Reassessment after the Finance Act, 2021: from "reason to believe" to jurisdictional gates

by Laveesh Bhandari, Prashant Narang and Aryan Pandey.

Tax statutes globally provide for reassessment power to an Assessing Officer (AO) enabling them to relook at a filed assessment. Reassessment powers are contested because they strike at the heart of finality and certainty which assessees desire. In India, reassessment is primarily dealt with in sections 147- 153 of the Income Tax Act, 1961.

For a long time, AOs could reopen an assessment if they had “reason to believe” that income had escaped assessment. The Finance Act, 2021 marked a shift in this standard, requiring the AO to instead possess “information suggesting escapement of income.” A zoomed out view indicates that the shift is about pairing a redefined trigger with rule-bound, record-verifiable jurisdictional gates that determine whether reopening can proceed at all.

Owing to the broad nature of the “reason to believe” standard, courts naturally stepped in to tighten the procedural and substantive boundaries of reassessment proceedings conducted under this standard. The paper discusses this in detail in section 2.1. A pattern emerged where the majority of reassessments were quashed by the courts on grounds such as non-application of mind, lack of tangible material, mere change of opinion etc. Each of these grounds questioned the AO’s formation of belief and sought a rational connection between the material relied on and the belief formed.

Seen in this light, the Finance Act, 2021 was a significant redesign of the framework. It inserted procedural safeguards which now introduce a mandatory pre-notice process. This provides the assessee with all the relevant information on the basis of which the reassessment was initiated. It also limited the timelines for opening a reassessment by making them shorter. It also revised the approval hierarchy under section 151. The Finance Minister’s budget speech also highlighted the fact that this was done so that taxpayers don’t have to remain under uncertainty for a long time.

Five years on, in this working paper, we ask what the redesign has actually done in practice at the Income-tax Appellate Tribunal (ITAT) level.

What we did

We undertook a doctrinal analysis of the reassessment provisions under the Income Tax Act, 1961. We combined this with a structured review of the ITAT decisions on reassessments that were available on Manupatra. We compared two periods: 2019, which represented how the practice was during the pre-amendment regime and 2025, which represented the post-amendment regime at a greater adjudicatory maturity.

A single ITAT order often deals with notices sent to the assessee for several assessment years, and the reasons on which the reassessment gets decided can differ for different assessment years. This resulted in 136 assessment years arising out of 101 orders in 2019 and 217 assessment years arising out of 178 decisions in 2025. The object of the exercise was to identify which statutory provision was getting litigated and what that revealed about how the reassessment architecture has changed after the Finance Act, 2021.

Outcome

Reassessment Outcome	2019 (n=136) %	2025 (n=217) %
Upheld	20.58	1.84
Quashed	72.79	80.64
Remanded	2.94	13.36
Miscellaneous	3.67	4.14

We observed that quashing rates in fact increased in the post-amendment regime; this indicates that more assessments are being struck down at the ITAT level. The sharpest decline is in the upheld rate and a necessary extension of that is that the revenue faces a direct loss of projected collection. This also means increased litigation cost for the department with no recovery.

Grounds

We also coded the dataset on the grounds for quashing, mapping the reason for quashing to the section it relates to. Again, because a single quashing may rest on multiple statutory grounds, each coded separately, the denominators here differ: 103 recorded grounds in 2019 and 187 in 2025.

Section	2019 instances (of 103)	2019 %	2025 instances (of 187)	2025 %
147	73	70.87	2	1.07
148	11	10.67	23	12.30
148A	—	—	2	1.07
149	5	4.85	59	31.55
151	14	13.59	64	34.22
151A	—	—	37	19.79

We noted that in 2019 quashings were largely done questioning the reasoning of AO’s assessment or a default in the notice (these two account for nearly 81% of the cases). However, by 2025, we see that grounds for invalidations lean towards procedural checks like time limit, sanctioning authority. The paper notes that some of this can be attributed to the combined impact of two landmark Supreme Court judgements in Ashish Agarwal and Rajeev Bansal.

Section 151A which accounts for 20% of the cases in 2025 is a result of impetuous drafting of law. A scheme titled ‘e-Assessment of Income Escaping Assessment Scheme’ was introduced by CBDT for enhancing transparency and objectivity in the reassessment regime. The scheme allowed automated allocation of S.148 notices routed through NFAC; however, Sections 148 and 148A continued to vest the power to issue notice in the ‘Assessing Officer,’ without excluding the Jurisdictional Assessing Officer (JAO). The legislative intent was thus not clear and it led the courts to guess what the lawmakers meant, leading to contradictory jurisprudence across High Courts. The Finance Act, 2026 has inserted a clarificatory provision in the form of Section 147A with retrospective effect from 1 April 2021.

What this means

The 2021 design shift moves reassessment from a broad standard to a rule. Rules have both pros and cons, on one side they lower decision costs and provide more certainty, on the other hand they don’t fare well in edge cases. Early numbers suggest that the shift from standards to rules is working for the assessee as fewer numbers of reassessments are getting upheld. For the revenue’s side, the paper points out that tax administration is a principal-agent relationship and when reassessments fail on procedural grounds at ITAT level, the cost falls on the exchequer, with no consequences for the department.

The paper ends with flagging that discretion has not been eliminated totally and rather it has moved upstream. What counts as “information suggesting escapement” is contingent on CBDT’s risk management strategy which is an algorithmic screening framework. The authors do not address the effects of upstream discretion or the patterns it might generate, suggesting these issues be explored in future empirical research.

The paper is available on the TrustBridge website, and the dataset is publicly available here.

Laveesh Bhandari is President and a Senior Fellow at CSEP. Prashant Narang and Aryan Pandey are researchers at TrustBridge Rule of Law Foundation.

What happens when arbitration deadlines are missed

by Prashant Narang and Renuka Sane.

Section 29A of the Arbitration and Conciliation Act 1996 was introduced to deal with delays in arbitration. It sets a time limit for making an award. If that time runs out, parties have to go to court to extend it. The court can also impose consequences for delay, such as reducing fees, awarding costs, or replacing the arbitrator.

Our new working paper studies how this works in practice. It looks at 202 reported orders of the Delhi High Court between 2015 and 2024.

It finds that the Court almost always grants extensions and almost never imposes sanctions.

What the data shows

Out of 202 cases, the court granted extensions in 198 (98%). Only 4 cases were dismissed, and those were on technical grounds. Sanctions were rarely imposed.

• Fee reduction: 0 out of 202 cases
• Adverse costs: 6 out of 202 cases (about 3%)
• Replacement of arbitrators: 4 out of 202 cases (about 2%)

Repeat extensions are not unusual. There are 30 cases where parties came back for a second or later extension. The court granted 29 of them (96.7%). There are no sanctions in these repeat cases.

These petitions also move quickly.

• Median time to decide: 3 days
• Median number of hearings: 1
• About 63% of cases are decided in a single hearing

So the delay is not in the court process. Courts dispose of these matters quickly. But they usually extend time without imposing any consequence.

Why extensions are common

Part of the answer lies in how Section 29A is structured.

For the Court, giving an extension is easy if both parties agree. The court can dispose of the case quickly.

Imposing a penalty is harder as the Court has to find out who caused the delay. It may have to look at the record in detail. It also has to hear the arbitrator before cutting fees. All this is likely to take more time and effort.

It is not surprising that consensual extensions are more common.

What this means for the law

Over time, this pattern shapes how the law works.

Section 29A was meant to push arbitrations to finish on time. It often works as a way to formally extend time after the deadline has passed.

If parties expect that extensions will be granted without much difficulty, the deadline may lose its force.

This does not mean the provision has no value. But it suggests that deadlines work best when consequences are easy to apply.

Looking ahead

If deadlines are not backed by predictable consequences, do they change behaviour?

The paper does not answer this fully. It focuses on what courts do once parties come for an extension. But the pattern is clear. Extensions are routine and sanctions are exceptional.

That may matter for how arbitration timelines are taken in practice.

You can read the working paper here.

The authors are researchers at TrustBridge Rule of Law Foundation.

