CA Anil Kumar

BACKGROUND-   We have  a unique law  in the name of Insolvency and Bankruptcy Code -2016 in force in whole of  India except part 111 shall not extend to the state of  Jammu and Kashmir. This  Act is called a code and not an Act because it is a compendium of many  acts meaning thereby with this code has caused the repeal of many acts  viz —— Sick Industrial Companies( Special Provisions  ) Repeal Act -2003, The presidency –Town Insolvency Act -1909 and The Provincial Insolvency Act ,1920 etc and amendment in many prominent commercial  laws as well .

1.  The provisions of this Code shall apply  to—

(a)  any company incorporated under the Companies Act, 2013 or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c)  any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;

(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e) partnership firms and individuals,

in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

The code has been brought to give a time bound legally binding solution to both Financial Creditor and Operational Creditor   for the debts owed by debtor who has  defaulted to make payment  on due date .

PROBLEM  STATEMENT- From the above background , it is evident that debtors owing sums to both Financial  Creditor ie Lenders in the form banks , NBFC & other Financial Institutions  and Operations Creditor ie Suppliers of goods and Services including government dues are virtually having gala time since our existing legal system has not only miserably failed to come to their rescue  but adds to their business challenges of creditors who  have to   spend not only  precious time , scarce energy and  money   to fight long and complex  legal battles . This  is also a reality even in case of secured creditor where the security may become a dead  or  a block asset for debtor but does not still yield realisation of dues to secured creditor for much longer period in most of the cases .The security and reconstruction of  Financial Assets and Enforcement of Security Interest Act,2002 ( SARFAESI ACT ,2002 ) has also not been able to give desired timely  relief to Financial creditor primarily due  to lethargic legal system and inability of  financial creditor to realise amount out of secured assets .

So the solution from the perspective of creditor is Recovery of dues . The broader vision must envisage  the resolution mechanism by virtue of that value of the asset , which is a national wealth  is preserved for all viable commercial ventures so that  the interest of all stakeholders are protected in the proportion of national priority.

Now this raises  a basic  question  Is IB Code -2016  only a resolution mechanism or a recovery tool or Both ? However there seems  to be  is a big contradiction .

PREAMBLE OF AN ACT – IB CODE -2016-   If we read the preamble of the Code as reproduced below, we get a sense that for preserving the value of assets of debtor Resolution needs to be planned meaning thereby that insolvency is presumed in case of defaults by debtor. Debtor is defaulting in making payment to Creditor due to failing business not because Financial failure or unwillingness to make payment.

The preamble of the code prescribes following objectives –

> 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 interest of all the stakeholders including alteration in the order of priority of payment of Government dues


> To establish an Insolvency and Bankruptcy  Board of India, and for matters connected therewith or incidental thereto


Now when we read the eligibility for Financial or operational Creditor to apply this code relating to the Insolvency and Liquidation of corporate debtor where the minimum amount of the default is one lakh rupees . It further says –“ Where a corporate debtor commits a default , a Financial Creditor , an operational  creditor  or the corporate debtor itself may initiate corporate Insolvency Resolution Process in respect of such debtor in the manner as provided under this chapter .”

Though the section entities the Financial and operational creditor to initiate corporate Insolvency Resolution process but nowhere in the code it is stated that creditor has to ascertain the insolvency   test before initiating CRIP  Nor the term Insolvency has been defined in the Code .

In various   forums of workshops and seminars  being organised by ASSOCHAM ,  IBBI ,   IPAs , Study Circle and other established law and consulting firms   it is  being said by various eminent speakers including  by Dr. Sahoo , Chairman , IBBI that IB Code is not a Recovery Tool  but a  Resolution mechanism for Insolvent debtors by giving Resolution Plan for viable business or liquidation / bankruptcy where  Resolution Plan is not possible or fails  .However we hear the whispers in the same forum  amongst speakers and participants that limited or ultimate objective of a Creditor is to have recovery of the debt .

There must  be underlying objective of the code  not to be used as a recovery tool  but lower limit of default of Rs .one lakh  to an operational creditor might   defeat that objective to some extent  .These limits  are applicable for  corporate debtor whereas the financial limits and  other criteria is much lower  for Individual and partnership firms .  I have  confined   my discussion largely to corporate debtor ie Corporate Resolution Insolvency  Process (CRIP )

Let us take a practical case –A small company having net worth of Rs. 50 lakhs   only  is an operational creditor to a big size corporate debtor  of net worth of Rs. 500 cr  for Rs.1.5 lakh which is an accepted liability by the corporate debtor ie there is no existing dispute to the liability  but corporate debtor   has defaulted in  making payment .

  • How such a small operational creditor would assess the financial insolvency of this big corporate debtor at it’s own unless he hires an expert who might charge Rs.10 lakhs plus  to test the insolvency .So no operational creditor would like to spend  more than 25 %  of the amount recoverable towards for the entire  recovery proceedings .
  • And more important is how that creditor either itself or through an expert  would  get access to information / documents of the corporate debtor  if it decides to do the exercise of assessing the insolvency of the corporate debtor . The corporate debtor may not co-operate at all with the creditor and it’s  expert by refusing to share any information / documents needed to do the test of insolvency  .Code has not made any provision for testing the financial insolvency of the corporate debtor .
  • Rather such an operational creditor can be used by the competitors of the corporate debtor to disrupt it’s business .

The above example leads to following questions –

1. That the operational creditor  practically cannot use this code for recovery?

2. And if  operational creditor  uses this code  and  the corporate debtor is found to be  a solvent corporate person ,  How the operational creditor would be treated by Adjudicating Authority ?

3. What is the definition and objective of Resolution ? Resolution is wider term and includes Recovery also ? if the amount in default is recovered 100% through resolution is it not a recovery primarily ?

4. Why an operation creditor  should not be more interested in recovering it’s debt than reviving the business of it’s debtor or preserving the assets of the debtor .

CONCLUSION – Looking   at painfully huge  economic disparity  widespread across India , It males  virtually impossible  to make a law which meets the test of equity at  all levels of economics .Imagine a country where 53% of it’s wealth is held by it’s 1% of population . This speaks a volume as to how our mixed economy concept has been used to the advantage of people in power thus denying the dividends  of the growth to the people who have actually contributed to this growth . Out of total estimated NPAs( Non Performing  Assets ) of Rs 10 lakh Craroe , around 5 lakh crorse is due to defaults by 50 Business Houses . These massively filthy rich financial power house have been beating every law of the nation . There would be n number of genuine and self created challenges to fail this law also . But the I B Code in itself is a very sincere  and  intelligent piece of legislation which if  allowed to be implemented by the DEVILS of India would bring both Resolution and Recovery for every creditor  beat small trader to big conglomerate

Time would test the intentions of our rulers   . We all would be witness to it .

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December 2020