INTRODUCTION

The legal framework for resolving Corporate Insolvencies in India has been the subject of much criticism for over two decades. The operation of the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) attracted criticism almost since its enactment for its lengthy delays in determining the viability of sick enterprises and for lending itself to significant abuse by debtor companies looking to draw off their assets from creditors. Another commonly heard complaint was the implementation of winding up and liquidation proceedings in the High Courts, which could take years or decades to be completed. Hence, the demand for a speedy trial to recover the heft investment done by the creditors though secured arose. First, in the chain was the Recovery of debt due to the Bank and Financial Institution, 1996 and the second were SARFESI, 2002. Though both the Acts went on to reduce the burden of the debtors still it could not solve the issue of ‘lengthy and long court proceedings’.

Therefore, the need for time bared proceedings arose and IBC’ 2016 was enacted for speedy disposal of disputes and recovery of assets which would result in attracting more investment in India within a specific time frame. “The principal focus of modern insolvency legislation and business debt restructuring practices is not the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.” The idea of IBC, 2016 is mainly taken from the US Laws as their also the company was to continue even during the CIRP but with a different board. In IBC, the key managerial function is taken over by the IRP who will not hamper the business transaction and other dealing that the company used to do as it will help in early reviving.

The demand for a better insolvency law arose because of the lengthy winding-up proceeding which the company had to undergo in case they were declared Insolvent and to avoid such lengthy procedure they had to opt for comprising, arrangement, takeover or acquisition be a corporation that was willing to or by those corporations which they owed heft debt. Apart from the lengthy and time-consuming winding-up procedure, all the companies liable to be wound up under the Companies Act may resort to the alternative of compromise or arrangement. Hence, the Government of India through its different committee with time formulated different laws to keep the capital market in pace with the changing setup. The paper will set forth the evolution of Insolvency and Bankruptcy Code, 2016 and the process involved to complete the process of insolvency in the code and how it helps in speedy disposal of the proceedings.

EVOLUTION OF INSOLVENCY LAW IN INDIA

India is poised for significant reform to its corporate insolvency laws, including the introduction of a new rescue procedure. Before the British came to India, there was no insolvency law in India. Government of India Act, 1800 was the first instant when the essence of insolvency Law was shown which was further broadened in the 1828 Act and was applicable only in the Presidency towns namely Bombay, Madras, and Calcutta.  The Jurisdiction to entertain the matter was limited to the High Court of Presidency town, i.e., Bombay, Madras, and Calcutta. The increase in issues of Insolvency and growth rate of exchange of capital leads to the insertion of insolvency Law in the Code of Civil Procedure, 1882 chapter 20. Later on the Provincial Insolvency Act, 1907 was passed which was repealed by present Provincial Insolvency Act, 1920.

When the issue arose before the court, it referred the matter to the respective committee of corporate affairs which proposed the formation of a different Law that will held the Creditors and other stakeholders to claims back their money from the Debt-ridden corporations. Hence, the Sick Industries Corporation Act, 1985 was introduced.

Due to the failure of SICA to reconstruct the company the Narasimham Committee I introduced Recovery of Debt by Bank and Financial Institutions Act, 1993. The Committee also considered setting up the “special tribunals” with special powers for adjudication and speedy recovery of such matters as critical to the successful implementation of the financial sector reforms. Under this Act, DRT was empowered to detain the debtor when situation demands and sale their assets to repay the dues. Further, in case of an appeal, the party appealing has to deposit 75% of the awarded amount. This leads to delays in the proceeding and not abiding with the time from six months. As the law only covered Banks and Financial Institutions, the scope of recovery was limited and other stakeholders had to move to court for recovery of their debt.

To avoid such issues, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI, 2002) Act in 2002 was introduced by the Narasimham Committee II. This Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions. With the introduction of the Act, a new institution was formed the ‘Asset Reconstruction Company’ which reduced the burden of the court and improved the capital Market situation. However, the issue continued as it covered only a specific class of creditors. Hence, the Insolvency and Bankruptcy Code, 2016.