Comments on the Securities Market Code Bill, 2025

by Natasha Aggarwal, Pratik Datta, K. P. Krishnan, Bhavin Patel, M. S. Sahoo, Renuka Sane, Ajay Shah and Bhargavi Zaveri-Shah.

Finance is the brain of the economy. It dictates allocative efficiency. The financial system chooses which industries and firms receive capital. This efficiency determines the extent to which investment translates into GDP growth. Getting finance right is critical. The prioritisation of financial reform must be absolute.

The Securities Market Code Bill, 2025 (SMC) marks a substantial advance over the existing Securities and Exchange Board of India Act, 1992, particularly in strengthening governance arrangements and formalising the processes of regulation-making. Importantly, it makes a serious attempt to end the ''circular raj'' by confining the issuance of subsidiary instruments to the Chairperson or senior members of the Board, rather than dispersed internal authorities. Further, it has introduced timelines for investigations and attempted to separate the investigation function from the adjudication function, making the first effort towards a clearer separation of powers. That said, the SMC can make further strides if it focuses on the issues described below.

We now address the issues in relation to specific provisions drafted within the current SMC.

Separation of powers

The SMC raises three related concerns, which demonstrate a concentration of powers at SEBI.

Issue 1: Excessive delegation of essential legislative functions

Clause 96 prescribes imprisonment, a fine, or both as penalties for market abuse (an offence defined under Clause 93). However, Clause 93 also grants the regulatory authority to define new offences within the 'market abuse' category, which would carry the same criminal sanctions. This raises concerns around excessive delegation: the identification of criminal offences is a core legislative function and cannot be delegated. Moreover, such excessive delegation is subject to being struck down in judicial review.

Issue 2: Regulation-making on adjudication

Clause 146(2)(j), read with Clause 17(4), permits SEBI to make regulations on the manner of conducting adjudication proceedings. This should not be done by SEBI itself. SEBI is the agent, and the Parliament is the principal. The Parliament must define the checks and balances on the coercive power of the agent. Otherwise, the agent always has incentives to appropriate more arbitrary power.

Issue 3: Ineffective separation of investigative and adjudicatory functions

Clauses 17 and 27 introduce limited separation of investigative and adjudicatory functions for specific matters. Investigation is an executive function, and adjudication is a quasi-judicial function. A conflation of these two functions in the same individual raises concerns about the separation of powers.

In summary, there is no clear separation of power between the three functions of the regulator. The same regulator is empowered to define the scope of violations and offences, investigate them, enforce them, adjudicate upon them, and impose sanctions for their violations, all under regulations of its own design. This combination blurs the distinction between legislative, executive, and adjudicatory functions and concentrates powers in the same persons.

Proposal:

Remove Clauses 17(4), 92(f), 93(g), and 146(2)(j) from the SMC. Implement strong structural separation between the investigative and adjudicatory functions. One way to do this is to create a distinct career track for adjudicatory officers as Administrative Law Officers (ALO). One SEBI board member should also be designated as an Administrative Law Member, who oversees the functions of ALOs. These officers should be solely responsible for adjudication and must have no involvement in investigative or quasi-legislative functions. Introduce extraordinary safeguards to mandate arm's length operation between investigation and adjudication.

Timelines for investigation and adjudication

Issue: Clauses 13, 16, and 27 introduce timelines for investigation and interim orders. However, provisos allow these timelines to be extended (Clause 27(4), proviso to Clause 13(2)). Additionally, the SMC specifies no timelines for the completion of adjudication proceedings. This allows investigations and adjudications to continue indefinitely, rendering the statutory limits ineffective.

Proposal: Remove the power to extend timelines for investigation. If extensions are retained, mandate the publication of written reasons, subject to mandatory review by the SEBI governing board. Introduce a strict statutory timeline for the conclusion of adjudicatory proceedings. These timelines should be part of the Parliament-specified regulations on the manner of conducting adjudication proceedings that we recommend in our preceding suggestions.

Methodology for calculating unlawful gains

Issue: The SMC requires the determination of unlawful gains by an investigating officer under Clause 13(3), but provides no calculation methodology. This virtually guarantees arbitrary and inconsistent determinations. It defeats the rule of law.

Proposal: Codify standard methods or guidelines for calculating unlawful gains within the SMC. Operationalise these through detailed regulations. Reference the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024, as a baseline.

Sanction determination factors

Issue: The SMC lists factors for adjudicating officers to consider while imposing sanctions. Some mirror Section 15J of the SEBI Act, which are unimplementable in practice. Terms like 'impact of the default or contravention on the integrity of the securities markets' (Clause 19(b)(v)) lack precision and invite arbitrariness.

Proposal: Base sanctions strictly on the quantifiable extent of harm caused to specific persons. Codify this methodology. Alternatively, publish binding guidelines detailing specific aggravating and mitigating factors, expanding upon the approach in the SEBI (Settlement Proceedings) Regulations 2018.

Criminal enforcement

Issue: The SMC retains criminal liability, including imprisonment, for some offences. Establishing guilt in Indian criminal law requires proof beyond a reasonable doubt, typically coupled with the requirement to establish intention. This is an inefficient tool for complex financial markets. The boundary between aggressive trading and market manipulation is thin. The threat of criminal sanctions deters contrarian strategies. This reduces market liquidity and harms price discovery. Traditional fraud is adequately covered by the Bharatiya Nyaya Sanhita.

Proposal: Remove all criminal liabilities. Structure sanctions as punitive civil penalties or restorative remedies, scaling to a multiple of the illicit gains. Retain debarment for systemic misconduct.

Power to issue directions

Issue: Clause 23 vests SEBI with open-ended direction-making powers. Moreover, the requirement to record reasons in writing (currently included in Section 11(4) of the SEBI Act) has not been included in Clause 23.

Proposal: Delete Clause 23. Confine non-penal measures to specific, narrowly defined statutory triggers (e.g., immediate asset freezing powers under strict procedural safeguards). All adjudicatory actions must be justified by reasons in writing.

Nominee directors on the SEBI board

Issue: The SMC retains government nominee directors on the SEBI board. Nominee directors prioritise the perspective of their parent departments over market efficiency. They exercise disproportionate influence. Inter-agency coordination should not occur via board representation.

Proposal: Appoint mid-career professionals for fixed terms until a mandatory retirement age. Bind them statutorily to SEBI's specific objectives. Address inter-agency concerns externally through the Financial Stability and Development Council (FSDC).

Commodities markets

Issue: Clause 49 empowers the government to determine commodities eligible for trading. The market must decide which commodities warrant hedging instruments. State determination of eligible commodities is equivalent to the government deciding which firm is permitted to issue equity.

Proposal: Delete Clause 49. Empower SEBI to draft regulations defining objective eligibility criteria for commodity derivatives, identical to the framework for eligible scrips.

Ombudsperson

Issue: Clause 73 empowers SEBI to designate an Ombudsperson. This creates a conflict of interest. The SMC lacks an appeals mechanism for decisions made by the Ombudsperson.

Proposal: Mandate statutory independence for the Ombudsperson. Ensure job security separate from SEBI management. Define a clear appellate process.

Exemptions for PSUs

Issue: Clause 65(2) empowers the Central Government to exempt listed public sector companies from listing and disclosure requirements. This violates Article 14 of the Constitution. State-owned enterprises must face the identical market discipline applied to private enterprises.

Proposal: Delete Clause 65(2). Mandate equal treatment for all market participants.

References

Natasha Aggarwal and others, "'Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading'" (Working Papers, TrustBridge Rule of Law Foundation, 2025).

In Re: The Delhi Laws Act, 1912 (AIR 1951 SC 332).

M S Sahoo and V Anantha Nageswaran, 'Regulatory architecture 2.0: Securities Markets Code marks a decisive shift' (Business Standard, 25 December 2025).

M.S. Sahoo and Sumit Agrawal, "Reimagining SEBI's Consent Settlement Framework" (Chartered Secretary, January 2026).

C.K. Takwani, Lectures on Administrative Law (7th edition, 2023) at page 100.

Bhargavi Zaveri-Shah, 'SEBI does not need unlimited powers – here's what's wrong with the Securities Markets Code' (ThePrint, 5 January 2026).

