A specialized consumer protection law is a step in the right direction, but it can benefit from targeted interventions.

References

Department of Economic Affairs, Report of the Financial Sector Legislative Reforms Commission: Volume 1, March 2013.

Dhirendra Swarup, Establishing the Financial Redress Agency, January 27 2017, The Leap Blog.

Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.

Karan Gulati and Renuka Sane, Why do we not see class-action suits in India? The case of consumer finance, May 03 2020, The Leap Blog.

Karan Gulati and Shubho Roy, India's low interest rate regime in litigation, March 11 2020, The Leap Blog.

Murali Krishnan, Supreme Court urges consumer forum to look into grievance of year-long adjournments, August 16 2020, Hindustan Times.

National Informatics Centre, Computerization and Computer Networking of Consumer Forum in the Country.

Neil Borate, Those mis-sold Yes Bank AT1 bonds face long haul, May 11 2020, LiveMint.

Pratik Datta, Mehtab Hans, Mayank Mishra, and others, How to Modernise the Working of Courts and Tribunals in India, March 25 2019, NIPFP Working Paper No 258.

Reserve Bank of India, National Strategy for Financial Inclusion, January 10 2020.

Supreme Court Bar Association v. Union of India, April 17 1998, Supreme Court of India.

Tinesh Bhasin, RBI sees 387% rise in complaints against NBFCs, 58% rise against banks, February 08 2021, LiveMint.

The authors are researchers at NIPFP.

Why do we not see class-action suits in India? The case of consumer finance

by Karan Gulati and Renuka Sane

Mis-selling of financial products is pervasive in India and across the world. Sound grievance redress systems are one path to ensuring a degree of consumer protection. For example, complaints by customers to the Financial Ombudsman Service in the UK on Payment Protection Insurance paved the way for redress.

Class-action suits are another important means of seeking redress. For example, Bank of America was accused of charging excessive overdraft fees. Consumers of the bank got paid USD 410 million in 2011 as a result of the class-action suit on this issue. J P Morgan also had to settle a case on similar allegations for USD 110 million. Citizen Bank agreed to pay USD 137.5 million.

In India, too, we have seen several instances of mis-selling. The sale of Yes Bank's risky AT1 bonds as guaranteed return bonds is a recent example. To the best of our knowledge, consumers have not initiated a class-action suit for any of the mis-selling episodes in India.

At best, courts have taken it upon themselves to grant a class-wide remedy. For example, in Dr Virendra Pal Kapoor v. Union of India and Ors, a senior citizen had invested INR 50,000 in a unit-linked product in 2007. Upon payout in 2012, he had lost the entire sum except INR 248 on account of hidden charges. He had been mis-sold the policy without any caution. The court declared the policy to be void. It also directed the regulator, the IRDAI, to re-examine all policies issued by the specific insurance provider. If it detected regulatory breaches, it was to wind up the business of the firm. The apex forum, however, dismissed the class remedy without offering a reason.

In this article, we examine the reason behind the lack of class action suits in India. We argue that this is because of two issues. First, the substantive law is not clear. This makes it difficult for class members to come together. Second, procedural issues limit the financing of such cases. The issues we raise are pertinent to all aspects of consumer protection: from health to the environment. In this article, we combine the general treatment of class action with features specific to financial consumer protection.

Why is class action important?

Civil litigation is important for two reasons. First, the threat of litigation serves as a deterrence from injuring others. Second, it provides insurance to the injured when deterrence has failed.

When claims are small, plaintiffs may not be able to undertake individual litigation. In such a case, the plaintiffs do not get a chance to seek a remedy. This collective action problem is solved using class action litigation. As Fitzpatrick, 2010 describes, class-action allows claims to get aggregated. This is especially important when parties do not enjoy an equal bargaining power, as is the case in consumer finance. Plaintiffs can share resources such as evidence, expert witnesses, and the costs of litigation. To the extent that class actions permit disputes to go forward that might not have done so individually, they provide the possibility of insurance to the plaintiffs. Class-action suits also help ultimate recoveries to be close to the cost of injuries. This is because plaintiffs can keep more of their awards for themselves.

The ability to go to courts for private resolution between different parties reduces the need for the administrative state. This is because if people can solve disputes in courts, the rationale for concentrating power in the hands of a regulator, and the subsequent creation of mini-states does not remain (Kelkar and Shah, 2019). Class action suits, thus, serve an important function over and beyond the relief that is made available through the suit.