Evolution of Insolvency and Bankruptcy Code, 2016

Year Committee Outcome
1964 24th Law Commission Amendments to the Provincial Insolvency Act, 1929.
1981 Tiwari Committee SICA, 1983.
1991 Narasimham Committee I RDDBFI Act, 1993.
1998 Narasimham Committee II SARFAESI Act, 2002.
1999 Justice Eradi Committee Companies (Amendment) Act, 2002, Proposed repeal of SICA.
2001 L. N. Mitra Committee Proposed a comprehensive bankruptcy code.
2005 Irani Committee Enforcement of Securities Interest and Recovery of Debts Bill, 2011. (With amendments to RDDBFI and SARFAESI Acts).
2008 Raghuram Rajan Committee Proposed improvements to credit infrastructure.
2014 Bankruptcy Law Reforms Committee Insolvency and Bankruptcy Code (Replacing extant laws with a single consolidated code)

INSTITUTIONS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

With the passage of the Insolvency and the bankruptcy code, 2016 many other authority were formed which were to look into the proper functioning of the Code and remove irregularities if any. The committee that was formed is as follows:

1. Insolvency and Bankruptcy Board of India (IBBI)

In case of the ambiguity in the code and regulation of Insolvency and Bankruptcy, the Board will be referred to. Board will be appointed by the Central Government and will consist of a Chairperson; Members representing Ministry of finance, Corporate affairs, and Law; Five members nominated by Central Government of whom three of them to be a whole-time member and One member to be nominated by the Reserve Bank of India, ex-officio.

“The primary functions of the Board will include registration of insolvency professionals, insolvency institutions, information utilities, provide guidelines on the conduct of bankruptcy resolution, etc.”

2. Insolvency Professional Agencies (IPAs)

These agencies are required to register with the Insolvency and Bankruptcy Board of India. The IPA Regulations provides that only a company registered under Section 8 of Companies Act, 2013, with the sole object of functioning as an insolvency professional agency under the insolvency Code shall be entitled to be registered as an insolvency professional agency (IPA). At present, the following few Insolvency Professional Agencies are registered under Section 8 of the Companies Act, 2013 and registered with Insolvency and Bankruptcy Board of India.

3. Insolvency Professional

The power and function of IRP or Resolution Professional are of vital importance as they play a major role in the CIRP. For a person to be appointed as an IRP or RP should first be enrolled with the IPA and IBBI. He/she should first get enrolled in the IPA and then register on the board.

Though the power of RP is wide, it is only limited to verifying the claim made and not to decide upon itself whether such claim is fit for the process because the existence of default is not a pre-requisite condition for filing a claim with the resolution professional under the Code.

STAGES OF CORPORATE INSOLVENCY RESOLUTION PROCESS

Step 1 – Application to the NCLT (Section 6- Section 8)

Chapter II of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with the Corporate Insolvency Resolution Process (CIRP) and has been amended thrice since the code was passed. The reason why the Code is different from other laws relating to Insolvency and restructuring the company financial position is that the application for CIRP can be made by the any of the aggrieved party, it may either be a financial Creditor or operation Creditor of the Company or the Company itself go for the Insolvency.

The application for Insolvency is to be made to the National Company Law Tribunal (NCLT) who will if it deems fit and after the creditors proof that the default made on the part of the debtor is more than or exceed one lakh rupees will pass as the order for the company to go into the CIRP. The tribunal has to within 14 days of the application pass an order of either accepting or denying the contention of the party who has approached it for the Insolvency process.

Though the provision lays down the time limit, NCLAT in J.K. Jute Mills Co. v. M/s Surendra Trading Co. held that it is not to be interpreted in a strict sense but is merely a directory. In Re: Surendra Trading Company v. JuggilalKamlapat Jute Mills Company Limited and Ors, the Hon’ble Supreme Court of India held that the period of fourteen days within which the Hon’ble NCLT has to pass the order is a mere directory and not to be interpreted strictly.

IBC differentiates between the Operational and financial creditor and put forth different criteria for them to show that the debt has arisen and the value of debt is above the threshold limit before the NCLT. A financial creditor in its application to NCLT annex the record of default that has arisen in the Information utilities. The dispute between the parties will include disputes that were existing before the receipt of notice and all also that are pending in any suit or arbitration. Before Information Utility was set up, records of default made by the Corporate Debtor was kept in the form of statements of accounts, bankers’ book certificates, and credit information bureaus.