Bhargavi Zaveri-Shah and Harsh Vardhan, 'Ghost of the Commodities Controller—why India's new financial law feels like the 1970s' (ThePrint, 19 January 2026).

A Score Card for Pre-Legislative Consultation

by Mallika Dandekar and Antaraa Vasudev.

In 2014, the Ministry of Law and Justice published the 'Pre-Legislative Consultation Policy of 2014', the policy aims to create a framework for effective participation in lawmaking. This policy encouraged Ministries and Departments at the State and Central Levels to proactively publish and seek feedback on draft laws and policies.

Pre-legislative consultation, if implemented to its full potential - is a crucial tool in removing the democratic deficit in law formulation and regulatory functioning. Pre-legislative consultation (or public consultation as is commonly referred to), refers to the process of publishing a draft regulation or legislation for public comment for a period of time to gather feedback from practitioners, academics and the lived experiences of citizens impacted by the law. Consultation leads to further deliberation on the instrument, and re-drafting of certain clauses as needed.

While one may make the case for faster lawmaking, consultation if implemented correctly highlights the practical constraints of a law or policy document, which may not otherwise be visible to an administrator, without adequate input from those impacted by the instrument.

While India's history of consultation (particularly among Parliamentary standing committees and regulators) is long standing - the process continues to be viewed largely as a qualitative or unstructured process to be implemented. This poses challenges as it enables a great amount of discretion in consultation methodologies, and subsequently the input that informs the policy.

The subject of Pre-Legislative Consultation has garnered significant traction in Parliament since 2014. Member of Parliament - Supriya Sule proposed the private member bill the 'Pre-Legislative Consultation Bill, 2019', another private member bill was introduced byMember of Parliament - Jagdambika Pal, titled the 'National Consultation Commission Bill, 2019'. The Finance Minister in budget speeches of 2023-24 and 2025-2026 emphasised on the importance of regulatory consultation and impact assessment. More recently RBI, PFRDA and other regulators have made significant strides in codifying the process of consultation. Borrowing from these examples, as well as international best practices - Civis has aimed to devise a robust methodology to assess and evaluate the procedural integrity of India's pre-legislative consultation methodologies across Central, State Governments and regulatory bodies.

What follows is an exploration of the methodology devised to assess consultations, and an open invitation to assist with contributing to and enhancing the methodology. Annually, these parameters are used to assess consultations culminating in a platform to share recognition with those who excel in implementing the process - an initiative known as CIPCA (Civis' Public Consultation Awards).

The 10-Criteria Matrix of the Methodology:

Building upon a robust theoretical and practical foundation, Civis has codified a methodology. This framework combines academic standards and best practices with Civis' practical experience in fostering public engagement. The core of this methodology is a 10-criteria list, organised under four overarching analysis metrics, designed to provide an assessment of any public consultation.

The methodology to assess public consultations relies heavily on India's 2014 Pre-Legislative Consultation Policy, the United Nations Public Consultation Index, OECD's Practitioners Handbook on Public Consultation, and inputs from our jury of practitioners involved in the awards in 2024 and 2025.

A. Quality of Consultation Document

The first set of matrices assess how effectively the government's document presents the proposed policy for public feedback, focusing on its clarity, comprehensiveness, and accessibility.

1. Justification:This criterion looks at whether the consultation document clearly articulates the rationale behind the proposed policy or legal change. Is the problem it seeks to address defined well, with the context in which it is being proposed, including relevant background, existing issues, and the objectives it aims to achieve? A strong justification helps citizens understand the 'why' behind the proposal, enabling more informed and relevant feedback. Assessing the justification required qualitative assessment of the Consultation document. The jury across the first and second edition has retained this criterion as its original conception.

   This criterion is borrowed from the Pre-Legislative Consultation Policy, particular Section 2 that reads "The Department/Ministry concerned should publish/place in public domain the draft legislation or at least the information that may inter alia include brief justification for such legislation, essential elements of the proposed legislation, its broad financial implications, and an estimated assessment of the impact of such legislation on environment, fundamental rights, lives and livelihoods of the concerned/affected people, etc". This section has also helped shape the next 3 criteria, as detailed below.

2. Essential Elements: This criterion looks at whether the proposed changes, new provisions, or key components of the draft are clearly outlined. Citizens should be able to easily identify and understand what exactly is being proposed, and its key features. These include any proposals being made, key rights and penalties, or any other government intervention or policy decision. The qualitative test is to discern whether these proposals are clear, with no room for ambiguity.

3. Impact Assessment: Has the potential impact of the proposed draft, including financial, social, environmental impact, been analysed and stated within the document? The third criterion looks at this issue in great detail. Transparency about potential impacts, both positive and negative, is crucial for citizens to assess the draft's broader implications and offer feedback after considering these effects. In edition one of the awards, the impact assessment was calculated uniformly across the financial, social and economic impacts flowing from the policy and whether it was articulated. This was an extremely subjective process, validated by each level of deliberation.

   However, as we evolved the criteria for the second edition through fresh deliberations with the jury, it led to a demand for increasing the granularity and detail in how this criterion was evaluated. Hence, we sought support from the Trustbridge Foundation, and the team led by Dr. Renuka Sane, who further refined this criterion to include 25 sub-questions that were answered to arrive at the overall score.

4. Comprehension: This criterion asks the question of whether the draft can be easily understood by an average reader, even if they do not possess specialised domain expertise? This criterion qualitatively evaluates the document's readability, clarity of language, and overall user-friendliness. Is the language unambiguous, avoiding jargon where possible or providing clear explanations for technical terms? Complex technical concepts should be simplified or accompanied by clear explanations, and the document should be free of excessive jargon or overly academic prose.

   In addition to Section 2 of the PLCP, it also follows on the heels of Section 5 of the PLCP - "Every draft legislation or rules, placed in public domain through prelegislative process should be accompanied by an explanatory note explaining key legal provisions in a simple language".

B. Scope of Engagement Opportunities

These matrices evaluate the breadth and effectiveness of the consultation's reach and the opportunities they provided for stakeholders to engage.

1. Duration: Here, we looked at whether a consultation is open for a reasonable period, allowing sufficient time for stakeholders to review the document, understand its implications, and prepare their feedback. An inadequate consultation period can severely limit participation and the quality of feedback. This criterion is derived from Section 2 of the PLCP which reads: "...Such details may be kept in the public domain for a minimum period of thirty days for being proactively shared with the public in such manner as may be specified by the Department/Ministry concerned".

   Across the two editions, the manner of scoring this criterion has evolved through deliberations with the jury. In year one, a more granular approach was adopted, similar to the other criteria, where a range of scores from 1-5 were applicable on a sliding scale based on the number of days a consultation was open for. This looked like:

   • Consultations that gave less than 20 days were marked a 1,
   • Those that allowed between 20 to 29 days were given 2 points,
   • Those that met the PLCP criteria of 30 days exactly received 3 points,
   • Those that allowed for 30 to 59 days received 4 points, and lastly,
   • Those that allowed for 60 days of more for comments received a full 5 points.

   However, the jury in the second edition recommended moving to a binary approach, where only two quantitative scores were possible: 1 for any consultation open for a duration under 30 days, and 5 for any consultation open for 30 days or higher. This was a deviation from our first edition, and it reflects the duration provision contained in the PLCP. In order to have a binary scoring, but not conflict with the scale on the rest of the criteria, 1 and 5 were chosen as the binary scoring indicators.

2. Outreach: Here, we consider if the outreach was comprehensive and diverse through various media and channels to ensure the consultation reached a broad range of relevant stakeholders and the general public. Effective outreach goes beyond merely publishing on a government website; it involves active dissemination through different platforms (e.g., print media, social media, community forums, targeted invitations) to maximise visibility and encourage participation. A compilation of all consultation outreach helped score the efforts undertaken by the relevant department.

   The criterion is derived from Section 3 of the PLCP which reads "Where such legislation affect specific group of people, it may be documented and disclosed through print or electronic media or in such other manner, as may be considered necessary to give wider publicity to reach the affected people".

C. Inclusivity

This set of matrices focuses on ensuring that the consultation facilitated diverse participation and equitable access for all citizens, regardless of their background or location.

