To achieve objectives of Code, CIRP is not available in respect of defaults arising during COVID-19 period and default of less than Rs.1 crore.
There are several laws which regulate ‘Insolvency Resolution’ for Companies in India. These include (i) Sick Industrial Companies Act, 1985, (ii) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act, 1993), (iii) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and Companies Act, 2013.
These laws provide for the restructuring of debt, seizure and sale of the debtor’s assets for repayment of outstanding loans. Similar laws such as the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 regulate insolvency resolution for individuals. While these laws specify processes for resolving Insolvency, a creditor may also approach civil courts for recovery of debt.
The Insolvency and Bankruptcy Code (‘Code’) seeks to consolidate the existing framework by repealing the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it amends 11 laws including Companies Act, 2013, DRT Act, 1993 and SARFAESI Act, 2002.
The Preamble of the Code states that it is “An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
We know that the first and foremost objective of the Code is reorganisation and Insolvency Resolution of Corporate Debtor (‘CD’). It means revival of companies is prime objective and current code envisages rescue of a CD as a ‘going concern’. It means current Code never like death of Corporate except in adverse conditions for its liquidation.
The current Code has been recognised in resolving Corporate Insolvencies, which is “creditor friendly” as against the previous “debtor controlled” regime. The Code benefited both, the Creditors and CD. It is pertinent to note that Code endeavours to rescue the life of a company when it is under serious threat to its life.
We all know that in a company, there is two main stakeholders say one Shareholders and other Creditors. The shareholders have complete control over the company and the creditors, despite of loan given to company, have no involvement in the business. Shareholders take the decisions to run the business. But in case where the company fails to pay the debt on time, the control of the company should shift to the creditors for resolving insolvency. It has been seen in last many years that several companies, including large ones, changed hands consequently i.e. from CD to creditor. The current Code redefined the debtor-creditor relationship.
In old regime, there was no such concept. The creditors had to wait till cows come home to get milk i.e. their debt. For more understanding, the creditors have to wait for realisation in the process of liquidation. Now, we can say that the current Code redefined the balance of power among the stakeholders of a company in terms of their interests and rights.
Under the current Code, stakeholder has right to trigger Corporate Insolvency Resolution Process (CIRP) of the CD in case where a threshold amount of default of debt (i.e. Minimum Rs. 1 crore as on date). If CIRP has been triggered the CD moves away from ‘debtor-in-possession’ to ‘creditor-in-control’ and management of debtor and its assets vest in an Interim Resolution Professional (IRP) and then to a Resolution Professional (RP) and later to a successful Resolution Applicant (RA).
An IRP/RP runs the CD as going concern, prohibits suspension or termination of supply of essential and critical services, mandates continuation of licences, permits and grants, stays execution of individual claims, enables raising of interim finances for running the CD and constitutes a Committee of Creditors (CoC) to take commercial decisions in respect of the CD.
In this process, IRP/RP insulates Resolution Applicants (RAs) from the misdeeds of the CD under the erstwhile management, etc. and invites feasible and viable resolution plans from eligible and credible RAs for resolution of insolvency of the CD. IRP/RP allows only capable and credible persons to submit resolution plans, which has the potential to expel the current promoters.
A resolution plan envisages limitless possibilities of resolution and may entail a change of management, technology, or product portfolio; acquisition or disposal of assets, businesses or undertakings; restructuring of organisation, business model, ownership, balance sheet; strategy of turn-around, buy-out, acquisition, takeover; and so on.
If the CoC approves a resolution plan within the stipulated time with 66% voting share, the CD continues as a going concern. If the CoC does not approve a resolution plan with the required voting share within this period, the CD mandatorily undergoes liquidation.
Thereafter, a resolution plan approved by the Adjudicating Authority (AA) is binding on all stakeholders, including Central Government, State Governments, and any Local Authority to whom the CD owes debt under any law. CD enjoys several privileges like moratorium, and binding outcome, and regulatory benefits such as, exemption from public offer under takeover Code, set off of brought forward loss against book profits for the purpose of Minimum Alternate Tax, etc.
It is also notable that CD can also initiate CIRP voluntarily in case of stress. But the data indicate that less than 3% of CIRPs that commenced during 2019-20 were self-initiated by CDs.
The second objective of current Code is maximising value of assets of the company. To achieve this object, the Code mandates revival of a company in a time-bound manner, as undue delay is likely to reduce the enterprise value of the company. When the company is not in sound financial health, the possibility of resolution may be impossible or remote, in case there is long uncertainty about its ownership and control i.e. long period of IRP/RP in CIRP. The strict adherence to timelines is of essence to both the triggering process and the insolvency resolution process. It is mandatory to complete a CIRP within 180 days, with a onetime extension of up to 90 days. The current Code and regulations provide a model timeline for each task in the process, which needs to be followed as closely as possible.
In the earlier regime, the CD could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory.
Recently, it has been seen that non-co-operation by the current promoters and management in some CIRPs are leading to intense litigation. The litigation and determination of several issues, including avoidance transactions, has been a challenge to the limited capacity of the AA. For several reasons, including litigation, it has generally not been possible to adhere to timelines envisaged under the Code as regards commencement of CIRPs as well as their closure. From the data bank, 250 CIRPs, which have yielded resolution plans by the end of June, 2020, took, on average 380 days (after excluding the time excluded by the AA), for conclusion. Similarly, the 955 CIRPs, which ended in orders for liquidation, took, on average 312 days, for conclusion. The longer a CD stays in the state of insolvency, the higher is the cost, both direct and indirect.
The Third objective of current Code is promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders. Therefore, if there is a RA who can continue to run the CD as a going concern, every effort must be made to try and see that this is made possible. Even after an order for liquidation is made, the Code enables the liquidator to sell the CD as a going concern. It enables revival and continuation of the CD by protecting it from its own management and from death by liquidation.
CIRP requires an RA to rescue a failing company through a resolution plan. When every company, every industry and every economy is under stress, the likelihood of finding an RA to rescue a failing company is remote. If all failing companies were to undergo insolvency proceeding, most of them may end up with liquidation for want of saviours to rescue them. Upon such liquidation, the companies would have a premature death and the assets would have distress sale, therefore, would less realisation for creditors. This neither resolves the stress nor maximises the value of assets and, hence is not consistent with the objectives of the Code. In view of non-availability of RAs, the Code made another course correction to suspend filing of applications for initiation of CIRP in respect of defaults arising during COVID-19 period.
We should also note that CIRP is not available in respect of defaults arising during COVID-19 period. It is not available in respect of defaults of less than Rs.1 crore as well as for stress before default. Further, the availability of RAs would continue to be a concern for quite some time, as the business conditions are unlikely to return to pre-pandemic levels soon. The inevitable consequence when a CIRP fails to find an RA discourages the stakeholders to resort to CIRP.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.