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
SECTION 7 AND 8 OF IB CODE -2016
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 .