1. Feedback Collection: The criterion considers whether multiple, accessible avenues were provided for stakeholders to submit their responses and feedback. This includes online portals, email, postal addresses, and potentially public hearings and interviews. Offering a variety of channels ensures that citizens with differing levels of digital literacy or access can participate effectively.

   This criterion builds on the principle outlined in OECD Practitioner's Guide on Stakeholder Consultations, which recommends evaluating consultations on the "transparency of the process and accessibility of the consultation, e.g., was there an equal opportunity to take part, was the process easily understood by stakeholders".

2. Translations: Here we considered if the consultation document translated into regional languages is relevant to the target audience. In a linguistically diverse nation like India, providing materials in national and local languages is paramount to ensuring true inclusivity, allowing citizens to engage with the content in their mother tongue and participate meaningfully. In addition, braille and sign language transcriptions have also greatly aided the accessibility of some drafts.

   Translation and accessibility of policy documents across languages is emphasised in OECD Practitioner's Guide on Stakeholder Consultations. The Guide recommends that consultation bodies "assure clear and plain language drafting, including in translations".

   Through deliberation, jury members concurred that English and Hindi translations for consultations with a national scope, and English and 1 regional language for a consultation with a regional scope would be scored quantitatively.

D. Open Governance

This final set of matrices examine the transparency and responsiveness of the consulting body throughout and after the consultation process.

Both transparency and responsiveness were created as qualitative criteria on the recommendation of the jury members on our inaugural edition of the awards. These criteria aim to highlight the importance of the completion of feedback loops and providing publicly accessible data, which are higher order asks - but extremely important to determine the responsiveness of policy making.

1. Transparency: Did the consulting body provide a report, a summary, or publish the responses received (in part or in entirety) after the close of the consultation period? Transparency in feedback processing is vital for accountability. It demonstrates that public input was received, analysed, and potentially influenced the final policy, fostering trust between citizens and government. It is also aligned with existing PLCP sections like Section 6 "The summary of feedback/comments received from the public/other stakeholders should also be placed on the website of the Department/Ministry concerned". Additionally, elements of this were also derived from a public consultation index created by UNDP (Page 16 of ASSESSING PUBLIC PARTICIPATION IN POLICY-MAKING PROCESS).

2. Responsiveness: The question to be considered here was if the consulting body is responsive to communications made through letters, RTIs, or other means by citizens or civic organizations.

   Responsiveness demonstrates that the government is open to dialogue and willing to address queries and provide information after the consultation process, reinforcing trust and encouraging future participation. Adding to transparency, responsiveness creates an additional avenue to allow government departments to publish and share information regarding the consultation process, i.e. even if they are not shared on their public websites and notices, they are open to sharing this information when specifically requested.

Application of the Methodology - Draft Kerala IT Policy 2023:

To better understand the methodology, we examine the Draft Kerala IT Policy 2023, ("Draft Policy") and through it explore how the methodology to assess Pre-Legislative consultation in India can be improved upon.

The draft policy in question received an overall score of 37 out of a possible 50 on the scale, translating to a 74% effectiveness rating in the last edition of the awards. In order to contextualise the draft as against other draft documents the mean and the standard deviation for the complete data set of 286 consultations has been calculated. This comparison is only illustrative, as the lawmaking procedures and maturity across State Governments, Regulatory Bodies and Central Legislators differ greatly.

This policy, released in September 2023, aims to be a blueprint for the state's IT sector growth and citizen well-being through digital technologies. We will integrate its performance against each criterion to provide a tangible illustration of Civis' methodology in action.

A. Consultation Quality - Draft Kerala IT Policy 2023

1. Justification: The Draft Policy scored outstandingly well (5/5) on this criterion. Sections 1.1 and 2.1 of the policy thoroughly state the need for an IT policy for Kerala. This is further supplemented by details regarding the state's and India's current IT infrastructure and the opportunities for Kerala to contribute to its betterment.

   The policy provides a clear background, detailing Kerala's historical strengths in IT (e.g., establishing Technopark in 1990) and the need for a new policy framework given global and national shifts in the digital landscape. It explicitly states its two-fold objective: leveraging IT, Electronics, and Space sectors for economic growth and adopting digital technologies for equitable, inclusive societal development.

   Mean Score: 2.74
   Standard Deviation: 1.49

2. Essential Elements: On this, the Draft Policy also received an outstanding score (5/5). Chapter II, titled 'Policy Framework,' meticulously lays down all essential elements, including 'Directions for Growth' (differentiating between economic and social development), 'The Enablers,' 'New Policy Framework,' and 'Policy Objectives.' Notably, section 2.2 explains the anticipated outcomes if the policy is implemented, showcasing forward-thinking and depth of thought. Furthermore, the policy addresses cybersecurity concerns through a dedicated section on 'Information Security' (Section 3.4) and discusses the augmentation of IT industry infrastructure via the development of four IT corridors in section 4.3.

   Mean Score: 3.73
   Standard Deviation: 1.12

3. Impact Assessment: The draft policy exceeded the average score here (4/5). The document effectively identifies the need for an IT policy in Kerala, backed by industry trends and growth potential. Stakeholder engagement and impact articulation are strong, as the Draft Policy incentives and investments for each business category separately. However, cost-benefit analysis and alternative strategies were not present explicitly, which was penalised. While implementation details exist, they lack clear timelines. Additionally, environmental impact, long-term evaluation, and rural integration were minimally addressed.

   Mean Score: 2.54
   Standard Deviation: 1.31

4. Comprehension: The policy also received a 4/5 for comprehension. The draft IT Policy is logically structured and emphasises inclusivity, innovation, and social equity. While it provides detailed objectives, strategies, and frameworks, its technical language may challenge non-expert readers slightly, but not significantly. Visual aids or summaries were absent which could have enhanced accessibility, and hence one point was lost. The document maintains clarity throughout, with no apparent contradictions.

   Mean Score: 3.28
   Standard Deviation: 1.03

B. Scope of Engagement Opportunities - Draft Kerala IT Policy 2023

1. Duration: The Draft Policy scored a 5/5 for its duration. The consultation period was from October 27, 2023, to January 31, 2024, for a total of 96 days. This significantly exceeds the recommended 30-day minimum, providing ample time for review and feedback.

   Mean Score: 2.85
   Standard Deviation: 1.23

2. Outreach: The Draft Policy received a 4/5 for its outreach efforts. The Government of Kerala extensively leveraged social media platforms, with posts found by Infopark, Technopark, and Kerala IT on X. Instagram posts were traced on Cyberpark Kozhikode and Infopark pages, and Facebook was utilized by Kerala IT, Technopark Trivandrum, Infopark, and Cyberpark Kozhikode. Several of these government undertakings also created awareness through their LinkedIn pages. The Draft was also available on the Kerala State Information Technology Infrastructure Limited (KSITIL)'s website. Furthermore, the erstwhile Secretary of the Kerala Electronics and Information Technology department utilized digital media to spread information about this policy.

   Mean Score: 1.49
   Standard Deviation: 0.80

C. Inclusivity - Draft Kerala IT Policy 2023

1. Feedback Collection: Here, the Draft Policy needed improvement (2/5). The Draft Policy did not mention any feedback collection mechanism. However, a webpage was created (https://itpolicy.startupmission.in/) to accept feedback in both English and Malayalam. While a digital portal was available, the lack of explicit mention within the policy document itself and potentially limited other traditional avenues for feedback impacted its score.

   Mean Score: 2.40
   Standard Deviation: 0.69

2. Translations: The Draft policy meets average expectations (3/5) in this category. The Draft is available in both English and Malayalam. This demonstrates a decent effort towards linguistic inclusivity, allowing a wider segment of the population in Kerala to access and understand the policy in their state language.

   Mean Score: 1.50
   Standard Deviation: 0.86

D. Open Governance

1. Transparency: The Draft Policy scored very low (1/5) on transparency. No published reports or public comments were found after the consultation period. Despite the general emphasis on e-Governance and proactive data disclosure within the policy, the lack of specific mechanisms for publishing feedback on this particular draft significantly impacts its score significantly.