Institutional framework required for class action suits

For class action to work, the institutional design has four pre-requisites.

• Identifying members: The first is the possibility to identify members of the class. The burden of identification is usually placed on the plaintiffs, which courts later certify. Identification is non-trivial and varies from case to case. Members connected through a transactional relationship are easier to identify. Fitzpatrick, 2010 showed that more than three-fourths of all class actions were based on cases where it was possible to identify the class by back tracing the contract. Identifying members aggrieved by mis-selling is thus easier than identifying those who have suffered health issues in an environmental dispute. Courts may have a concern about how a class has been identified. In this case, courts could allow the plaintiffs to draft a workable definition of members of the class. It need not be important to identify every single member at the time of certification. This determination can be made when new members join the suit.
  
  
• Aggregation of claims: The aggregated claims should represent a substantial portion of the full class (also termed as the adequacy of the class). This is because a class action by its very nature is "representative". The question of whether a suit represents a substantial portion does not have one easy answer. As a practical matter, courts should rarely need to worry about it. Few lawyers would want to waste their time pursuing class certification (with its hurdles) for a small number of claimants. Hence, the instances in which adequacy is a valid reason to reject the claim should be rare. If courts are unhappy about the adequacy of the class, they should allow plaintiffs to make a representation in this regard.
  
  
• Incentive alignment: In individual cases, clients approach the lawyer. In a class-action, it is more likely that lawyers solicit work from a class. Victims of a class seldom have much in common besides the injury. As a result, an informed referral process may not develop. The principals (the members of the class) may not be able to act as good monitors of the agent (the lawyer). The lawyer may have an incentive to engage in self-dealing (Lahav, 2003). Contingency fees solve the incentive problem by linking the lawyer's fees to the amount of benefit she provides to the class. This is especially important in consumer class actions where client cohesion is unusual.
  
  
• Meeting expenses: Lawsuits can be both expensive and risky. A class-action does not guarantee that members will be able to bear all expenses. Legal requirements may mean that members have to provide specific evidence individually. Litigation may also carry on for a long time leading to an increase in expenses. And it is always possible that members lose the suit. The legal system should allow expenses to be borne through "third-party funding". Contingency fees, discussed above is one element of it. A second element is raising finances from companies (such as Vanin Capital, IMF Bentham) specializing in investing in class-action litigation. If members win, they share their proceeds with the firm in return for financing the suit. The companies are in a better position to manage the risk of loss of the suit than class members.
  
  

The law in India

The Code of Civil Procedure, 1908 provides for representative suits where one or more persons can sue on behalf of all those who have a common interest or grievance. Such suits are also provided for under several other laws with varying scope. Shareholders and depositors may file a case for oppression and mismanagement under the Companies Act of 2013. Under the Consumer Protection Act, 1986, a consumer can file an action on behalf of all other interested consumers before a consumer court. A suit may also be filed under the Competition Act, 2002 to challenge anti-competitive agreements and market positions. The scheme of class actions suits may hence be summarized as follows:

Table 1: Scope of Laws governing Class Actions

Law	Subject Matter	Class	Example
Code of Civil Procedure	There are no limits on the subject matter except for actions that cannot be filed in the civil courts at all, such as mismanagement suits.	Persons having the 'same interest' in the suit	Excess demand by housing board
Companies Act	A suit can only be brought for oppression and mismanagement of the company but does not include a banking company.	Shareholders and Depositors in the Company	Depriving shareholders of their right to dividends
Competition Act	A class may dispute an agreement which causes an appreciable adverse effect on competition within India or abuse of dominant position by an enterprise.	Any person, consumer, or their association	price-fixing, output limitation, market sharing, and bid-rigging
Consumer Protection Act	The suit is restricted to goods and services sold/provided or delivered or agreed to be sold/provided or delivered.	Consumers of the goods or services	Mis-selling of products by a banking or insurance company

As the table shows, the subject matter and class depend on the law under which the suit is sought to be filed. However, there are two problems with this system:

1. A Representative Class: Persons who approach the court in a class-action suit need to represent an adequate portion of the class. The National Consumer Dispute Redressal Commission (NCDRC) has said that it would not permit a case if only 10 persons out of a class of 100 wish to litigate. They argue that if they accept the case, the other 90 would have to either file individual complaints or file on behalf of another class (Ambrish Kumar Shukla v. Ferrous Infrastructure). One could, however, argue that the other 90 could always opt-in to the action already initiated, or the court could club matters if two class-actions are initiated. This standard is also difficult where the class is likely to be millions of customers. For example, consider a dispute between a bank and its million customers over fees charged by a bank. While 10 out of 100 injured parties may seem inadequate, it is hard to argue the same if 100,000 customers out of a million formed a class. This issue is not unique to consumer disputes. The Companies Act prescribes a high adequacy standard if shareholders want to initiate class actions for oppression or mismanagement. The class needs to include at least 5% or 100 shareholders of the company. This may be difficult to meet since such cases are usually filed by minority shareholders.
   
   
2. The new Consumer Protection Law, 2019: India enacted a new consumer protection law in 2019. Unlike the erstwhile law which permitted a class to initiate a case before a consumer commission in cases of mis-selling, the 2019 law establishes a new regulator in the regime of consumer protection i.e. the Central Consumer Protection Authority (CCPA). The CCPA is tasked with protecting and enforcing the rights of consumers as a class. As per section 17 of the new Act, a complaint relating to violations of consumer rights prejudicial to the interests of consumers as a class is to be forwarded to the CCPA. It would then conduct a preliminary inquiry as to whether there exists a prima facie case of violation of consumer rights and instruct for an investigation to be conducted. This has taken away the power to initiate class actions from individuals and vested them into the hands of the regulator. Unlike earlier, where a class of consumers could approach consumer commissions with their common grievance, they are now required to meet the subjective satisfaction of the CCPA. This is then meant to result in an investigation, and consequent orders, if any. The difficulties of public management now impact the enforcement process in consumer grievances. Persons who have suffered harm are now supplicants before the regulator, requesting it to enforce consumer law. Several steps have been added in the process, which could lead to a lesser filing of class action suits.

Banking companies have been given additional protection against class actions. Though consumers of such companies can initiate class actions in cases of mis-selling subject to the above challenges, shareholders have been restricted from bringing any class actions. The Companies Act introduced in 2013 provides for class action suits by shareholders for oppression and mismanagement of a company. However, the Act explicitly bars any class action against a banking company in such cases. Interestingly, this is the case even when there is no bar on an individual shareholder of a banking company from bringing a claim of oppression and mismanagement. Hence, shareholders have to bring multiple cases such as "A v. Banking Co", "B v. Banking Co", so on and so forth. They cannot file a case as a class such as "Shareholders of Banking Co v. Banking Co". Thus, all that the law has done is to make sure that shareholders of banking services are unable to pool their resources.

Procedural and financial hindrances

Solving the substantive issues listed above will not lead to class-action suits. This is because of the incapacity of people to finance such disputes and regulations on how to do so.

1. Stamp Duties: Litigation is expensive. One reason for this is the stamp duty payable for the same. Stamp duty is a tax on the value of instruments used in various business transactions. There are two kinds of stamp duties: (i) judicial stamp duties, and (ii) non-judicial stamp duties. Judicial stamp duties are fees collected from litigants in courts. These are best viewed as court fees and act as the cost of bringing an action. They may be prohibitive. For example, the fees payable in Delhi for a plaint (the first document submitted in court for a case) has been set at 4% of the value claimed. Fees are also to be paid in cases of review or appeals. There may be charges for obtaining copies, translations, additional applications, etc. The law of evidence requires the payment of non-judicial stamp duty for all documents submitted in court. These costs add up and would become prohibitive for a million customers. In a case like that of the Bank of America mentioned above, a claim for USD 410 million would need a fee of at least USD 16.4 million.
   
   
2. Third-Party Funding: Third-party funding ("TPF") is the act of a party outside the litigation paying for its cost. If the litigation is successful, the party gets a share in the award. This becomes important on account of the increased costs of litigation. When parties are not able to afford the dispute themselves, they should be able to turn to third-parties for funding. In 2018, the Supreme Court in Bar Council of India v. AK Balaji noted that there was no limitation on third-party funding. The Code of Civil Procedure, as amended by some Indian states including Gujarat, Karnataka, Madhya Pradesh, and Maharashtra, explicitly recognizes the role of a financier of litigation costs of a plaintiff. It also sets out the circumstances when such a financier may be made a party to the dispute. However, there is no central law on TPF in India. As a result, there is considerable uncertainty on whether the courts will hold the TPF agreement as "just". As early as 1876, the court held in Ram Coomar Coondoo v. Chunder Canto Mookerjee that:
   
   
   

   "agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefore, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, [the] effect ought not to be given to them."

