INTRODUCTION
For any capitalist economy to survive, bankruptcy laws form an integral part of that economy.
From every business be it a partnership, sole proprietorship or any limited liability company, bankruptcy laws help in the reorganization of the assorted assets of these corporations as well as the orderly dissolution of these assets. Therefore, from the perspective of the economy, bankruptcy laws facilitate the administration of capital fastened in an unsuccessful company.
As bankruptcy laws involve levelling competitive engrossment of parties like government, employees in organisations, suppliers, bondholders, creditors and banks, there are usual spacing repercussions in any bankruptcy law which makes these laws reactive to economic and political exigencies.
To understand the correct history of the progression of bankruptcy laws over the period of time, it is essential to understand the factoring in both the political and socio-economic context in which these laws were made. Therefore, in order to understand this context we need to understand bankruptcy laws unfolded from 1993, which has been 25 years till now.
However the year 1993 is not such an important year to mark the beginning of insolvency laws in India.[1] In 1947, when India became free from the subjugation of the British, the insolvency and bankruptcy law procedure was strongly established in the tradition of common law. After 1947, when India gained Independence, growth in the insolvency and bankruptcy laws was formed on the dispute of the non-public sector beneath a system of socially regulated industrial enterprise.
Initially, before the institution of Insolvency and Bankruptcy Laws, India had an exclusive composition of laws in situ handling company financial conditions. Plenty of acts such as Company’s Act 1956, the Scrutinisation and Reconstruction of Insolvency and Enforcement of Security Interest Act, 2002, Sick Industrial Act of 1985, etc governed the Company’s Insolvency Act[2] and in order to bring all the insolvency laws under one umbrella law, the Insolvency and Bankruptcy law came into force in the year 2016.
INSOLVENCY REFORM AND ECONOMIC POLICY
Insolvency is concerned with a condition under which a company is unable to raise sufficient funds in order to pay the debts and all the payments that are incurred by the company in the due course of time. Bankruptcy occurs when once the court of law determines insolvency and also recognises the same passing orders for its resolution. Once the court is of the view that the company has finally become insolvent and bankrupt it passes orders for the dissolution of the insolvent company and also decides on the distribution of the proceeds among the creditors for the payment of their dues of the company. Also, the time taken for the resolution of bankruptcy cases in the country is 4.3 years which is almost 3-4 times higher than the USA and UK where the cases are resolved in 1.5 years and 1 year respectively. This report was presented in front of the Parliament in the year 2016 and was passed in Lok Sabha as well as Rajya Sabha.[3]
INSOLVENCY AND BANKRUPTCY CODE, 2016
Indian government under the guidance of the current Prime Minister, Narendra Modi has brought in force many positive reform methods to reinforce capitalist trust. In the areas of company law, labour law, insolvency and bankruptcy law and taxation laws, major legal reforms have been witnessed by the Indian Economy. Among these laws bankruptcy and insolvency law is said to be the most significant contribution of this government to the Indian Economy as India was short of such laws which contributed to the resolution of tormented assets and debt-laden corporations within the banking sectors. For this purpose, the court has brought all the subsequent insolvency laws under one umbrella law i.e., the Insolvency and Bankruptcy Law 2016.[4] Therefore this legislation has tried to widen the length and breadth of insolvency laws in India.[5] One elemental option of this code is that it permits the creditors to evaluate the feasibility of the business and decide upon the inspiration of the business and thereafter call for its process of liquidation or extermination of the business. The Code to create a brand new institutional structure, consisting of a regulator, financial condition experts, data utilities and assessment mechanisms that may accelerate the formal financial condition resolution method and liquidation inside an outlined timeframe.[6]
The IBC institutional framework contains 4 pillars- the regulator, the adjudicatory authority, the insolvency professionals and the data utilities, that are as follows:
1. Regulator: Insolvency and Bankruptcy Board of Republic of India:
Education of the arena, implementation and operation of the board is the responsibility of the body known as IBBI which had been created by the IBC as a restrictive and superior body. All matters associated with the insolvency and bankruptcy code are handled by the board, kicking off eligibility necessities as being a unique regulator, it controls not only the profession but also the processes.[7] The board came out in the mainstream on 1st October 2016, under the Insolvency and Bankruptcy Code. The board is an important pillar responsible for implying the code that amends the laws relating to the conversion of insolvent companies.