   Mean Score: 1.59
   Standard Deviation: 1.20

2. Responsiveness: The Draft Policy exceeds expectations (4/5) in responsiveness. The Government of Kerala responded to Civis' RTI request and answered every question about the process individually. They also provided a list of all comments they received and shared that the final version of the document was not out yet, indicating that the consultation process still has the potential to yield changes to the policy. The criterion of responsiveness was only scored for the final 26 nominees, as data gathering for the full data set would be difficult. With that in mind, the scores for the 26 nominees are:

   Mean Score: 3.84
   Standard Deviation: 0.69

Conclusion

Codifying a methodology for assessment is the first step in building the legitimacy of the process of public consultation. Laying out a pathway for greater efficacy in consultations, and an enhancement of procedural trust in lawmaking as a whole.

The methodology outlined above works towards standardising a growing practice of consultation in India. However, there are unique improvements in consultative practices that we can look to from countries like Taiwan - which has institutionalised the platform vTaiwan, an open-source deliberative platform that brings together policy makers and citizens to deliberate national issues. Another example comes from the European Union's Regulatory Fitness and Improvement (REFIT) program which requires stakeholder consultation at all stages of policy formulation i.e., problem definition, solution identification, drafting, and evaluation.

While the domain of consultation is evolving, the authors invite scrutiny and feedback to enhance the parameters and measures of this methodology. With the aim of creating a practical and evolved framework for consultation evaluation and best practices in the country.

We invite suggestions on:

• Strengthening specific parameters of the evaluation framework.
• Defining the guardrails for what may constitute policy paralysis as opposed to constructive deliberation.
• Highlighting other consultative best practices which don't find mention in the methodology.
• Identifying national/international best practices that can be suggested to policy makers in the country.

Mallika Dandekar and Antaraa Vasudev are researchers at Civis.

Registration of security interest: A peculiar Indian problem

by Pratik Datta.

When a lender extends credit to a company, it often secures repayment by way of a security (often referred to as a “charge”) created over certain assets or properties of that company. Company law usually requires such security to be registered with an agency. For instance, in the UK, company charges are registered with the Companies House. Registration of security could serve three different purposes:

1. the purpose of registration of security could be to publish the existence of such security to make it available for public inspection. This gives potential lenders to the company information about the extent of prior lending to the company which may rank ahead of their own contemplated advances. Such information may also be of interest to credit analysts, resolution professionals, shareholders and investors.

2. registration may be necessary for ‘perfection’ of the security. That is, registration may be treated by law as a necessary part of the process whereby a person obtains a security interest against the company. Without registration, the person in question would fail to obtain security interest and so would not be able to rely on it against the unsecured creditors of the company during the company’s insolvency.

3. registration could be used in law as a way of determining priority among secured creditors. For example, the law could require that priorities among secured creditors be determined by the date of registration of the security instead of the date of creation of security.

In India, we have a peculiar situation. When a bank or notified financial institution extends a secured credit facility to a company, three different registrations are necessary under three different laws for the same security.

1. Under section 77 of Companies Act 2013, a company creating charge on its assets or properties is required to register the particulars of such charge with the Registrar of Companies (‘RoC’). This involves providing the relevant information in Form No. CHG-1 (for charges other than debentures) or Form No. CHG-9 (for debentures), getting it signed by both the company and the charge holder, and then filing the Form along with the underlying credit agreement with the ROC.

2. Under section 23 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’), the particulars of every transaction (involving banks and notified financial institutions) creating security interest must be filed with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (‘CERSAI’). This involves filing Form I with CERSAI.

3. Under section 215(2) of the Insolvency and Bankruptcy Code 2016 (‘IBC’), a financial creditor (which typically includes banks and regulated financial institutions) is mandatorily required to submit financial information and information relating to assets, in relation to which any security interest has been created, to an Information Utility (“IU”). Unlike RoC or CERSAI, IUs are required to authenticate and verify information of default, and issue a record of default in Form D to its registered uses.

As a result of these legal provisions, every single secured credit transaction in India has to be mandatorily registered with the RoC, the CERSAI as well as an IU. More than increasing compliance burden, this institutional overlap increases the legal uncertainties around security creation and enforcement, with potentially adverse implications for the entire secured credit landscape. A recent case illustrates the point.

Case in point

In Bizloan Pvt. Ltd. v. Mr. Amit Chandrashekhar Poddar (“Bizloan judgment”), the NCLAT was seized of a unique situation where a corporate credit transaction was registered only with CERSAI but not with RoC. Bizloan Private Ltd. (“Bizloan”) provided financial credit facilities to Autocop (India) Pvt. Ltd. (“Autocop”) in the form of sales bill discounting and purchase bill discounting of Rs. 1 crore in aggregate. Subsequently, Autocop went into corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code 2016 (“IBC”). Bizloan filed its claims in Form C during CIRP, which were admitted in full without indicating if they were secured or unsecured. It was only when Bizloan received the final resolution plan for Autocop that it realized that Bizloan had been classified as an unsecured financial creditor. Bizloan challenged this classification but by then Autocop had been put into liquidation. The NCLT dismissed Bizloan’s challenge. Consequently, Bizloan approached NCLAT in appeal.

Bizloan’s arguments

1. Bizloan argued that proving security interest in liquidation proceedings under IBC should be governed by Regulation 21 of the IBB (Liquidation Process) Regulations, 2016, which states:

The existence of a security interest may be proved by a secured creditor on the basis of -

1. the records available in an information utility, if any;
2. certificate of registration of charge issued by the Registrar of Companies; or
3. proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

Evidently, proof of registration of charge with CERSAI is sufficient for proving security interest in a liquidation by virtue of Regulation 21(c) of the Liquidation Regulations.

2. Bizloan further argued that section 238 of the IBC overrides provisions of other statutes. Therefore, if there is any inconsistency between IBC and any other statute, IBC and the regulations issued under it should prevail.

Liquidator’s arguments

1. The Liquidator relied on section 77(3) of the Companies Act 2013, which states:

Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator appointed under this Act or the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be, or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under subsection (2).

The underlined portion of the above provision was inserted through the Eleventh Schedule of the IBC itself, which came into effect from November 15, 2016. The liquidator highlighted that the words “shall” makes him duty bound to follow the above provision. Further, if there is any conflict between section 77 of Companies Act 2013 and Regulation 21 of the Liquidation Regulations issued under the IBC, the former will override the latter since section 77 is a specific provision dealing with the particular situation (that is, registration of charges) and it explicitly uses the words ““notwithstanding anything contained in any other law”. Since Bizloan’s charge was not registered with the RoC under section 77 of the Companies Act 2013 and only registered with CERSAI, Bizloan cannot be treated as a secured financial creditor in liquidation governed by the IBC.

2. The liquidator further argued that Regulation 21 is an outcome of section 52(3)(b) of the IBC, which states:

Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either – (a) by the records of such security interest maintained by an information utility; or (b) by such other means as may be specified by the Board.

The liquidator argued that section 52(3) applies only before a secured creditor chooses to “realise” its security interest, which does not come into the picture in Bizloan’s case since Bizloan had effectively “relinquished it security interest to the liquidation estate” and was to receive the sale proceeds in terms of section 53 of IBC.

3. The Liquidator further highlighted that Regulation 21 uses the words “may prove”, which is discretionary and not mandatory. In contrast, section 77 uses the word “shall” which is mandatory and binding.

4. Additionally, the Liquidator argued that if there is a conflict between section 77 and Regulation 21, Regulation 21 of the Liquidation Regulations issued under section 240 of the IBC will have to give way to section 255 of the IBC, which amended section 77(3) of the Companies Act explicitly giving more weightage to section 77 of Companies Act 2013 in matters of registration of charges on a company’s assets or properties.

5. The Liquidator also drew attention to section 20(4) of the SARFAESI Act 2002, which reads:

The provisions of this Act pertaining to the Central Registry shall be in addition to and not in derogation of any of the provisions contained in the Registration Act, 1908 (16 of 1908), the Companies Act, 1956 (1 of 1956), the Merchant Shipping Act, 1958 (44 of 1958), the Patents Act, 1970 (39 of 1970), the Motor Vehicles Act, 1988 (49 of 1988), and the Designs Act, 2000 (16 of 2000) or any other law requiring registration of charges and shall not affect the priority of charges or validity thereof under those Acts or laws.

