INTRODUCTION
Laws that govern insolvency and ruin are essential to every business system. Sole occupancies, connections, and limited liability pots can all be dismantled in an orderly fashion with the use of these documents. Consequently, the laws of ruin make it simpler to re-allocate cash that has been trapped in a failing business. Is a circumstance in which more money is owed than is available to pay them, even if the money is pledged or vended? Bankruptcy isn’t the same as ruin. Ruin occurs when a court has declared bankruptcy and issued legal instructions for its resolution. Bankruptcy is a court-ordered resolution of insolvency that is meant to be resolved via the use of legal processes.
Frame of reference from the local community “Bankruptcy and Insolvency” is listed in the “Concurrent List” (Composition 246 – Seventh Schedule to the Constitution), which means that both the federal and state governments can legislate on this topic.
POWERS OF RESERVE BANK OF INDIA TO INITIATE CORPORATE INSOLVENCY RESOLUTION PROCESS
Regulatory Framework
Under the Reserve Bank of India Act, 1934:-
NBFCs are regulated and supervised by the Reserve Bank of India (RBI) under Chapter III B of the Reserve Bank of India Act, 1934 (the “RBI Act”), which grants it the authority to do so. Regulators and supervisors aim to keep NBFCs viable by ensuring they operate on healthy lines; (ii) develop an appropriate prudential framework for the NBFC sector; (iii) protect the interest of the depositors by comprehensive regulation of deposit taking NBFCs; (iv) curb un-authorized and fraudulent deposit acceptance by NBFCs; and (v) ensure protection to consumers of NBFC services by laying down fair practices.
It is possible for the RBI to override a company’s board of directors under Section 45-IE of the Reserve Bank of India’s (RBI’s) regulations if the RBI believes that an NBFC’s business practises are harmful to the interests of its depositors or creditors. As soon as the board of directors is replaced, an administrator will be put in place who is obligated to adhere to the RBI’s directives. For as long as it takes for the company’s board of directors to be re-established, the powers, responsibilities, and duties of that board are to be exercised and performed by an administrator, who is the only person authorised to do so. Three or more people with knowledge in law, financial management, banking, administration, or accounting will be appointed to a committee to assist the administrator in his tasks. Employees of an NBFC whose board has been suspended must help the administrator by giving all information and facts necessary to carry out his tasks.
Insolvency and bankruptcy code: 2016
T.K. Viswanathan proposed the Insolvency and Bankruptcy Code in 2014. (IBC). The IBC was created to consolidate and amend laws governing reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner to maximize the value of such persons’ assets, promote entrepreneurship, increase credit availability, and balance the interests of all stakeholders, including changing the priority of government dues payment. The 2016 IBC was adopted and published in May. The law requires bankruptcy specialists to act quickly (originally 180 days, extendable by further 90 days under specific conditions, but currently extended to 330 days). The law separates the judicial and business aspects of settlements, correcting legislative flaws. The IBC would be adjudicated by the NCLT, not the DRTs. The IBC is the single legislation that controls insolvency, bankruptcy, and corporate restructuring, replacing preceding laws. The IBC filled a fundamental legislative gap in NPA settlement. In a circular dated February 12, 2018, the RBI replaced the current CDR regulations with a simpler overall framework for resolving stressed assets under IBC. Despite the Supreme Court’s judgment on 2 April 2019 that the RBI’s 12 February circular ordering loan settlement or restructuring even if the default was for a single day was illegal, this circular constitutes the first step towards maintaining the integrity of debt contracts.
The Code’s provisions were revealed in phases and by need. The Code’s CIRP parts took effect in December 2016. First, personal guarantors to corporate debtors (starting December 2019), next partnership businesses and proprietorship firms, and ultimately others (yet to come in force).