2. Adjudicatory Authority: National Company Law Appellate Tribunal:
Every proceeding with respect to the code under the insolvency law is undertaken by the NCLT[8]. NCLT functions as a single forum that undertakes the resolution of insolvency in corporate entities. Any appeal that is created under NCLT can be quashed or a stay can be initiated against that order. NCLAT is the right forum where the appeals under NCLT can be created. The Supreme Court being the apex court of India is entitled to hear appeals against the order of NCLAT. In case the reorientation of the company is not possible, NCLT might order for the cessation of the corporate entity.
3. Insolvency Professionals:
The Insolvency and Bankruptcy Code also directs for a cadre of professionals known as the insolvency professional, who are directed with the work of overseeing varied aspects of insolvency resolution. An additional body of corporates known as the Insolvency Professional Agencies (IPA’s) is incorporated for the entitlement of regulating the work of the Insolvency Professionals. Practitioners practising individually are needed to be enrolled with the IPA’s sceptre for controlling and developing the role of the insolvency professionals. At present, there are 3 IPA’s registered beneath the provisions of the IPA law.
4. Information Utilities:
The task of gathering, collating and passing the information from the creditors to the corporate was envisaged with the information utilities under the Insolvency and Bankruptcy Code, 2016. At present, the financial data of the creditors can only be obtained from the income tax department and not from any other source even if it comes under the Right to Information Act, 2005. The Information Utilities envisaged under the insolvency and bankruptcy code are present to fulfil this loophole present in the economy. Under section 209-216, in Chapter V of the code, the wide configuration for governance, origination and core services of the information utilities is legislated.[9] The sanctionative provisions encourage the event of the IUs as a business that will prosper only with some sufficient amount of time. Only the IBBI has the ability to licence the IU’s and also can exercise the power to control them as well as the grouping of knowledge and to provide such access to the information. National E-Governance Services Limited is the only operative information utility at present.[10]
PRESENT INSIGHT OF THE INSOLVENCY AND BANKRUPTCY CODE
In 2014, the Bankruptcy Legislative Reforms Committee, led by T. K. Viswanathan[11], projected the Insolvency and Bankruptcy Code (IBC). The target of IBC was to consolidate and amend the laws concerning reorganization and economic condition resolution of company persons, partnership companies, and people in an exceedingly time-bound manner for the maximization importance of assets of such persons, to push entrepreneurship, the convenience of credit, and balance the interests of all the stakeholders as well as alteration within the priority of payment of state dues.[12]
In May 2016, the Insolvency and Bankruptcy Code was ultimately enacted and notified within the official Gazette of India. The main aim of the law was the resolution of insolvency in an exceedingly short time frame (initially one hundred eighty days, extendible by another ninety days underneath sure circumstances however currently extended to 330 days), a task undertaken by insolvency professionals.[13] The separation of business and judicial aspects was the main purpose of the law, in order to correct the mistakes done by past legislation.
Moreover, underneath the insolvency and bankruptcy code, the adjudicating bodies are not the DRT’s but the NCLT. As IBC has come out to be umbrella legislation, it has somewhat decreased the importance of previous legislations by dealing with insolvency, bankruptcy and restructuring of the sick companies.[14]
DIFFICULTY IN INTERPRETATION OF INSOLVENCY AND BANKRUPTCY CODE
Since the inception of the law in 2016, it has been five years and in this five-year span, there have been several changes in the code. The code has seen several changes as it has been amended five times in these five years, also many landmark cases have decoded the code, the most recent one being the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 (with the result from 05,06, 2020).[15]
The rules and laws governing the code are amended in a timely manner. The Supreme Court as well as the High Courts have enunciated noticeable landmark cases decoding the Code, raising a question over the constitutionality of the code with its grey areas. It has been a troublesome task to execute the Insolvency and Bankruptcy Code efficaciously. There are a lot of alterations created to the regulative structure underneath the Insolvency and Bankruptcy Code. The purpose of these ordinances and amendments is to facilitate the code and also the sleek working of the procedures.
In order to utterly perceive the Insolvency and Bankruptcy Code, one will have to study the most recent and amended variations of the Act, allied rules, and laws, that are indicated on the IBBI (Insolvency and Bankruptcy Board of India) portal together with the judicial elucidation of the code.[16] It is prudent to mention that the laws relating to insolvency in the country are nonetheless evolving, it is still an unprepared law. The regular conversions and interpretation of the law make it problematic for the people to understand and perceive it effectively.
MAJOR SHORTCOMINGS OF THE CODE
The first shortcoming of the code is due to the time factor involved in the code.
- The Company Insolvency Resolution Process (CIRP) under the IBC provides for a mechanism that is time-bound and helps the creditors in the recovery of their debts. Once a company makes any default in the reimbursement of the overdue to the creditors, the creditors can inform the CIRP and after which a resolution is initiated by the CIRP against the company for the recovery of debts of the creditors.