Accordingly, the Liquidator argued that SARFAESI Act 2002 is ‘only in addition and not in derogation of’ the provisions of Companies Act 2013 and any other law. Therefore, registration with CERSAI under SARFAESI Act 2002 cannot affect the priority of charges or validity thereof under those other Acts or laws.

NCLAT’s judgment

The NCLAT noted the well-established principle of statutory interpretation that a latter law prevails over an older law. Accordingly, it observed that the IBC came into effect on December 1, 2016 while the amendment to section 77(3) of Companies Act 2013 came into effect earlier on November 11, 2016. Further, Regulation 21 of the Liquidation Regulations came into effect on December 15, 2016, after the amendment to section 77(3) of Companies Act 2013. Therefore, NCLAT concluded that the IBC will override the amended section 77(3) of Companies Act 2013. Consequently, it was held that security interest of a creditor can be proved if the same is available only in CERSAI. It is not completely and exclusively dependent on charge registered with RoC under section 77 of Companies Act 2013. As a result, Bizloan should be treated as a secured financial creditor based on its CERSAI registration pursuant to Regulation 21 of the Liquidation Regulations.

Analysis of NCLAT’s reasoning

The NCLAT’s reasoning is problematic. The general principle of statutory interpretation that a new law overrides an old law is based on the assumption that if both laws have been enacted by the Parliament at different points in time, it is reasonable to assume that the latter law reflects the latest policy intent of the Parliament and therefore, should prevail over the earlier law.

When IBC was enacted by the Parliament, section 255 of IBC amended section 77(3) of Companies Act 2013 to clarify that a liquidator appointed under IBC must take into account a charge created by a company only if such charge was registered under section 77 of Companies Act 2013. The Parliamentary intent was clearly to ensure that only charges registered under section 77 of Companies Act 2013 are taken into account in a liquidation under IBC.

The Ministry of Corporate Affairs (“MCA”) notified different provisions of IBC at different points in time because of administrative convenience. Parliamentary intent cannot reasonably be determined based on whether a provision of IBC was notified before another provision of the IBC by the MCA, that too within a span of a month. Therefore, the fundamental basis of NCLAT’s reasoning stands of unsure footing.

Policy issues

The NCLAT noted that RoC and CERSAI registrations serve different purposes. Registration of charges with RoC under section 77 of Companies Act 2013 is relevant for determining priority of claimants of a company during liquidation under IBC or winding up under Companies Act 2013. In contrast, CERSAI registration under section 20 of SARFAESI Act 2002 is relevant for realization of security interests by banks and notified financial institutions through the SARFAESI Act 2002. It is also noted that CERSAI registration helps in fraud prevention by allowing lenders to check if the asset being offered as security is already hypothecated or mortgaged.

On closer examination, these stated purposes do not appear to be mutually exclusive. When a bank or a notified financial institution extends secured credit to a company, the borrower company is mandated by law to register the charges with the RoC under section 77 of Companies Act 2013. This RoC data is available for public inspection. Potential lenders to the company can use the RoC data to check if the company has already given any of its assets or properties as security to any prior lender(s). Clearly, fraud prevention in corporate lending by banks and notified financial institutions cannot be a reason for setting up CERSAI.

CERSAI becomes relevant only for fraud prevention in the case of loans extended by banks or notified financial institutions to non-corporate borrowers such as individuals, sole proprietorships, societies, partnerships etc. The RoC does not have information on prior borrowings by such non-corporate borrowers or the existing security on the assets or properties of such borrowers. In such cases, CERSAI plays a legitimate role in fraud prevention.

The problem in the current institutional design lies is the overlap between RoC, CERSAI and IUs with respect to corporate secured lending. Banks and notified financial institutions have a strong incentive to register security interests in corporate lending transactions with CERSAI because it enables them to enforce such security interests through the special out-of-court enforcement mechanism under SARFAESI Act 2002. These lenders also have an incentive to get the same information filed with an IU so that they can rely on the IU’s record of default in insolvency proceedings under IBC. And the corporate borrower is anyways legally mandated to register the security with RoC under Companies Act 2013. Overall, these laws have created layers of institutions over one another for the same purpose, muddying the functional clarity between RoC, CERSAI and IUs.

Conclusion

The blurring of functionalities between the RoC, CERSAI and IUs not only creates avoidable transaction cost in corporate secured credit transactions, it also leads to legal risks around security creation as the Bizloan judgment illustrates.

Registration of a particular security interest against assets or properties of a particular corporate debtor should be done only once. Let’s assume that the registration agency is RoC. The corporate debtor should register a particular security interest only once with the ROC. In case of default, that RoC registration alone should be enough for banks and notified institutions to use enforcement rights under SARFAESI against such corporate debtors. Similarly, the same ROC registration alone should be adequate proof of security interest against a corporate debtor for the purposes of IBC. The law should not require the same security interest against the same corporate debtor to be registered with CERSAI or any IU.

CERSAI would, of course, remain relevant for registration of security interests against non-corporate borrowers. The case for IUs is more nuanced. The BLRC had envisaged an open competitive industry in the market for information required for insolvency and bankruptcy. This should be achieved by enabling multiple private competing businesses to perform the role of RoC, which would require a fundamental rethinking of the RoC as a state monopoly under Companies Act 2013. Adding an additional layer of IUs over the existing RoC to perform exactly the same function is not exactly the reform that the BLRC had envisaged.

The legal mechanics of achieving these outcomes is not particularly complex. Suitable amendments would be required to Companies Act 2013, SARFAESI Act 2002 and Insolvency and Bankruptcy Code 2016 and some subordinate legislations issued under these statutes. But first of all, the MCA (for RoC and IUs) and Ministry of Finance (for CERSAI) need to recognize the problems with the current laws on registration of security interests and agree on the policy pathway ahead.

The author is a lawyer.

Reducing challenges to arbitration awards: lessons from court data

by Madhav Goel, Akshay Jaitly, Renuka Sane and Anjali Sharma.

Contracts form the bedrock of economic activity in the formal economy. As an economy grows, so does its reliance on contracts. Delays and friction in contract enforcement erode trust in contracts and inhibit the pace of economic growth. In India, contract enforcement generally falls in the jurisdiction of the civil court system, which, according to the National Judicial Data Grid, has more than 11 million pending cases and takes, on an average, more than three years to dispose of a case. One of the solutions to an increasingly overburdened court system in India has been to move certain types of matters to a different judicial forum, either a specialised court or tribunal or by using an alternate dispute resolution (ADR) mechanism. Arbitration is one such alternative mechanism, the framework for which is provided by the Arbitration and Conciliation Act, 1996 (A and C Act).

Contract enforcement by private persons against the state in India brings its own set of problems. Increasingly, government contracts provide for dispute resolution by arbitration. However, anecdotal evidence suggests that the state consistently challenges adverse arbitration awards. In this article, we use Delhi High Court data on challenges to arbitration awards for matters in which the National Highways Authority of India (NHAI) was a party. We analyse the grounds on which these awards were challenged and the manner in which the court dealt with these challenges.

Our main finding is that both the NHAI and the private parties challenge adverse arbitration awards, most often on the merits, even though the A and C Act specifically prohibits this. We also find that the court generally does not interfere with arbitral awards, which is in line with the legislative intent. However, this does not deter such challenges. This may be for a variety of reasons, such as the relatively low cost of litigation vis-a-vis the award value or the incentives of decision makers within the state.

Our analysis adds to the intersection of two growing bodies of recent work in India on the subject. The first that studies government contracting, both from a public administration lens and from the lens of how the government impacts ease of doing business and business outcomes (Chitgupi and Thomas (2023), Burman and Manivannan (2022), Mehta and Thomas (2022), Manivannan and Zaveri (2021), Shah (2021), Roy and Sharma (2020)). The second studies the functioning of courts and the manner in which they deal with a variety of matters (Manivannan et. al. (2021), Damle et. al. (2021), Sharma and Zaveri (2020), Gulati and Sane (2021), Bhatia et. al. (2019)).