As the intention of the lawmakers was to have a time-bound Insolvency process and the parties affected to get their debt recovered as early as possible, hence the court in Innoventive Industries Limited v ICICI Bank Limited, have held that the application filed u/s 7 of IBC, 2016 is only limited to the question that whether they exist a default in making the payment by the Corporate Debtor or not and not going further and investigate on the circumstances that led to the default or whether it was appropriate for the corporate debtor to be admitted into CIRP.

Unlike the Financial Creditor, an Operational Creditor has to first make a demand (10 days’ notice) for the debt that is due and the Corporate Debtor may if it deems fit to challenge the claim made and contend that the debt is an ongoing dispute or arbitration proceeding is going on for the same.

Step 2 -Corporate Insolvency Resolution Process Begins (Section 9- Section 15)

Once the NCLT accepts the application, Corporate Debtor enters into the CIRP, Company’s Board of Director are suspended for the period and the companies’ management is transferred to an independent “interim resolution professional”. From this point, till the end of CIRP, the earlier management terminates (under which the debt arose and the company failed to pay) and cease to have any control over the day to day affairs of the company.

After the 2018 Amendment Ordinance, now in cases where the corporate debtor initiates the CIRP a special resolution is to be passed by the shareholders or the consent of 3/4th of the Partners is required. Such a step is a major decision and may have an impact on the company’s reputation or may also lead to liquidation.

The maximum time period of 180 days is given to the Resolution Professional to complete the CIRP and a maximum of 90 days extension would be provided. The Committee of Creditors (CoC) appointed should at least have a voting share of 66% (earlier it was 75%) to the extent to the time of CIRP. After June 6, 2018, the AA may permit to withdraw of the CIRP post-admission. However, approval of 90% of CoC is required with the approval of all the debtors and the creditors affected.

Once CIRP begins moratorium begins which will exist till the CIRP is in force. It bars (a) any legal proceeding (existing or new) against the corporate debtor (b) transfer of asset or enforcement of any of its security (c) taking back possession of any property and (d) deferment or dissolution of the supply of essential goods and services that were made when the management was with the erstwhile board. However, the moratorium period will not cover any key business contracts entered into by the corporate debtor and will not be applicable to properties that are beyond the ownership of corporate debtor. In many cases, promoters act as a guarantor of loans that are taken by the corporate and if the application of Section 14 is extended to such contracts it may lead to a frivolous application by the promoter to guard their assets.

In the case of Sanjeev Shriya v. State bank of India court took a different view and extended Section 14 to the enforcement of guarantee against personal guarantor to the debt.  Once the CIRP begins, a public announcement is to be made for the same under Section 15 read with Regulation 6. As their exist ambiguity on the last date of making the public announcement, Insolvency and Bankruptcy Board of India (IBBI) is now vested with the power to decide.

Step 3 -Verification and Classification of Claims (Section 16- Section 21)

The AA shall appoint an Interim Resolution professional who will hold the office till the Resolution professional is appointed (name of RP is given by the Corporate debtor, Financial creditor or the Operational Creditor as the case may be). Before the 2018 ordinance, the term of IRP was for a maximum of 30 days from the date of appointment Role of IRP includes:

  • Verify claims submitted after the public announcement.
  • Access information utility of the corporate debtor to lay down the steps as to how and in what manner can the company be revived.
  • Form the CoC that will only comprise of Financial Creditor and take assistance from the personnel of corporate debtor.
  • Secure the assets of Corporate Debtor and take control and custody of it.

The CoC formed will take the decision of routine nature by a voting share of 51%. Creditors who have become a related party to the corporate debtor by converting their debt to an equity share will not be barred from becoming a part of CoC.

Step 4 – Appointment of the resolution professional (Section 22- Section 30)

Once the CoC is formed, within seven days of their formation they will convene their first meeting and appoint a Resolution Professional who would be an independent person and will function for the rest of the CIRP term. Approval of 66% of the total number of CoC is required for the appointment of RP. The RP may be the same person, i.e., the IRP may be an RP but the consent of IRP is required in both cases. The power and duties of the RP are the same as that of IRP. RP shall not take any action which is against the interest of the creditors and should take prior approval of them in activities that are financial in nature.