PROGRESS OF THE RESTRUCTURING AND INSOLVENCY ACTIVITY POST INTRODUCTION OF THE CODE
It has been more than three years since the International Building Code (IBC) was signed into law. Over 3600 of the nearly 26,250 applications submitted under the IBC have been approved as at February 2020. Out of the approved cases, 205 have been resolved and 890 have been liquidated. The time it takes to settle a business dispute has shrunk from an average of 4.3 years to just 364 days since the IBC was implemented. In addition, financial creditors received around 42% of their claims in settlement programmers, compared to their claims. In the fiscal year ending in 2019, the percentage of gross nonperforming assets (NPAs) decreased from 11.2 percent to 9.1 percent. 5 The Code’s recuperation rate is significantly higher than that of other recovery and workout approaches. In the ‘resolving insolvency index,’ the World Bank estimates that by 2020, India will have risen from 136th place in 2015 to 52nd place in 2019, its recovery rate will have increased from 25.7% in 2015 to 71.6 percent in 2019, and its recovery time will have decreased from 4.3 years to 1.6 years. In 2015, India’s recovery rate was 25.7%, and in 2019, it will be 71.6 percent.
OVERVIEW OF THE PRESENT LEGAL FRAMEWORK UNDER THE CODE
Insolvency and bankruptcy proceedings are divided under the Code into commercial and judicial components. Protecting the corporate debtor from its management and from a corporate death by liquidation is the primary purpose of the Act. So the Code is both a valuable piece of legislation for resurrecting an insolvent business and a straightforward statute for creditors to reclaim their debts. When it comes to a company’s creditors, their interests have been separated from those of the company’s founders and/or managers. Settlement procedures preserve corporate debtors’ interests rather than being confrontational. In the liquidation waterfall, the Code’s framework prioritises payments to secured creditors over payments to crown debts in order to protect creditors’ interests. The majority of creditors, on the other hand, prefer to discuss with the possible resolution applicant how and in what manner the corporate resolution process, including the distribution of funds, would be carried out throughout the resolution process. As part of the liquidation process for corporate debtors, the CIRP framework includes the following:
An insolvency resolution procedure for corporations An operational or financial creditor, as well as the corporate debtor, are all entitled to initiate CIRP if the debtor has defaulted on a minimum of ‘1,00,00,000. In the midst of the COVID-19 issue, the government recently raised the starting level for CIRP from ‘1 lakh to ‘1 crore to prevent bankruptcy proceedings against small and medium-sized firms. A moratorium on lawsuits, asset transfers, and security enforcement is put in place as soon as a person is admitted. An interim resolution professional (IRP) is appointed to seize control of the corporate debtor and its assets, among other things. A committee of financial creditors is then appointed by IRP (CoCs). CoC is required to make non-IRP decisions that are both significant (66 percent of the vote) and regular (51 percent of the vote). An expression of interest (EOI) is published by a resolution professional (RP) in order to get authorization from the CoC to submit a resolution plan for consideration. Section 29A of the Code prohibits some people from submitting a resolution plan in order to prevent the contaminated person from regaining power. Following the CoC’s acceptance of a resolution plan that is legally compliant, financially sustainable, and practicable, the NCLT’s relevant bench must now approve it. It is necessary to liquidate the corporate debtor if no resolution plan is received or approved by the CoC before the end of maximum resolution term (270 days or 330 days) (including litigation). In Essar Steel India Limited vs. Satish Kumar Gupta & Others[1], the Supreme Court held that the 330-day limit was unnecessary. 11 Under the Code, a corporate debtor may be restructured by a merger, amalgamation, or demerger.
Liquidation process:
It’s possible for a CIRP to be followed by liquidation, but it’s up to the Code. (a) NCLT rejection of a resolution plan if it fails to meet certain conditions, (b) the resolution plan not being approved by the CoC by 66 per cent in value or no resolution plan is received, (c) a decision of the CoC to proceed with liquidation during the CIRP period, or (d) failure of the debtor to adhere to the terms of the resolution plan approved by NCLT. A company may choose to dissolve itself if it has not defaulted on any payments. A liquidator is appointed, the CoC is disbanded, and a stakeholders’ (creditors entitled to distribution) consultation committee is constituted when the NCLT issues a liquidation order. Liquidator examines, recognises, or rejects the claims of creditors, generates an asset document, and takes possession and management of all of the assets of the corporate debtor. As a liquidator, you can choose to sell the debtor’s assets either in bulk or on a piecemeal or slump-selling basis. The most typical form of selling is auction. Individuals who are unable to offer a bankruptcy resolution plan under the International Bankruptcy Code .
Other key features:
According to the Code, any preferential, undervalued, or excessive transactions must be scrutinised to ensure that creditors benefit from them. There is a two-year review period for transactions with related parties and a one-year review period for all other transactions. Although the Code does not allow for a lookback period, transactions that are intended to defraud creditors must be considered.
