AI may be used to flag distress signals before insolvency: Justice Sanjiv Khanna at launch of IBC commentary by Anant Merathia

Artificial Intelligence (AI) may have the potential to be used to assess distress signals of an entity before it defaults on a debt or goes into insolvency, observed Justice Sanjiv Khanna recently..The Supreme Court judge made the observation during his keynote address at an event to mark the launch of the book Defaulter’s Paradise Lost: Demystifying the Insolvency and Bankruptcy Code, authored by Anant Merathia, a corporate litigator and disputes resolution lawyer..“I feel that AI may have a greater role to play as far as examination and fine assessment of distress signals for potential for insolvency concerns. There is also need for formulation of a pre-default debt recovery mechanism and debt restructuring options. This has to be gone into and developed on a big scale,” Justice Khanna said, during his address..He also suggested that special funds may be demarcated to deal with the bad debt problem, noting that the Securities and Exchange Board of India (SEBI) has already taken some first steps by dedicating an Alternative Investment Fund (AIF) termed the Special Situation Funds for investment in distressed assets markets.“This is little controversial but i think in long term, a solution,” the judge said..Notably, he also batted for a conservative approach when it comes to regulating personal guarantors“I'd like to see a time when the law of personal guarantors in India is based on changes from the fairly conservative approach, which is adverse to taking risk in a market economy … Personal guarantees are appropriate in certain lending or contractual situations. They are generally not necessary or conducive to functioning of investment markets. Instead, investment markets rely upon legal structures, regulatory oversight and risk management practices,” he remarked..He added that due diligence is something that “just doesn’t exist in India”, where it is at the banking and financial sector level or even in corporate entities.“I have sat on the company and saw it. I have seen due diligence reports, including valuation reports, which were completely sham. They were just not dealing with the issues,” he said..The event also saw the presence of Chairperson of the National Company Law Appellate Tribunal, Justice (retired) Ashok Bhushan and President of the National Company Law Tribunal, Justice (retired) Ramalingam Sudhakar..Justice Bhushan, who is also a former Supreme Court judge, spoke extensively about Merathia’s book, lauding it as wholesome commentary on the Insolvency and Bankruptcy Code (IBC), its impact on the economy, as well as the practical problems with its implementation, issues faced by participants, and the future of the insolvency regime.Each chapter of the book is complete in itself, covering why and how code came into existence, which would be useful for various stakeholders, Justice Bhushan said..Justice Sudhakar, a former High Court judge, meanwhile, highlighted how the IBC’s introduction has positively impacted bad debt management in India by referring a recent report issued by the Insolvency and Bankruptcy Board of India (IBBI).The success percentage is almost 86% for Section 7, IBC applications, 90% for Section 9 and 95% for Section 10 applications, he said. The number of resolution plans approved came to about 730 plans, with 180 plans having been approved in the last year, he noted."These figures may be was mined by us because we were faced with a situation because there was a misconception in the public mind that NCLT is not keeping up with the timeline, that it was not performing well… The data showed that our performance was really good. Much better than what the earlier laws - DRT, SARFAESI .. had achieved,” he said..He also raised concern that over the last two decades, banks have been funding debtors without proper due diligence.“We can say that banks have been throwing their money against people, who, obviously know that they are not going to come back and pay.. So, the issue should start from the bank. The Code is one which we do at the end of the show. But before the show starts, the banks should be diligent and vigilant,” he said.He also suggested that a method should be devised so that debts are flagged even before they are defaulted on or before their value is eroded.“Unfortunately, the banks are coming at a moment when it is past the ICU stage. They should do it at the earliest point of time because that’s safe,” he added..The book’s author, Anant Merathia, said that the primary objective behind the book was to provide a reference guide to all the stakeholders on a law that touches upon the lives of so man.He added that when the intent and the design of the law itself is to have a wider inclusion of stakeholders, it was only natural to bring out a simple, accessible guide not just for the professionals associated with IBC but also for the stakeholders impacted by it..The launch event was moderated by retired IAS officer, Raghav Chandra.A panel discussion was also conducted at the event, moderated by insolvency lawyer, Sumant Batra, with the participation of senior Supreme Court lawyers, Arun Kathpalia, Madhavi Divan and Rana Mukherjee, who shared their experience and challenges in IBC cases..[Watch the event launch]