At any point in time, the CoC may with a 51% vote change the RP who is acting against their interest or is revealed later that he/she is a related party to the corporate debtor. One of the most important roles played by the RP is to form an Information Memorandum containing relevant information which would help the resolution applicant to form a resolution plan. After the 2017 amendment, Section 29A was inserted in the IBC, 2016 which lays down the list of the person who is not eligible to submit a resolution plan. As the resolution plan is for reviving the company parties with disqualification are barred to submit the plan, subject to the condition that they clear their debt that exists or ceases to exist a related party.

Step 5 – Resolution Plan approval or Liquidation (Section 31- Section 32)

RP will put forth the resolution plan before the shareholders and CoC who by a voting threshold of 66% will either accept or reject the resolution plan. The resolution plan should consist of a detail plan of reviving the company and paying the creditors and other affected parties in the manner provided. It is important to mention that Section 29A will not have a retrospective application. Once the CoC approves the plan, RP will submit it to the AA who will ensure that the resolution plan is satisfactory in nature and could be implemented. The resolution plan that is approved by the AA and CoC will be binding over all the debtors and creditors. The resolution plan would be submitted to NLCT, who will then take steps for its implementation. The moratorium period will cease to exist once the resolution plan is accepted.

In case the company successfully complete the process of insolvency and the plan accepted is put to force then the manner of distribution, i.e., an order of priority would be:

  • The cost incurred in CIRP or liquidation.
  • Workmen due that were existing 24mths before the CIRP.
  • Wages and employees unpaid dues.
  • Debts of unsecured creditor
  • Debts of the secured creditor
  • Remaining debts
  • Share of Preference shareholders
  • And at the end to the Equity shareholders.

MAJOR AMENDMENTS IN THE INSOLVENCY AND BANKRUPTCY CODE, 2016

1. Insolvency and Bankruptcy (Amendment) Act, 2017

In a continuous effort of ease of doing business, the Government of India is trying every possible means to smoothen the role played by the RP during the CIRP and disqualified debtors/creditors do not take part in the Insolvency process. The amendment was brought forth to exclude certain persons from taking part in the resolution plan and reviving the Company. The object of the Code is to avoid court interference and have a speedy adjudication of the dispute. “The consequent increase in the number of firm insolvencies in the corporate sector highlights the need for commercial bankruptcy laws to liquidate efficiently unviable firms and reorganize viable ones, so as to maximize the total value of proceeds received by creditors, shareholders, employees, and other stakeholders.”

Hence, the amendment was made by the parliament so that the object and essence of the Code are not diffused and it came into force on January 19, 2018. Major Changes that were made in the code are:

  • Personal Guarantors, partnership firm, proprietorship firm, individuals have now been included under the heads ‘applicability’

This is done to avoid frivolous applications that will be made by the personal guarantor when the moratorium period is declared under the act as only personal assets of the corporate debtor were covered before. In the case of Sanjeev Shriya v. State Bank of India, it was held by the court that personal guarantor of the corporates, which may include promoter will be covered u/s 14 of the Code

  • Resolution Applicant may now be an individual or may jointly submit the application (resolution plan) when invitation is made u/s 25(2) of the Code.
  • Resolution Plan will now only be submitted by the Resolution Applicant.
  • The scope of the duty of Resolution Professional has been broadened and he/she has not has to be more vigilant as to who is submitting the resolution plan. The person submitting has to be well versed with the functioning and complexities of the companies operation. Further, the criteria of selecting the resolution application that is set by the Resolution professional has to be approved by the CoC as their interest is at stake.
  • Section 29A has been inserted in the Code as a person not eligible to submit the resolution plan. List included undischarged insolvent, disqualified for the post of director, convicted of an offense, account declared NPA, wilful defaulter, etc. This disqualification of whose account has been declared NPA can still submit the resolution plan if he pays his dues within 30 days and is no more a defaulter.
  • In a case where the public auction is done, the movable or immovable property will not be sold to persons who are not eligible u/s 29A.

The amendment reduced the court interference and initiated a better CIRP. No sooner was the changes been made in the code, parliament passed the second amendment which came to force on June 6, 2018.