   
   Courts have left it to their own discretion to examine whether the financing agreement is just and fair. In the absence of statutory requirements, courts usually lay down legal tests to determine a question of law. This allows parties to predict the behavior of the courts and make appropriate arrangements. There are no tests to determine the appropriateness of TPF agreements. Their validity is entirely up to a judge's concept of just-ness, leading to the TPF market not evolving.
   
   
3. Contingency Fees: Contingency fees is the fees of the legal counsel as a stake in the outcome. This is prohibited in India. This is problematic as lawyers do not have an incentive to argue unless their fees are paid. This means that fees must be paid upfront. A class action with a high claim is likely to be argued by a senior member of the bar. Appearance costs may be to the tune of INR 1.2 million. With an average of one hearing every two months, this would be INR 64.8 million (USD 850,000) for nine years (the average time of a civil case in India). Further, TPF funders usually seek contingency fees of legal counsel as this ensures alignment of interests. The lack of contingency fees also has an adverse effect on TPF.
   

Besides these reasons, India follows the loser-pays rule in litigation (Law Commission of India, 2012). The unsuccessful party is ordered to pay the costs to the successful party. There is some merit in this as it restricts vexatious litigation. But for class-actions, the class has to worry about paying the defendant's attorney's fees and adjoining costs if it loses the case, even though Indian courts award low costs (Law Commission of India, 2012).

Conclusion

The laws in India create a system which either prohibits or disincentives class actions. This article is not a definitive finding on how to cure such a situation; however, our analysis shows that the two reasons for the absence of class action in India require independent solutions.

To achieve a sound law on class action, two changes have to be brought to Indian legislation. Laws that allow for such suits may provide for what constitutes an adequate portion of the class to approach a court. Further, the new consumer protection law could give more clarity on what constitutes a prima facie case of violation of consumer rights and the elements of the investigation thereon. We need to explore the possibility of transitioning away from the loser-pays principle in class actions and toward contingency fees for lawyers and third-party investors.

These reforms have the potential to pave the way for class action suits in a wide range of areas. They are also an extremely important pillar in the system of grievance redress in consumer financial markets to protect millions of customers against egregious behavior by financial firms.

References

Ambrish Kumar Shukla & 21 Ors v. Ferrous Infrastructure Pvt Ltd, January 19 2016, NCDRC.

Bar Council of India v. AK Balaji, March 13 2018, Supreme Court of India.

Coral Gables, $137.5 Million Settlement Announced In Citizens Bank Overdraft Fee Class Action, Lexis Nexis.

Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.

Fitzpatrick, 2010, An empirical study of class action settlements and their fee awards. Journal of Empirical Legal Studies, 7 (4), pp 811-846.

Fitzpatrick, 2010, Do Class Action Lawyers Make Too Little?, University of Pennsylvania Law Review, 158 (7), pp 2043-2083.

Jonathan Stempel, BofA $410 million overdraft settlement wins court OK, May 24 2011, Reuters.

Jonathan Stempel, JPMorgan settles overdraft fee case for $110 million, February 07 2012, Reuters.

Kelkar and Shah, 2019, In Service Of The Republic: The Art And Science of Economic Policy, Penguin Random House India Private Limited.

Lahav, 2003, Fundamental Principles for Class Action Governance, Ind. L. Rev., 37, p 65.

Costs in Civil Litigation - Report No 240, May 2012, Law Commission of India.

Ram Coomar Coondoo v. Chunder Canto Mookerjee, June 30 1876, Privy Council.

Shreeja Sen and Deepti Bhaskaran, SC stays Allahabad HC order on scrutinizing SBI Life policies, July 15 2014, LiveMint.



Karan Gulati is a consultant at NIPFP and Renuka Sane is researcher at NIPFP. We thank Sudipto Banerjee, Aditi Dimri, Pratik Dutta and Ajay Shah for useful comments.