RECENT LEGAL DEVELOPMENTS
An increase from Rs. 1 lakh to Rs. 1 crore has been implemented by the government for IBC lawsuits. The government is contemplating halting IBC registrations for a few months due to an increase in corona virus infections. The government has implemented new rules regarding financial service companies’ insolvency and bankruptcy (FSPs). Non-banking financial institutions (including home financing organisations) with assets of 500 cores or more are presently covered by legislation as an FSP category (with the RBI as the financial sector regulator). Dewan Housing Finance Corporation Limited is the first FSP to undergo the CIRP process. The phrase “any extra debt that may be reported” was added to the definition of “interim financing.” There may be circumstances in which certain pre-IBC financing can be classified as “interim finance.” A class of creditors must have less than 100 members or at least 10 percent of the entire number of such creditors in order to qualify for a filing under the IBC; and in the event a group of homebuyers/allotters, less than 100 allot tees or at least 10% of all allot tees in the same project. RP has been granted the authority to designate critical products and services that cannot be cancelled under the ban (provided dues are paid during moratorium). It is important to note that no rights granted by the federal or state governments or local authorities, sect oral regulators or other authorities will be automatically terminated or suspended and must be maintained throughout the moratorium, subject to payment of dues for services rendered during the moratorium. 14 According to several reports, a lack of finances is a common problem during the liquidation process. Actually, a change stated that, if the company goes into liquidation, COC must evaluate its available liquid assets and compare them with what a liquidator is likely to charge in fees (liquidation cost). If the estimated liquid assets are fewer than the liquidation expenses, CoC will help make up the gap between the liquidation costs and the firm’s liquid assets. The costs of bankruptcy resolution, liquidation charges, and workmen’s compensation (for the 24 months prior to the liquidation start date) must also be paid by secured creditors who opt to abandon their security interest. After the liquidation begins, they must make these payments within 90 days. After the liquidation begins, they must additionally pay any excess revenues realized over their approved claims within 180 days. If the secured creditor fails to pay the liquidator within 90 days or 180 days, as the case may be, the asset will become part of the liquidation estate assets of the Corporate Debtor. 16 Insolvency plans can’t be filed by anyone who isn’t a secured creditor (Section 29A).
CHALLENGES AND WAY FORWARD
Creditors’ rights have been strengthened as a result of IBC, and the corporate credit culture in India has been transformed. As a result, non-performing firm promoters’ behavior has changed as a result of the establishment of credit discipline. Since the IBC’s release of new provisions relating to the insolvency of personal guarantors of corporate creditors, its influence has grown. The proper resolution of companies under the IBC is further complicated by the following factors: (a) the resolution applicant’s breach of the resolution plan after NCLT approval; (b) the absence of cross-border insolvency regulations and rules; (c) the absence of cross-border insolvency regulations and rules for group insolvency; (d) post-closure litigation by operational creditors, such as tax authorities or unsuccessful bidders; and (e) conflicting NCLT judgments. In order to address some of the difficulties in the implementation of the International Bankruptcy Code (IBC), it is necessary to hold colloquia for NCLT judges and increase the interaction between practitioners from various jurisdictions; (b) sensitizing various government and statutory authorities about the treatment of government and statutory dues under the IBC; and (ii) NCLTs should according with each other.
CONCLUSION
A flurry of lawsuits ensued following the approval of the IBC, which resulted in delays and hindered the timely completion of these processes. To plug the loopholes in the framework and protect both lenders and borrowers, SEBI has made several revisions and judicial deliberations since its inception. Although major changes to enhance the financial sector are needed soon, we must also shift our focus in order to balance the interests of different stakeholders and minimize friction created by regulatory overlaps, if any exist. In these times of uncertainty and skepticism, the Indian economy may not benefit from a disjointed approach to the insolvency process.
Since the Securities and Exchange Board of India (SEBI) was established, several changes and judicial deliberations have helped to reduce the vulnerabilities in the framework and ringfence both lenders and borrowers. These efforts have contributed to closing the gap between the two groups. Nevertheless, in the not-too-distant future there will be a need for substantial modifications that would improve the banking system.
Note:-
[1] (2020) 8 SCC 531.
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