2. Insolvency and Bankruptcy (Amendment) Ordinance, 2018

“The evolution of the laws for corporate insolvency resolution as described above, has resulted in a complex and fragmented environment for both creditors and debtors. In a landscape dotted with multiple laws and special provisions, there is a lack of clarity on what holds precedence in a given situation. In India, this has been a subject of significant litigation.” Though the Code was implemented and was enforced for the benefit of the Creditors and other connected parties the loopholes in the law were leading to the same old problem of judicial interference and failure of RP to revive the company.

Stringent voting threshold, ambiguity in the application of the Moratorium period and public announcement, appointment process of RP, ineligible person submitting the resolution professional have all lead to the amendment in the IBC, 2016. The changes made are:

  • One of the major amendment that was done in the IBC, 2016 was adding home buyers under the definition clause. Now, the home buyers will also fall under the definition of financial creditors and will be able to recover the amount paid as an advance. Before, they were to take recourse of the COPRA which was a lengthy and time taking litigation and usually the buyers had to undergo loss.

In the case of Chitra Sharma v. Union of India  the amount paid by the home buyers as an advance was more than the bank dues of the seller (real state). Even though, the dues of home buyer were more they not being a financial creditor was not given preference and bank was in a favorable position.

  • CIRP may now be triggered even by the guardian, administrator or the executor of the financial creditor. Further, the word dispute u/s 8 of the code to now include even the pending suit or arbitration proceedings.
  • Submitting a certificate from a financial institution by the operational creditor to proof the existence of debt has been optional. Further, they have to submit a proof of its debt and that it is still unpaid.
  • At least 3/4th of the partner of the corporation should vote in favour of CIRP before they opt for the same. The proposed RP should not have any disciplinary proceeding against him.
  • Voting threshold has been reduced to 66% from 75% for extending the time period of CIRP by the CoC. Post admission of CIRP, AA may allow the withdrawal if 90% of CoC vote in favour of withdrawal subject to the approval of all the debtors and creditors.
  • Moratorium will have an application only on the assets which are within the ownership of the corporate debtor subject to the clause that a personal guarantor if is a connected party to the debt would be included.
  • IBBI to specify the last date of submitting the claims after the public announcement of CIRP is done as the code is unclear of the time period.
  • Unlike the previous law, IRP will continue to hold the post till the appointment of RP and his consent will be mandatory in the
  • appointment of RP by the CoC (with a voting threshold of 66%) and even when the committee thinks of continuing the IRP as an RP.
  • 51% of the vote is required for the approval of the decision of routine nature in CoC.
  • Authorized representative (AR) of the Creditor will have the right to vote in the meeting of CoC, further AR who are related party to corporate debtor is barred from being a part of CoC.
  • Approval of 66% of the CoC is required for approving the resolution plan submitted by the resolution applicant.

“IPR is responsible for managing the company, appointing and coordinating creditor’s committee proceedings, entering into contracts on the behalf of the company, securing interim financing for the company and completing many other critical tasks with substantial financial and strategic implications.” Hence, to lessen the burden of the IRP and reduce the rate of litigation amendment has been done in IBC, 2016.

3. Insolvency and Bankruptcy (Second Amendment) Bill, 2018

As the status of home buyers was not clear, loksabha has made it final on August 10, 2018 that they’ll now be a financial Creditors. Further, prior approval of Competition Commission of India is required when the creditors finalize the resolution plan. Aim of such amendment is to reduce the chance of extending the time of CIRP, i.e., asking for a 90 days extension.

The overarching objects as set forth in the statement of objects and reasons are laudatory and indeed much needed for reform of the resolution, insolvency and bankruptcy regime governing corporate persons as well as individuals and partnership firms. Hence, with the changing situation and corporate deadlock, the parliament will keep amending the code to meet the market failure, if any.

4. Insolvency and Bankruptcy Code (Amendment Bill), 2019

The Union Cabinet approved the proposal to introduce a Bill dated 19th July 2019  in the Parliament to carry out amendments to the Insolvency and Bankruptcy Code, 2016.

The amendments aim to fill critical gaps in the corporate insolvency resolution framework as enshrined in the Code, while simultaneously maximizing value from the Corporate Insolvency Resolution Process (CIRP).

The Government intends to ensure the maximization of the value of a corporate debtor as a going concern while simultaneously adhering to strict timelines.

Amendment of Section-5

The Insolvency and Bankruptcy Code, 2016 (31 of 2016) (hereinafter referred to as the principal Act), in clause (26), the following Explanation shall be inserted, namely:–

“Explanation.– For the removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;”.