The organisation of this article is as follows. We first provide an overview of the legislative and judicial framework to challenge an arbitral award, i.e., Sections 34 and 37 of the A and C Act. We then describe our data set and our methodology for analysis. This is followed by our findings and some recommendations on the way forward.

An overview of Sections 34 and 37 of the A and C Act

The design of the A and C Act allows for a two-stage sequential challenge to outcomes of arbitration proceedings, first under Section 34 and then under Section 37 of the Act. Section 34 provides 5 procedural and jurisdictional grounds, along with 3 additional grounds to set aside an arbitral award. These are:

• Procedural and Jurisdiction:
• The party was under some incapacity while entering into the arbitration agreement;
• The arbitration agreement was not valid under the law to which the parties have subjected it;
• The party making the application was not given proper notice of appointment of arbitrator or of arbitral proceedings, or was otherwise unable to present its case;
• The arbitral award dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contained decisions on matters beyond the scope of the submission to arbitration; or
• The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the A and C Act, as the case may be.
• Additional Grounds:
• The subject matter of the dispute was not capable of settlement by arbitration;
• The award is in conflict with the public policy of India, i.e., award is affected by fraud or corruption, or is against the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice; or
• The award is vitiated by patent illegality appearing on the face of the award.

It is useful to note that Section 34 proceedings are not appeals (Delhi Airport Metro Express (P) Ltd. v. DMRC (2022)), and the grounds for challenge are limited by the A and C Act itself (Union of India v. Annavaram Concrete Pvt. Ltd. (2021)). Under the scheme of Section 34, an arbitral award cannot be set aside on merits, that is, on the grounds of erroneous application of law or by re-appreciation of evidence (MMTC Limited v. Vendanta Limited (2019); PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin (2021)). Therefore, unless an arbitral award is set aside under the grounds laid down in Section 34, it is ready for execution as a civil court decree against the award debtor. Section 37 of the A and C Act, on the other hand, is an avenue of appeal against an order under Section 34 of the Act. Accordingly, proceedings under Section 37 are governed by the Code of Civil Procedure, 1908 (CPC) and are in the form of an appeal. However, through consistent judicial pronouncements, the grounds for appeal under Section 37 have been restricted, even as compared to the grounds under Section 34 (Mahanagar Telephone Nigam Limited vs. Applied Electronics Ltd. (2014)).

While the A and C Act is, to a large extent, modeled on the UNCITRAL Model Law on International Commercial Arbitration, 1985, it deviates from the Model Law in two important ways. First, it introduces an additional ground to challenge an arbitral award: patent illegality appearing on the face of the award. Second, it provides for a two-stage appeal process, where Section 37(1)(c) of the Act allows an appeal against an order under Section 34 setting aside or refusing to set aside the arbitral award. These two deviations from the Model Law have implications for the efficacy of the arbitration framework in India. The ground of patent illegality introduces ambiguity and discretion in the otherwise procedural nature of the process of challenging awards. The two-stage appeal process adds to this ambiguity and discretion, and introduces delays in the enforcement of the award. Section 36 of the A and C Act, under which an award is enforced as a decree, adds to these challenges. Section 36(2) specifically gives the court the power to stay the enforceability of an award. Section 36(3) specifies the conditions under which the court may grant such a stay.

Data and methodology

For our analysis, we collected judgments from Delhi High Court for the years 2018 and 2019 pertaining to matters where the NHAI is a party. Our choice of Delhi High Court is due to its importance as a court for arbitration matters, as well as because NHAI matters are likely to be brought before it.

Our choice of the years 2018 and 2019 is driven by three factors. First, the arbitration framework has undergone significant legislative change since 2015 and more recent data reflects the current framework. Second, the period from 2020-2022 was marked by disruptions in the judicial system due to the COVID-19 pandemic, and therefore, may not represent the ordinary course of dispute resolution. Finally, the choice of 2018 and 2019 allows for the possibility of extending our analysis to studying the entire life-cycle of such litigation all the way to the Supreme Court.

We focus on the NHAI because of its status as an autonomous, specialised statutory body that has been tasked with development, maintenance and management of India's national highways. NHAI is also one of the largest contracting bodies within government, accounting for nearly 10 percent of the total union government expenditure on public procurement (Sharma and Thomas (2021), Chitgupi, Gorsi and Thomas, (2022)).

We find 96 judgments in Delhi High Court where NHAI is a party. Of these, 82 pertain to matters under Sections 34 and 37 of the A and C Act (details can be found by clicking here) From these 82 judgments, we collect the following details:

1. The nature and quantum of claims filed before the arbitral tribunal;
2. The party that won the arbitration;
3. The time taken between filing the petition under Section 34 or 37 of the A and C Act to the final judgment;
4. The nature of disputes and grounds for the petition under Section 34 or 37; and
5. Which party won, and the quantification of the claims that were upheld/set aside by the Court.

Findings

Our main finding is in regards to the win-loss record for a challenge to an arbitral award under Sections 34 and 37 of the A and C Act, i.e., the likelihood of success in challenging the arbitral award (Table 1).

Table 1: Outcome of Section 34 and 37 Challenges

Categories	2018	2019	Total
Petitioner won	4	4	8
Petitoner lost	44	30	74
Total	48	34	82
Source: Delhi High Court judgments

We find that in 74 of the 82 cases (90.2%) involving NHAI, the court refused to interfere with the arbitral award, irrespective of whether the party challenging the award was the NHAI or the private party. This suggests two things. First, the Delhi High Court's action of ordinarily not setting aside the arbitral award is in line with the legislative intent of Sections 34 and 37 of the A and C Act. Second, despite the court not interfering with the award, parties continue to mount such challenges. This is especially so for NHAI, which is the petitioner in 67 out of the 82 matters.

When we look at the grounds under which awards are being challenged in court (Table 2), we observe that the bulk of the challenges, 77 out of 82 (93.9%), are under Section 34(2A), which is unlike the provisions of the UNCITRAL Model Law, and is an Indian innovation that allows the award to be reviewed on the basis of the substantive merits of the case. Patent illegality is a subjective formulation whose treatment may change from case to case and from court to court.

Table 2: Nature of Section 34 challenges

Provision	2018	2019	Total
S. 34(1)	2	1	3
S. 34(2)	-	-	-
S. 34(2A)	45	32	77
S. 34(3)	1	1	2
Source: Delhi High Court judgments

The findings from Tables 1 and 2 together indicate that award debtors routinely challenge arbitral awards on substantive merits, even though the courts routinely turn down such challenges.

We also find that, on average, it takes the court 805 days (2.2 years) to dispose of a Section 34 challenge and 208 days (0.6 years) to dispose of a Section 37 challenge. A matter in which both Section 34 and 37 challenges are brought will be in court for about 3 years after the award has been made by the arbitral tribunal.

In 36 of the 82 matters, we get data for the size of the claim. The total value of claims, across these 36 cases, is Rs. 17.5 billion and the average per case claim value is Rs. 485 million. While these may not be significant for an entity of NHAI's scale, for private parties dealing with NHAI, these may be consequential. And so may be the additional time of three years and the cost of litigation to secure these claims.

Some simple calculations also give us a sense of what these challenges with minimal chance of success mean for the government. At an interest rate of 8% per annum (MCLR during 2018 and 2019 was in this range), compounded annually, after the three year litigation challenging the arbitral award, the government will have to bear an additional interest cost of Rs. 4.5 billion on these awards. This does not take into account the cost and time consumed by the litigation.

Why do parties challenge arbitral awards?

There may be two main reasons why parties continue to appeal even though the chances of the award being overturned are low:

• Low costs: for large value awards, the cost of the litigation challenging the arbitral award is lower than the expected benefit to the award debtor even at low probability of the award being overturned (Mehta and Thomas (2022) supra). Additionally, for the government, the economic considerations around litigation costs may not be as relevant as for private litigants. Empanelled lawyers for the government and its agencies are often remunerated far less than lawyers representing private parties. Further, incentives of the bureaucracy are often such that they do not accept adverse outcomes in contractual disputes and litigate till the last available forum, regardless of cost.

