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In the last post on Information Utilities, we spoke about the Information problem in the current insolvency process.
Let's do a quick recap:
Why Information Utilities are needed
The Insolvency and Bankruptcy Code (IBC) is an attempt to give creditors in India a fast, certain mechanism to enforce their debt claims.
One way the IBC tries to make the system faster is by removing the scope of evidence that can be used in an insolvency proceedings - confining the process as a verification to see whether there has been a default of debt.
Seeing whether a debt has been defaulted or not relies on 2 pieces of evidence - a) Debt Documentation and b) Debt Information
But in the conventional process there is an Information Problem that debtors exploit to cause delays.
The Information Problem consists of 4 vulnerabilities that are exploited by borrowers to cast doubt on the integrity and authenticity of debt information:
- Physically executed debt documentation is inherently prone to vulnerabilities of damage and mistakes
- The slow and inconvenient physical execution process incentivizes parties to take shortcuts - creating “chain of custody” vulnerabilities that cast doubt on the integrity of the documentation
- Physical documentation made it very hard to codify revisions and updates to the arrangements between a debtor and a creditor
- Debt information and documentation was fundamentally non-neutral. The creditor stores the original documents and maintains the information repository - which is inherently prone to mistrust and dispute
Debtors use these vulnerabilities to frustrate and delay proceedings before the NCLT. And delays - as we learnt in the last post - thwart the aims and objectives of the IBC process.
Information Utilities are designed to solve this problem - and ensure that the insolvency process is completed in a time-bound manner.
Enter Information Utilities
As per NeSL - India’s first information utility - an Information Utility is an institution with multiple objectives:
The first objective listed seems to lay down the overarching purpose of an Information Utility - mainly to prevent disputes surrounding debt information.
An Information Utility serves as a credit and contract repository, accepts financial information from financial or operational creditors or debtors, and stores authenticated financial information for use as evidence in any legal process.
Based on the functions it performs - an IU definitely does seem to have the ingredients to solve for the Information Problem in insolvency, minimize disputes related to debt documentation - and help the insolvency process complete in a time-bound manner.
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In our next post, we cover the legal framework underpinning the IU system - and investigate if the IU system is mandatory for creditors under the IBC.
If you have any questions, feedback or comments - don't hesitate to email the author at aditya@leegality.com
If you're a Bank or NBFC interested in implementing NeSL in a fast and easy way - click on the link in the blue bar below!