Amendment of Section-12

“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:

Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.”.

Amendment of section 25A.

“(3A) Notwithstanding anything to the contrary contained in sub-section (3), the authorised representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty percent of the voting share of the financial creditors he represents, who have cast their vote:

Provided that for a vote to be cast in respect of an application under section 12A, the authorized representative shall cast his vote in accordance with the provisions of sub-section (3).”.

Amendment of Section 30 of the principal Act,–

(a) in sub-section (2), for clause (b), the following shall be substituted, namely:—

“(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than–

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Explanation 1.– For the removal of doubts, it is hereby clarified that distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.

Explanation 2.— For the purposes of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor–

(i) where a resolution plan has not been approved or rejected by the Adjudicating Authority;

(ii) where an appeal has been preferred under section 61 or section 62 or such an appeal is not time-barred under any provision of law for the time being in force; or

(iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;”;

(b) in sub-section (4), after the words “feasibility and viability,”, the words, brackets and figures “the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor” shall be inserted.

Amendment of section 31 of the principal Act, in sub-section (1), after the words “members, creditors,” the words “including the Central Government, any State Government or any. local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,” shall be inserted.

Amendment of section 33 of the principal Act, in sub-section (2), the following Explanation shall be inserted, namely:–

Explanation.-– For the purposes of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.”.

Amendment of section 240 of the principal Act, in sub-section (2), in clause (w), for the words “repayment of debts of operational creditors”, the words “payment of debts” shall be substituted.

The salient features of the amendments are:

a) Clarity on allowing comprehensive corporate restructuring schemes such as mergers, demergers, amalgamations etc as part of the resolution plan.

b) Greater emphasis on the need for time bound disposal at application stage.

c) A deadline for completion of CIRP within an overall limit of 330 days, including litigation and other judicial processes. The current timeline of 270 days has been extended in a number of cases with lawyers seeking to exclude time taken for litigation.

d) Votes of all financial creditors covered under section 21(6A) shall be cast in accordance with the decision approved by the highest voting share (more than 50%) of financial creditors on present and voting basis.

e) A specific provision that financial creditors who have not voted in favor of the resolution plan and operational creditors shall receive at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with section 53 of the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with section 53 of the Code, whichever is higher. This will have a retrospective effect where the resolution plan has not attained finality or has been appealed against.

f) Inclusion of commercial consideration in the manner of distribution proposed in resolution plan, within the powers of the Committee of Creditors.

g) Clarity that the plan shall be binding on the all stakeholders including the Central Government, any State Government or local authority to whom a debt in respect of the payment of the dues may be owed.

h) Clarity that the Committee of Creditors may take the decision to liquidate the corporate debtor, any time after constitution of the Committee of Creditors and before the preparation of Information Memorandum.

{Source: https://taxguru.in/income-tax/cabinet-approves-amendments-insolvency-bankruptcy-code.html}

Faster Resolution : The changes are expected to lead to timely admission of applications and timely completion of the Corporate Insolvency Resolution Process, greater clarity on permissibility of corporate restructuring schemes, manner of distribution of amounts amongst financial and operational creditors, clarity on rights and duties of authorized representatives of voters and applicability of the resolution plan on all statutory authorities.

Analysis of data available demonstrates that there are delays in admission of applications and spillage of CIRP cases well over the time limits presently laid down in the code. The amendments are expected to address the issue of sanctity of timelines for completion of the entire corporate insolvency resolution process and also maximize the outcomes envisioned in the Code.

The proposal is in line with the overall objective of the government to achieve the outcomes envisioned in the Insolvency and Bankruptcy Code and seeks to ensure speedier resolution of cases involving corporate debtors.

Advantage for Homebuyers: The government has also addressed a longstanding demand of homebuyers who have filed cases against builders for non-delivery of flats. A proposed amendment will ensure that a majority vote from creditors such as homebuyers will be counted as a 100% vote from that class of creditors in favor of or against a resolution plan. For example, if out of 100 homebuyers, half or more of those present and voting back a resolution plan, then all homebuyers would be considered to have voted for it. This is likely to impact insolvency cases such as that of Jaypee Infratech.