• Delaying the enforcement: parties may resort to challenging the award to delay enforcement. Filing a petition under Section 34 of the A and C Act often forces the award holder to delay an execution petition under Section 36 of the Act. This could be because of the uncertainty regarding the outcome of the challenge, and due to potentially wasteful litigation costs, should the award be stayed or overturned. Anecdotal evidence shows that the executing court is often cognizant of the filing of a petition under Section 34 while taking substantive decisions under Section 36 of the Act. The executing court typically awaits the outcome of proceedings under Section 34 or 37 before taking any coercive action against the award debtor. Therefore, it is likely that much of the litigation under Sections 34 and 37 is a means of delaying enforcement of the award, and not because the litigants expect to succeed.

Legislative solutions

Disincentivising litigants from challenging arbitral awards on merits, especially if the litigant is the government, is important to ensure that the A and C Act remains relevant as an alternate dispute resolution mechanism. This can be achieved through two levers. First, that courts take up Section 34 challenges only in cases where there is a high likelihood of the challenge succeeding. Second, the cost of challenging the award either under Section 34 or Section 37 are high enough to alter the economic incentives of the award debtor. To this effect, we suggest three legislative solutions:

1. Amending Sections 34 and 37 of the A and C Act to introduce a prima facie test of satisfaction: As the law stands currently, the courts must hear petitions under Sections 34 or Section 37 and decide them on merits, irrespective of the grounds of challenge and the chances of success. This takes up significant resources. Introducing a prima facie test of satisfaction will enable the Court to dismiss the petition at the pre-notice stage itself, unless the petitioner is able to satisfy the court that it has a good case on merits. This will be similar to the procedure adopted by the Supreme Court while hearing fresh special leave petitions under Article 136 of the Constitution of India. The decision of the court to entertain a petition under Section 34 or Section 37, based on a prima facie view of the merits, has cost advantages to the litigants as well as the court. Dismissal at the pre-notice stage means that the litigants do not bear the cost of a full appeal and the court also spends less time and resources in deciding the petition on merits (Shavell (2010)). Further, deciding the merits at the pre-notice stage may also reduce time and costs during the full appeal as part of the assessment of the merit will already have been done by the court.

2. Amending of Sections 34 and 37 of the A and C Act to introduce a mandatory pre-deposit of fees proportionate to the arbitral award for the admission of petitions to set aside arbitral awards: As pointed out earlier, the economic incentives are stacked in favour of a challenge to the award. One way of counteracting this would be to increase the cost of a challenge. This can be achieved by adopting a mandatory pre-deposit of a proportion of the award value with the court before a challenge can be instituted. Such a pre-deposits can be tiered, with a higher proportion being required under Section 37 as compared to Section 34.

Another way of achieving this outcome will be to amend Section 82 of the Act to introduce a clarification that empowers the courts to frame rules to introduce barriers to unmeritorious challenges. These could include, as suggested above, a prima facie test or a mandatory pre-deposit of a proportion of the award value under challenge. This method leaves the discretion of framing such rules, and the substance of these rules with each High Court which could take into account local conditions while framing them. Further, the desired objective will be achieved without hard coding too much detail in the statute itself, which might make it inflexible and require more amendments going forward.

In October, 2021, the General Financial Rules, 2017 (GFR), the procurement rules for union government and its agencies, were amended to introduce Rule 227A which requires government departments challenging arbitral awards to pay 75% of the award value into an escrow account, to be used sequentially for the settlement of lender's dues, project completion and then as payment to the contractor. However, the impact of this change is in respect of of government challenges to arbitral awards. Our analysis shows that even private parties routinely challenge arbitral awards, and hence an amendment to the A and C Act introducing a pre-deposit may be desirable.

3. Amending Section 37(1)(c) to remove the second challenge avenue for the award debtor: Section 37(1)(c) of the A and C Act permits an appeal of the order of the court either setting aside or refusing to set aside an arbitral award under Section 34. This affords the award debtor a second avenue to continue litigation and stave off enforcement of the award. Our analysis shows that while courts generally uphold the award even during this challenge, both time and resources of the court and the litigants are consumed. Further, even at this stage courts may adjudicate the matter on merits, despite this already having been done at the award stage and at the Section 34 stage. Further, as mentioned earlier, no analogous provision to Section 37(1)(c) exists even in the Model Law as well as the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

   One possibility is to completely remove Section 37(1)(c) from the A and C Act and align the framework for challenging an arbitral award with the Model Law. Alternatively, Section 37(1)(c) could be amended to remove the appeal available to the award debtor, but retain the appeal available to the award holder. This will protect against frivolous appeals by the award debtor, while providing adequate remedy in matters where an award has been erroneously overturned under Section 34.

Conclusion

In India, delays of the court system have increasingly led both government and private parties to opt for ADR mechanisms such as arbitration to resolve contractual disputes. However, for arbitration to be used effectively, it is important that challenges to the outcome of arbitration are limited to the procedural and jurisdictional grounds laid down in the A and C Act. Our analysis shows that this may not be so, and that both government and private parties routinely challenge arbitral awards on merits. Challenges to arbitration awards appear to have become a way of delaying enforcement. The Delhi High Court has been sanguine in the manner of its dealing with these challenges, most often refusing to interfere with the arbitration outcome. However, this does not seem to have deterred challenges, especially from government agencies.

One way of disincentivising such challenges is to amend the A and C Act to remove the legislative loopholes. These include: (i) introducing a prima facie test of the merits of the challenge, (ii) seeking a pre-deposit of a part of the award value before allowing a challenge, and (iii) removing the second challenge permitted under the Act. These changes could go a long way in curbing the litigious behaviour of parties to delay enforcement of high value awards.

Contract enforcement is hard when there exists an imbalance of power and resources between the parties to a contract or where the incentives of one of the parties are not driven entirely by commercial considerations, as in the case of government contracting with private parties. Creating legislative boundaries against strategic actions by parties, whether government or private, is one way of dealing with this challenge. There are other ways, that seek to change the behaviour of government departments and agencies, through measures such as a National Litigation Policy or the government procurement rules.

References

Aneesha Chitgupi and Susan Thomas, Learning by doing for public procurement, XKDR Working Paper No. 22 (2023).

Pavithra Manivannan, Susan Thomas, and Bhargavi Zaveri-Shah, Helping litigants make informed choices in resolving debt disputes, The Leap Blog (2023).

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

Aneesha Chitgupi, Abhishek Gorsi, and Susan Thomas, Learning by doing and public procurement in India, The Leap Blog (2022).

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation, The Leap Blog (2022).

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The Leap Blog (2021).

Ajay Shah, The bottleneck of government contracting, Business Standard (2021).

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

Devendra Damle, Karan Gulati, Anjali Sharma, and Bhargavi Zaveri-Shah, Litigation in public contracts: some estimates from court data, The Leap Blog (2021).

Karan Gulati and Renuka Sane, Grievance Redress by Courts in Consumer Finance Disputes, The Leap Blog (2021).

Anjali Sharma and Bhargavi Zaveri, Judicial triage in the lockdown: evidence from India's largest commercial tribunal, The Leap Blog (2020).

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

Surbhi Bhatia, Manish Singh, and Bhargavi Zaveri, Time to resolve insolvencies in India, The Leap Blog (2019).

Steven M. Shavell, On the Design of the Appeals Process: The Optimal Use of Discretionary Review versus Direct Appeal, 39 J. Legal Stud. 63 (2010).

Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131.

Union of India v. Annavaram Concrete Pvt. Ltd., (2021) SCC OnLine Del 4211.

MMTC Limited v. Vendanta Limited, (2019) 4 SCC 163.

PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin, (2021) SCC OnLine SC 508.

Mahanagar Telephone Nigam Limited vs. Applied Electronics Ltd., AIR (2014) Delhi 182.

Madhav Goel, Renuka Sane and Anjali Sharma are with the TrustBridge Rule of Law Foundation. Akshay Jaitly is the co-founder of TrustBridge Rule of Foundation and Partner, Trilegal. We thank Karan Gulati, Ajay Shah and two anonymous referees for their inputs and comments.

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.