- Corporate Insolvency Resolution Process may be a method wherein the time is of great essence below the code. Section 12 of the code makes it mandatory for the process to be over within the interval of hundred and eighty days from the admission of such requisition into the CIRP.
- The period of time for which the resolution can be extended is upto the adjudicating authority provided that the creditors who have requested for the resolution in front of the board have a vote of 66% of the option shared. Despite this resolution passed by the CIRP, the period cannot be extended by a span of ninety days.[17]
- Together with all the extensions granted the resolution process has to be finalised within a span of three hundred and thirty days at any cost. But if the proceedings are being delayed due to some inevitable circumstances, a ninety-day extension can be granted as provided under the section of the code.[18]
- The percentage of the benches of NCLT allotted to the high variety of cases is not accurate as it is somewhat unbalanced and on top of that, the deadline to finish the resolution in 330 days is next to impossible which creates a hassle in a lot of cases. Large corporations having huge quantities of creditors, experience hindrances for the functioning of this sleek method efficiently.
The second shortcoming of the code is due to a shortage of proper infrastructure.
According to the data presented by the Minister of State for Finance and Corporate Affairs Anurag Singh Thakur in an exceptionally written reply to the Upper House of the Parliament which is the Rajya Sabha, there have been more than ten thousand unsolved cases before the tribunal i.e., NCLT till 2019 September. The dearth of proper inches of the NCLT and on top of that the number of rising cases before the IBC has slowed down the process, which in turn is somewhat harmful to the country and also ultimately defeats the main purpose of the fast resolution process.
The third shortcoming of the code is due to a shortcoming in the resolution professionals.
As of now, there are 897 recorded insolvency professionals with the board. Required that if a person aspires to become an insolvency expert, he has to be a Practicing Lawyer for almost 15 years, or a Chartered Accountant or a Company Secretary or a Cost Accountant, and on top of that one should also additionally clear the examination conducted the IBBI so that, that person can become a diligent insolvency professional and also his credibility can never be questioned before the board.
JUDICIAL PRONOUNCEMENTS
To understand the evolving law of insolvency and bankruptcy it becomes vital to study the judicial interpretations of the court. The interpretation is done by the Apex Court of the country i.e., The Supreme Court, the High Court and also the NCLT (National Company Law Tribunal) becomes necessary to be read to understand the abstract portions of the code.
In accordance with Section 4 of the Insolvency and Bankruptcy Amendment Act of 2019, it became ‘mandatory’ for the CIRP to be concluded within a span of 330 days from the start of the resolution mechanism. Failing to finish the procedure in a span of these 330 days would take the company one step ahead to the process of liquidation.
The Hon’ble Apex Court within the case of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta & Ors[19], related to the committee of creditors decided to annul the word ‘mandatorily’ in the code stating the reason that the time of the proceeding indirectly hampers the interest of the litigator.
The Court also said that the time of the proceeding taken by NCLT and NCLAT should also be kept in mind and an extension of time can be granted depending on the facts of the case, which may vary certainly from case to case or in some exceptional circumstances.
Committee of Creditors
In the milestone case of the Committee of Creditors of Essar Steel India Limited through Authorised person v. Satish Kumar Gupta & Ors[20], the apex court reinforced the status of the committee of creditors. The Court was of the viewpoint that the committee of creditors is that higher authority that chooses whether a company’s soul should be rehabilitated by the method of resolution or not.
Role of a Resolution Expert
The resolution expert must scrutinize whether the receipt submitted by the person on the board is consistent with Section 30(2) of the code. Once that is consistent with Section 30(3), the arrangement is bestowed to be validated by CoC.
On the passing of the arrangement by CoC, then the resolution expert forwards the approved resolution to the adjudicating authority.
In the case of Arcelormittal India Private Limited v. Satish Kumar Gupta & Others[21], the Apex Court scrutinised the duty of the resolution expert and commanded that the office of the resolution expert is to examine each and every part of the resolution submitted to him with due care and caution, before submitting it to the committee of creditors. He has to abide by the rules and cannot take his own decisions and work according to his whims and fancies by placing his opinion before the committee. A resolution expert doesn’t have the ability to conclude whether or not the resolution offends any of the provisions of the resolution. Therefore, the sole duty of the resolution expert is to properly check the resolution and submit it to the CoC after due checking and not making any changes according to him.