The government has also sought to reduce delays at the beginning of insolvency proceedings initiated by financial creditors by requiring NCLT benches to explain why an application has not been admitted or rejected within 14 days.

In a recent ruling by the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel resolution case, Homebuyers have also been given a stronger voice in the bankruptcy resolution plans of developers that haven’t delivered projects.

The NCLAT had modified Rs 42,000-crore ArcelorMittal resolution plan for Essar Steel to treat various classes of creditors equally and provided 60.7% recovery of their admitted claims. However the order has been challenged in the Apex  Court by Essar Steel’s financial creditors, which had been set to recover around 92% of their claims under the resolution plan that had been approved by the National Company Law Tribunal (NCLT).

CONCLUSION AND RECOMMENDATION

The 2016 Code is a major step taken in the right direction to provide umbrella legislation for the laws relating to bankruptcy, liquidation and insolvency resolution, concerning both individuals/firms and corporate entities. As the law relating to Insolvency and Bankruptcy were many and provided for different remedy for different stakeholders parliament by way of introducing a new Code in the corporate market for protection of debt-ridden corporation and Failure by the Bank’s to perform their functions well have introduced the Code which with the changing market frauds and crime will be amended to meet the need of the creditors, employees and other affected parties. Fall of kingfisher, PNB fraud, Sahara Scam and other corporate failure have led the India’s capital Market to collapse and reduced the investment from Foreign Investors who were initially willing to invest in the Indian market. The objective and scope and IBC, 2016 covers reviving the corporate debtor, paying back the creditors and other stakeholders and most importantly and indirectly to improve and enhance the foreign direct investment in India.

FDI will be improved only when the Indian’s ranking will rise in the Ease of Doing Business Index. Ease of doing business is a burning issue for investors and business men. Having a code with Bankruptcy Law is an important tool for a well-functioning society and an ideal bankruptcy process must provide justice to all stakeholders.

IBC, 2016 aims at avoiding ‘discriminatory and impartial resolution plan’ to be accepted by the committee and authority and allows the highest bidder whose plan seems to be satisfactory and may help in revival of the corporation is accepted, where distribution of claims is laid down in the form that is impartial for all stakeholders including creditors, workmen, taxpayer, and the debtor. The code provides a well-defined framework for the distribution of debt that is due to the creditors and accepts only non-discriminatory resolution applicant.

An efficient corporate insolvency regime expands the rights of the creditors and incentivizes them to increase the supply of credit in the market. This helps not only in increasing the market credibility but also improves the sustainability and competitiveness of the businesses. But when all the other resolution applicants and corporate debtors are closely knit together it will lead to the failure of the Code. Failure of Sree Metallic Equipment to continue with the CIRP as the resolution applicant was hit by Section 29A of the code led the whole proceeding of insolvency futile. Further, not covering personal guarantor in the moratorium period and only the personal assets of the corporate debtor is one of the loopholes of the code.

  • The recent amendment in the IBC might put CoC back in the driver’s seat, ensures faster resolution and role of NCLT to explain delays in admission of the cases.
  • The waterfall mechanism, during liquidation debts to secured financial creditors and workmen, is to be paid fully before payments to unsecured financial creditors and operational creditors.
  • The CoC will have the powers to take commercial decisions on distribution of the funds to various classes of creditors. In ESSAR STEEL case, NCLAT said,“We hold the CoC has no role to play in distributing the amount among creditors, including the financial creditors or the operational creditors. The CoC is only required to notify the viability, the feasibility of the resolution plan,”. The observations by the NCLAT came on a plea moved by StanChart and operational creditors.

It has been 3 years since the Bankruptcy Law has been enacted and there are cases like Essar Steel awaiting court judgment when it had already been more than 600 days since the case entered IBC then there are cases for admission, like Visa Steel, filed in December 2017 following the banking regulator’s nudge. The ability of the Insolvency and Bankruptcy Board to act with the speed and the timelines the Code contemplates as being one of the key roles of the Insolvency and Bankruptcy Board within the resolution, insolvency and bankruptcy process is critical and need to be adjudicated on a priority basis.

Author Bio

Qualification: LL.B / Advocate
Company: HBF Direct Limited
Location: Ghaziabad, Uttar Pradesh, IN
Member Since: 03 Jun 2019 | Total Posts: 4
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