Financial and Operational Creditors
In the case of Swiss Ribbons Pvt. Ltd. & Another v. Union of India & Others[22], it had been held that the excellence created in the middle of the operational creditor and financial creditor is in contravention with Article 14 of the Indian Constitution. In addition to that, the issue raised in front of the Supreme Court was that the operational creditors were not included in the committee of creditors.
CONCLUSION
Being umbrella legislation the Insolvency and Bankruptcy Code is very important for the advent of insolvency laws in the country. It guarantees a mechanism that is restricted by time and is also economical for a system of recovering debts. The Insolvency and Bankruptcy Code is a much new enactment of the law and is also not fully developed but in the phase of development, therefore it becomes important to study the amendments and also the judicial pronouncements in order to understand the complexities. The code provides relief to the creditors but also keeps in mind the interest of the company as well. There are certain complexities relating to the provisions of the code, but with due process of law and the tribunals, the problems are being solved and full-fledged legislation for insolvency and bankruptcy law is being given to the creditors as well the corporations.
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Written By: Aayush Akar, Student, National Law University Odisha & Ritika Bansal, Student, Maharaja Agrasen Institute of Management Studies, IP University
[1] Hishikar, S., Kheterpal, D., & Sharma, S. (2019). A socio-economic history of bankruptcy & insolvency laws in India. [Paper presentation]. IIMA-World Bank Research Conference on Financial Distress, Bankruptcy, and Corporate Finance, IIM Ahmedabad.
[2] Challenges of interpretation of Insolvency and Bankruptcy Code, 2016, By Diganth Raj Sehgal- February 7, 2021, IPleaders-https://blog.ipleaders.in/challenges-interpretation-insolvency-bankruptcy-code-2016.
[3] Balz, M. (1997) Symposium commentary: Market conformity of insolvency proceedings: Policy issues of the German insolvency law. Brooklyn Journal of International Law, 23 pp 167.
[4] Budhiraja, J. K. (2016) Insolvency resolution process, liquidation and opportunities for CMAs under IBC. The Management Accountant Journal, 51(12) pp 48-58.
[5] Armour, J. and Lele, P. (2009) Law, finance, and politics: The case of India, Law and Society Review, 43(3) pp 491-526.
[6] Flaschen, E. D. and DeSieno, T. B. (1992) the development of insolvency law as part of the transition from a centrally planned to a market economy. The International Lawyer, pp 667-694.
[7] Goel, Shivam. “The Insolvency and Bankruptcy Code, 2016: Problems & Challenges”, Imperial Journal of Interdisciplinary Research (IJIR), Vol-3, Issue-5, ISSN: 2454-1362, 2017.
[8] National Company Law Tribunal (2019) NCLT, website available at https://nclt.gov.in/content/judgments.
[9] IBBI (2019) Newsletter Jan-March 2019. Retrieved 26 April 2019 from Insolvency and Bankruptcy Board of India (ibbi.gov.in).
[10] Government of India (2016), the Insolvency and Bankruptcy Code 2016.
[11] Vishwanathan, N. S. (2018, April 18). It’s not business as was common for lenders and borrowers [Speech by Deputy Governor, RBI]. NIBM.
[12] CS Peer Mehboob, Insolvency and Bankruptcy Code- An Introduction, 06 June 2016; Insolvency and Bankruptcy Code – An Introduction (caclubindia.com).
[13] Hagan, S. (2001). Insolvency reform and economic policy. Connecticut Journal of International Law, 17(63) pp 63-73.
[14] Srijan Anant, Aayushi Mishra, A Study of Insolvency and Bankruptcy Code and Its Impact on Macro Environment of India, IJEDR 2019 | Volume 7, Issue 3.
[15] Shinu Vig, Insolvency Reforms in India: Policy and Economic Implications, The Journal of Contemporary Issues in Business and Government 2019 Volume 25, Number 1, pp 14 – 29.
[16] Valecha, Javish & Xalxo, Ankita Anupriya. “Overview of the Insolvency and Bankruptcy Code, 2016 & the Accompanying Regulations”, Journal on Contemporary Issues of Law, Vol-3, Issue-4, ISSN 2455-4782, 2017.
[17] Sharma, H.K. “Insolvency and Bankruptcy Code, 2016 – Fast Track Corporate Insolvency Resolution Process”, ICSI 2016, (https://www.icsi.edu/WebModules/LinksOfWeeks/ICSI_CS_SEP2016.pdf).
[18] Supra Note 2.
[19] SC, Civil Appeal No. 8766-67 of 2019.
[20] SC, Civil Appeal No. 6409 of 2019.
[21] SC, Civil Appeal Nos.9402-9405 of 2018.
[22] SC, Writ Petition (Civil) No. 99 of 2018.
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